Excerpts from an interview to Business Line:

How have high net worth individuals (HNIs) and affluent investors responded to the recent meltdown in stock prices? Have you seen panic? Or are investors seasoned enough to accept such volatility as a part of equity investing?

There is no denying the fact that the volatility in the equity markets has been high. It is also a fact that HNIs are generally more seasoned investors than their retail counterparts, having seen several ups and downs. However, we have not seen panic among them yet. Typically, HNIs are investors with a longer term investment horizon and don’t enter and exit asset classes too frequently.

What changes in asset allocation have you been recommending to your clients after the credit crisis broke out?

Risk aversion amongst investors at the current juncture is at its highest today. This has brought about a change in sentiment towards equities. The one significant change in asset allocation that has happened in the last few months is greater flows into lower risk asset classes such as gold, capital protected notes or money market funds. There is also an increasing tendency towards holding cash in banks or FDs in banks. Asset allocation has undergone a significant change, not because of reshuffle of portfolios but more because of a fall in valuation of equity portfolios.

Have you asked clients to raise their cash positions/safe investments? What cash position would you advocate in an investor’s portfolio now?

We would recommend at least 20- 25 per cent of the investors portfolio being in cash or cash equivalent assets under the present market conditions.

How can investors take advantage of the very attractive interest rates now prevailing in the Indian markets and the spike in short term rates as a result of tight liquidity conditions?

The way spreads between Government Securities and Commercial paper have widened indicates that far from preferring higher yields, there is a capital flight to safety. However, investors can take the benefit of high interest rates prevalent now, by allocating fresh funds into the highest-rated short term debt. However, given the differential risk perception of the issuers, it is imperative that the quality of paper be closely watched.

Worries about a domestic meltdown in property prices have been rife recently. How can an investor with a sizeable exposure to property reduce his risks?

Property is not a very liquid asset class, neither is it frequently traded. There is no doubt that there has been apprehension about how long the property prices would sustain or how much they could correct. Yet, those overexposed to property do not generally exit whenever there are such scares about a price fall. Property as an asset class has been known to undergo such price movements and those overweight on it tend to normally factor that in.

With commodity prices crashing, stocks declining and most of the global markets falling in tandem, many of the alternative asset classes available to Indian investors have turned less attractive. Where can investors turn to, to really diversify their portfolio?

Under the present circumstances where there is a flight to safety, diversification has not been a priority for a lot of investors. In fact, what is happening is concentration of capital in perceived ‘safer’ avenues. Even tax efficiency goes for a toss and investors prefer parking money in avenues such as Gold and Bank FDs, which are perceived to be safer. This is typical of investor sentiment during trying times. We generally see movement into alternative asset classes only when there is greater certainty in the broader financial markets.

The recent crisis has proved that correlation between asset classes has strengthened in recent years. Does this weaken the case for portfolio diversification per se?

It is not very usual to have this kind of an asset class price movement correlation. A lot of this had happened due to multiple leveraging and cross leveraging across geographies. What we are now seeing is a conscious de-leveraging of most of these asset class positions, which has again resulted in a correlated price movement.

De-coupling completely is never easily going to be possible even in future. In circumstances different from the current ones, where leveraging is a key issue, we might not necessarily have the same degree of correlation between assets, in terms of a concerted price correction. Effectively, despite the recent experience, diversification in portfolios cannot and should not be ignored.

(Portrait by R. Rajesh)

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