The Hindu Business Line : ‘In handling the crisis, fund managers are not solely to blame’

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Keeping in mind that redemption pressure resulting from the market meltdown was also responsible for pressuring the fund mangers into making irrational decisions, the blame does not rest solely on the fund managers.
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MR D. K. AGARWAL, CMD OF SMC COMTRADE AND MD OF SMC WEALTH MANAGEMENT SERVICES.

Mr D. K. Aggarwal, a chartered accountant, CMD of SMC Comtrade and MD of SMC Wealth Management Services shares his views on asset allocation and equity investing in the present market conditions. He also talks of the value-addition that wealth managers can bring in at these times.

As the head of a broking and wealth management firm, what are the lessons that investors should have learnt from the meltdown in the stock market?

Invest out of your savings and not borrowed money. Leveraged exposure can be suicidal in a volatile market.

A stock should not only be fundamentally strong but also available at relatively cheaper valuation; in other words entry timing is equally important.

Do not invest based on hear say or rumours or gut feeling; do sufficient homework. If you do not have the time, then, take the mutual fund route or look at what wealth management companies or financial experts say.

Invest with a time horizon of at least three-five years and expect a reasonable return of 18-20 per cent per annum.

Did SMC advise its clients to reduce exposure to equities in end-2007, when valuations were at uncomfortably high levels?

Yes, SMC kept advising its clients quite regularly through its weekly magazine, Wisemoney when the valuations were over stretched and the market was going up without justifiable fundamentals.

What asset allocation would you suggest today to an investor who is in his 20s or 30s?

Though we still feel that the market has not bottomed out, in our opinion, the long-term fundamentals of the economy are strong.

An investor who is in his 20s or 30s should invest about 20 per cent in equities; about 20 per cent in fixed-income instruments and the rest in liquid funds, which should ultimately move to equities and commodities at an appropriate time.

When this particular correction began, most investors expected a correction of just 10-15 per cent. The 50 per cent-plus drop in the index and the 80-90 per cent fall in some stocks have taken almost everyone by surprise. Does this not weaken the case for equity investing?

Equity investing is all about long-term investment and what we are seeing today is only a temporary phenomenon.

The fall in Sensex to the level of about 12,000-14,000 was on expected lines as valuations were over-stretched due to excess money chasing less scrips; but the Sensex fall below 12,000 appears to be more out of panic and not justified by fundamentals.

I am sure in the long run, fundamentals rule the market and, therefore, equity investing will always remain attractive, as this is one asset class that can give you an extra 8-10 per cent per annum over a longer period compared to other asset classes.

Should a highly leveraged investor, who expects a substantial portion of his current income to go into loan repayment, consider investing in stocks?

In fact, investment should be made only out of your savings and leverage should always be avoided, as the capital gets eroded faster when there is a downside.

So I would advise such an investor not to consider stocks as an option.

What is the advice that SMC Global today gives to its younger HNIs with respect to where they should invest? Can you list out the top three investment options for such an investor today?

SMC Global advises a younger HNI to invest at least 50 per cent of the investible funds in equities, directly or through mutual funds, with a long-term horizon, 20 per cent in commodities — gold and other metals — and 20 per cent in debt funds and fixed-income instruments, and the balance 10 per cent in liquid assets to take advantage of any future opportunity.

Professional fund managers have been blamed for not doing better than the layman in the recent fall. What, then, is the case for a professional wealth manager?

It is true that several professional fund managers were inadequately prepared to handle grave situations such as the recent market meltdown. Lack of sufficient experience and excessive greed led to the bad performance of some of these funds.

Keeping in mind that redemption pressure resulting from the market meltdown was also responsible for pressuring the fund mangers into making irrational decisions, such as selling on the low side, the blame does not rest solely on the fund managers. The bad market conditions have, however, taught us that a fund manager can only help a disciplined investor and not an opportunist trying to make a quick buck in a bullish market. Disciplined investment can best be made only by professional fund managers. We should not forget that equity investing is about the long term; so we really have to look at the performance of these fund managers in that perspective only.

This temporary fall in the fund performance, due to panic and the prevailing conditions, should not be construed to mean that professional fund managers were responsible for the bad performance. Customisation, asset allocation and decision-making can be better handled by a professional wealth manager compared to a fund manager.

BL RESEARCH BUREAU

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