HNIs are not ‘sensitised' to fixed income opportunities

Mr Leslie S. Menkes, Managing Director and Head of Onshore Private Wealth Management for Asia at Morgan Stanley, appears to be at ease discussing about the requirements of Indian high net-worth individuals. In a brief visit to Chennai to open their fifth private wealth management branch in India, Mr Menkes discusses with Business Line the preferences of Indian HNIs and investment opportunities available onshore and globally.

Excerpts:

How do you view the HNI market in India? How has it been growing?

According to a recent survey by Capgemini, the number of HNWIs in India grew 50.1 per cent in 2009. These numbers are an encouraging reflection of the wealth growth in India.

Morgan Stanley started its wealth management business in India on September 16, 2008, a day after Lehman Brothers collapsed. If you consider the growth in the number of high net worth individuals and their wealth since that time, India has been among the highest in the world. We entered the market at an extremely difficult time. But in spite of the challenges, we have seen remarkable growth in our business.

How different are the requirements of Indian investors compared with other markets that you may have seen?

For the vast majority of Indian investors, investments need to be in local currency and have to be traded in the domestic market although they can invest out of the country every year for international diversification. In the domestic investment universe equities appear to be the most favourable asset class for most Indian HNIs.

There is also a deepening and maturing fixed interest asset class, which is everything from deposits to FMPs to gilt funds. There is interest in avenues such as private equity funds and commodities as well.

Indians are said to have bias for real estate as an asset class…

Due to the growth in Asia and India, real estate has an unusually large allocation. Morgan Stanley is not out to change that. Our message to customers is not really to de-emphasise real estate but to consider the correlation between the assets.

If there is a systemic shock to India, whether an active war or a natural disaster – it is highly likely that certain asset classes will perform better than others. Therefore it is important to understand what the correlations are and how one can be defensive.

When we discuss allocation to real estate with our clients, we try to get them to understand how real estate will perform in an inflationary or deflationary environment or a crisis so that investors can think about how real estate fits in their portfolio.

Indian market lacks investment avenues such as REITs, has a less liquid debt market and limited avenues to invest in commodities . How do you overcome these?

Since these investment avenues are still evolving in India, it is a matter of time before they will be ready. For now, we recommend exposure to them via investments in other markets such as Singapore or New York. Firms such as us are creating these asset classes and investment opportunities for clients given the importance of exposure to these assets. We have for instance, been active in the real estate investing sector in India for many years and we look to bringing our expertise to our HNW clients here in the form of real estate funds.

In my view, the deepening of the fixed income markets will become more critical and we truly believe that fixed income investments are important for HNW clients.

These clients are generally more familiar with the equity markets but not as sensitised to the opportunities in fixed income. Over time they would become appreciative of the risk-reward in this asset class.

How would you rate the risk appetite of Indian investors against other markets?

Indian HNIs have a slightly higher risk tolerance than most investors in the US and Europe. It has a lot to do with the culture of short term and relatively more speculative equity trading. In a recent market survey on average number of trades per week in India, 70 per cent said it was more than once a week.

In 70 per cent of the cases average time horizon of holding is a year.

However, our clients truly buy into our approach of long-term investing with lower volatility and more of a sophisticated wealth preservation and growth plan. Preserving wealth does not come at the expense of growth but you grow the wealth in a much more deliberate fashion.

How do you tailor products and services to suit your Indian private wealth clients?

We believe in the PMS approach. We combine research and fundamental analysis to private wealth portfolios. Secondly we do our own analysis on mutual funds.

India is a big mutual fund market but a lot of people don't appreciate the overlaps in these funds.

They may have different themes, different styles or different market-caps but if you do a transparency analysis, you will see there is a tremendous amount of overlap in the stocks held. We are very mindful of that and have a dedicated team that analyses beta and sharpe ratio and other attributes of funds, speaks to fund managers and does a qualitative and quantitative assessment of the merits of the fund.

We then put those in a recommended list and that is a differentiated offering – it provides alpha for clients, it provides out-performance but most importantly helps investors know their real exposure from these funds.

We also run fund-of-funds to invest in themes not available here. There is much access to institutional transactions which are not available to HNIs easily. We let our clients co-invest with Morgan Stanley in some of these transactions.

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