Where Do Millionaires Invest? Single-Currency Risk Driving International Investments: Edelweiss' Alok Saigal

The risk of being exposed to a single currency is pushing wealthy investors to consider international assets, according to Edelweiss Wealth Management’s Alok Saigal.“For the first time, the realisation has come that you are in a single asset class... and that is the rupee,' Saigal, president and head of private wealth, Edelweiss Wealth Management told BQ Prime’s Niraj Shah in the new series ‘Where Do Millionaires Invest?’This is driving them to diversify their currency exposure, he said.While the high-net-worth individuals are interested in directly investing in international stocks, structured products, instruments where value is linked to underlying assets, are also gaining traction, according to Saigal.'You can do risk management through structured products,' he said. 'There have been talks about Indian bonds traded in dollars, they give a good risk-adjusted return because you can also assess yield, etc. through leverage.”However, amid the global equity downturn, the fund is bringing down international investment in the portfolio from 7% to 5% and increasing exposure to gold.A recession in the U.S. looms as the Federal Reserve raised interest rates by 75 basis points last week, the single-biggest move since 1994. The U.S. central bank signalled a similar hike in July as well. The unprecedented rate action is aimed at controlling record inflation, stoked by higher oil prices after Russia's invasion of Ukraine worsened the supply-chain disruptions stoked by the Covid-19 pandemic.“We want to track how the Fed is behaving,” Saigal said. 'We want to see how the markets are behaving and then we will take a call.”.Watch the full show here:.Alok, this is the inaugural episode. Let's set the base. What is it that Edelweiss Wealth and Wealth Management particularly do? What are the set of clients that you typically have?Alok Saigal: In basic terms, we manage money for the rich. But, to give you a slightly nuanced answer, we are managing money for the ultra HNIs, family offices–basically, anybody who has a surplus of $5 million and above is our customer. That is how we define the client. But it goes all the way up.We, as a firm, have obviously specialised in the higher end of the curve much more because if you see the industry, people have specialised. You have the bank-led wealth managers which are more in the mass affluent and HNI space, and then you have some of the non-bank led players who specialised in the mid-segment, and there are some who have specialised in the ultra-rich segment. So, we are of the type who are more specialised in the mid- to ultra-rich variety, and catering to their needs. So, that's the spectrum that we cater to..When you think of asset allocation for these clients, how do you go about it, because this client probably has a strong opinion of herself or himself?Alok Saigal: There are two ways to look at asset allocation with these sorts of clients. One is the standard asset allocation which is how much debt and how much equity. But for this set of clients, what we also do is something more nuanced–we do a need-based asset allocation. So, the idea is that what does the client need to do with this money because obviously, it's not to meet his day-to-day requirements. He has enough and more of this surplus.So, what we try to bucket–we have created a sort of framework–is the lifestyle needs. Typically, that may include art, philanthropy, day-to-day running of the house and travel, and these are all big components for them.But the idea is that none of this should come from the capital. The idea is that this comes from the portfolios–we create a portfolio and this cash flow. So, it's basically a reverse–what we need to spend in the year.It depends on the type of client and this number can be very different, including luxury cars or luxury villas and all that stuff. But ultimately, we do not want to dip into their core capital. Therefore, the cash flow has to come from the portfolio and that is a very different thinking that we try and bring to the table.Secondly, a lot of these guys want to invest in growth companies, and it's a serious investment. So, in terms of either incubating new ideas or a lot of times, they want to invest in technologies related to their existing business.To give an example, if somebody is in the automotive business from their family office, they may want to invest in certain automotive technology companies; a lot of guys were in healthcare and they actually want to invest in new technologies in healthcare. But a lot of times that is either done from the incubation centres in the companies, a lot of times the family offices. A lot of it is also in new-age startups, etc. So, that is what we call the “growth portfolio”.The third is what we call the boring or the “standard portfolio”, which is where we say ‘You do nothing fancy, this is a place where you just invest for the long-term thinking in a moderate manner’.The fourth is what we call a 'safety net' or 'a sinking fund'. When markets go through extreme amounts of turmoil or people may suffer some risks in their business, they should have a safety net is what we say. So, this is a core basic philosophy that you may look at–lifestyle, look at your growth, look at a moderate portfolio, and your safety net. This is how we start the basic bucketing of the needs.It also couples with next generation planning, next generation thinking–how much they are going to keep for the succession. A lot of times children want to incubate new businesses, are you keeping money aside for that?So, the asset allocation is an output of first getting this input done, and then you invest according to that. And that is how it is possibly different from the regular asset allocation, because this sits on top of asset allocation, and then you come to the asset allocation, because for each portfolio the asset allocation will be different and this will be different for each client as well..But on an average, does safety play a larger part than growth, typically?Alok Saigal: Again, it depends on where the client is in his journey. To give context, if somebody has sold his business, the person may be in his 50s or late 50s. But his children are all 27-30-year-old. So, in that they will create a safety net. But beyond that, they want to take risks, because the children want to invest in a particular manner.We are also seeing that as the wealth is moving from one generation to the other, and to give context here in India, it's not so much that wealth is multi-generational. You have these old traditional business families–you have 100-200 of those. But a lot of the money that is getting generated is in businesses that started 20-25 years ago–in manufacturing, say pipes, cement, mid-market, a lot of these, and then obviously the new-age IT, the digital boom that has come.A lot of these people who have come into money are first generation. Keeping the new-age aside, the age group is between 45-60, and that's when they have come into money.I keep giving examples of a lot of listed companies today. All the promoters are in this age group and the children are 25-40. Now, for that generation, the money is moved from Generation One to Generation Two. Imagine a scenario where Generation One has worked very hard to build the business and Generation Two either has to build a new business or is only managing this money, which in itself is a very important and big task. Therefore, the outlook has changed. I don't want to preempt this but international as a theme five years ago, if you had asked any Indian why he is not investing in international, they would have said 'How does it matter? I don't want to do it'. But today, if you ask them because the children are all foreign educated, they possibly have a house abroad, they want to spend some time abroad. They want to do international investing. Also, the fact that they realise their entire money is a single asset class, and that asset class is Rupee. For the first time, the realisation has come that you are in a single asset class. Can I diversify my currency exposure? And therefore, you see a lot more of international (investing). So, I am seeing that thinking or approach towards money management is actually changing. It's very different from the old, traditional way that we had seen..It's actually from a dollar wealth perspective. Your wealth has gone nowhere even if it's doubled in the last 10 years because the rupee is depreciating. Let me start with a broader question. Where is it that the millionaires are investing currently? I don't mean just in the last one month. In the last 12 months, has the pattern of where the rich are investing, changed?Alok Saigal: Yes. One of the biggest changes that we are seeing is that there is a serious allocation to the private markets. Earlier, private markets were like, ‘Okay I am doing some like an angel (investor) or some friend’s family incubating some startups’, but now, you talk to 10 promoters and 9 out of 10 are doing this. It's not even 2 out of 10, earlier this was 1 out of 10.It is not even size-constrained. Earlier, only the very rich were doing that. Today, you meet family offices or an ultra HNI whose net worth financial is Rs 100 crore. Or you meet somebody whose net worth is Rs 5,000 crore. Both of them are investing. The size of cheques may be different.But they are very active. So, (this is) one very clear trend that has happened, and they want to bring direct investments. Like if you pick out say, Acko—an insurance startup—or you pick up a Digit. We recently saw Nykaa; you'll see the list of HNI names which have been with the company from the beginning. You see Policy Bazaar and FabIndia IPO.A lot of these (HNI) people have actually contributed not only from a money point of view, but being active board members they have contributed on strategy. That is where they enjoy it more.Making money is obviously their passion and it's important but also the fact that these guys enjoy contributing and it's their way of contributing back to some of these founders. So, that is one big trend that we are seeing.The second is international. This has clearly gone up as a trend–international stocks, international securities, when I say securities people are investing in a basket of bonds, they are also investing in the basket of structured products.And not to sensationalise, but SpaceX was raising money six months back and you had Indian investors participate in that.There is a lot of interest to participate directly in stocks, but also through structured products for HNIs. You can do risk management through structured products. There have been talks about Indian bonds traded in dollars, they give a good risk-adjusted return because you can also assess yield, etc. through leverage.So, a lot of options are opening up for people and people are more receptive to that because they are saying they want to have a certain allocation to international, ‘I want certain money which was allocated in a different currency. Now, I won't take too much risk with it. Some people will take more, but at least I want to invest in a proper manner’. That has clearly changed. .Has that also changed in the recent turmoil because private markets gave a bit of a sign slightly earlier? Public markets are now in a bit of a downward spiral. Is the mood/behaviour changing and what is it that you are therefore telling them about their asset allocation?Alok Saigal: I will tell you what the client is thinking. I think the clients are reasonably smart. I never doubt that, and I genuinely think that. They are smarter than us. They catch the trends also very early. So, if you see a lot of the clients actually identify the current market strength/ trend very early.If you see the data from November-December onwards till recently, people were not very active in investing. I wouldn’t say they started pulling money out, but they had made enough money. So, may be in some pockets people booked profits, but they did not allocate new capital. In the last four or five months at least, they have not allocated new capital.Now, they are saying that let's start seeing opportunities. So, they have been ahead of the curve, and there is some change. I would not call it panic. But, this is what we are seeing in the market. And if it continues for some more time, we will see some distress in pockets. It will be obvious because all of these companies that they have invested in, if somebody's say invested in October and at X valuation, and a downturn happens in the valuation it will start showing a down tick. But I think these guys are seasoned. So, it will have an impact.But then, they were ahead of the curve. There is a difference between say ultra HNIs and HNIs. So, if you see the HNIs continued to invest in a lot of these names, even in December, January, February, when the market was still going one way, or the bigger cheques stopped coming. From October, we have been telling people that we are seeing signs of overheating in private markets. We don't want you to take large or fresh positions in private markets right now. We also went underweight on small and mid-caps a month ago. Maybe a tight fit just around the corner, around the correction time when it began, and we went underweight on that. We are underweight on equities right now.So, in our asset allocation models, we are currently underweight in equities and that has–I won’t say it saved us, but it worked well for us. I would use the word “saved well” for us. We are looking forward to this correction stabilizing at least and then you can start looking at redeploying. Currently, we are not saying buy the dip. We are not saying that right now..What about fixed income? Is it a good time to buy with yields where they are? Are you suggesting to your clients to just go for that basic fixed income?Alok Saigal: No. So, we will continue to stay invested in fixed income, but our view has been that we do not want to buy duration right now. We have not been buying duration for at least 6-9 months because we expected rates to go up and therefore, we did not buy duration at all. Currently, we want the rates to stabilise because there is a certain upside that you will still have but we are seeing a lot of pockets of opportunity. Like there are some fixed income ETFs which are yielding better than the tax-free bonds.Now, on a post-tax basis and ETFs underlying the same security–same as tax free bonds. So, we are trying to find these adjustments or arbitrages that are there in the market.If you look at NTPC Tax Free Bond that's trading around anything between 5% or 5.20% on a tax-free basis, and you have an ETF called the Bharat Fund ETF, which were similar maturity, trading at 7.50% upwards.Even if you do the taxation and indexation, you still have a 90 basis to 100 basis point arbitrage. So, this is what we are advising clients. If you are holding it, do a switch. So that is an interesting pocket of opportunity.We see some more volatility in rates right now. We have asked our clients to play in fixed income, through a lot more innovative instruments which give better post-tax yields because you know, anything you do in fixed income, you just get charged the full taxation.REITs, structured products–a lot of these ideas give better post-tax return and better liquidity. So, we have tried to enhance client returns based on these things. .These structured products are restricted to a minimum size or is it openly available?Alok Saigal: They are openly available, but a lot of times it also depends on the issuer. You can have all the way from AAA to AA issuers and the issuer sometimes restricts. So, if you go to some of the AAA issuers, they may restrict–minimum ticket Rs 1 crore and all–but typically, in a structured product there is no regulatory cap; it’s Rs 10 lakh that you can issue, it’s like an NCD, you can issue a Rs 10 lakh structured product..What about real estate? Are people receptive even now because I presume people were putting money into real estate? Are they doing it now?Alok Saigal: In the last one year, there has been a lot of activity in residential real estate and especially in high-end real estate. So, people have picked up a lot of self-used properties, picked up lot of investment properties. We have had a lot of clients pick up properties in Mumbai specifically. We are not seeing a trend reversing right now because real estate also went through a lull with GST and various issues plaguing it. The NBFC crisis happened. But we are definitely seeing demand for real estate right now. We are not seeing a slowdown in any manner. It’s not that we are seeing some massive slowdown. None of that is happening. So, people are buying real estate..You are currently underweight on equities. Are there events which will dictate when you change your stance or how do you decide the overweight-underweight allocation? If you are underweight in equities at the current juncture, what percentage of an ideal average client portfolio would you allocate to equities now? What percentage would be to fixed income, to gold, to international and to real estate?Alok Saigal: Basically, we run a global investment advisory committee. Because I am the custodian of the client, along with one of my colleagues, I chair the committee. But we have built-in all the expertise that Edelweiss has built over the years into this committee and it's a very rigorous process. We have our head of equities research. We have a head of wealth research. We have a CIO of the mutual fund for fixed income. We have a chief economist. We have head of mid cap and small cap research, we have a product head. It's a fairly well-diversified committee with different views.We meet on a very regular frequency and if the markets are volatile, as they still are, then we meet on short notice. Interestingly, whatever the committee discusses, each person's views are published (and sent) to clients, so this is an industry first. The reason we did that is because I told you right now that three months or two months ago, we went underweight on small caps. Now, it is a published thing, and it has gone to the customers. So, there's a lot of accountability that we put on this committee. It is a very serious committee, and this committee actually decides the core asset allocation.When we say that we have 40-45% in equity, currently we have 40% in equities. We are 40% in fixed income; and in the 40% in equities; we will be 85% in large caps, and 15% in mid caps, no small cap exposure right now; and another 20% it's actually 12-13% in gold and 7% in international equities right now.The committee met a few days ago. International, for the time being, we are bringing down to 5% and gold, we were increasing much more. Equity, we are not touching right now–equities are at 40%, we will leave it at 40%; fixed income is at 40% and we are leaving it at 40%.We are also tracking certain key levels of the market, and there is a Fed decision around the corner. We also obviously want to see because our approach is, it’s not a trading portfolio. It's a long-term portfolio. We are happy to miss a few 100 points on either side, but we are taking reasonably medium to long-term views.If there is a scenario and right now, we are going through extreme heightened activities and a volatile scenario, we want to track how the Fed is behaving. We want to see how the markets are behaving and then we will take a call.Currently, we are not going overweight at all. But if we see certain levels in the market, we start adding to equity and I hope those levels don't come right now. But if those levels come, we are definitely adding to equities. .How receptive are clients to the advice that you give because these are guys who already created wealth. So, in some fashion, they will believe that they know more than most people. How receptive are clients generally to advice given to them?Alok Saigal: What has changed in the market again over the last 3-4 years, is that with the coming of a lot of the newer generation, they are very receptive. But let me not generalise. A lot of these clients have also been used to just too many people chasing them and so they also become very cautious about who they talk to. They have become very discerning, and they also see a lot of clutter. So, unless somebody is bringing quality to them, and quality advice, they are not going to deal with you. Clients also value a platform a lot.If you had talked to me five years ago, the power of an individual was greater than the power of the platform. Today, the power of the platform is greater than the power of the individual.Today, for a larger client, he needs multifaceted advice, especially the ultra HNIs or HNI family offices–they need to deal with your investment banking. They need to because either they are acquiring businesses, or they want to see a certain type of transaction. There's so many deals happening because they have become a semi-institutional set themselves.So, if there's a pre-IPO hype happening or there is a company raising funds or they want to raise funds for their company, they want to be dealing with a platform which is able to give them this access. They want to be dealing with the institutional equities’ teams, because with the size of the portfolios, they want to be also knowing—they want to know what is a hedge fund thinking, how are the flows coming, what is Goldman Sachs’ dealing room thinking right now?These are nuances that it's very difficult to provide as an individual. What does my fixed income CIO think about RBI, not what Alok thinks about RBI? They want to know what Alok thinks, but they also want to know what the fixation is, what the specialists think. So, the ability of the platform to deal with them is actually what determines your access, and the ability of the platform to stitch all this together.The value today of the relationship manager is how many of them are able to stitch this together–knowing what the client needs and being able to stitch it.We have everything available, but can you talk to the client and present it to the client in the manner that he needs it? You have to understand the client first–forget putting his need first–you have to understand the client, and you have that demand, so what is the need?One of our clients is looking to set up a new business for his son. Now, he has a very specific need that he wants to acquire a company building material space. Can our team show him 10 companies over the next three months, or can we go to five other places and get him that.If you can do that for him, his investments will automatically come to you. Having said that, you have to do a very good job on the investments as well. So, I am not undermining that. But I am saying there is an overall platform. The individual has to stitch together a platform for him..Any advice for people who are not necessarily clients? You cater to people with a minimum amount of $5 million, which is in the Rs 35 crore-Rs 40 crore bracket. Any advice for people who don't quite have that kind of wealth, but are trying to get into the minds of people who advise the rich?Alok Saigal: We want to keep things very simple. I think people like us make it look very complicated. Getting your asset allocation right and more than asset allocation–it’s a very heavy word–can you get your thinking right? What do you want to do with this money? I need the money for buying a new house. I need the money for my son's education or daughter's education. I need the money for my retirement planning.Whatever it is, you need to create a corpus for that. Can you start with that as a journey and start planning and understand your risk appetite?Today, as a long-term equity investor, you are seeing red on your portfolio every day. Are you really bothered? You don't see your bank FD every day, right? I tell this to everybody and I started this with my mother when I made her invest in equity markets. I said ‘Do you look at the bank FDs every day? Do you call up the bank and say, 'Now what is accrued interest on this?' You don’t ask them, right, so why do you want to see your stock every day?’ It is doing what it is, the company's not stopping because the stock price is down. So, if you're long term and really long term, then behave long term. I think it's a game of patience. There is no quick money in this business. People who are saying that there is quick money are lying and people who are thinking they will make quick money are in for some trouble. That’s all I will say.

Where Do Millionaires Invest? Single-Currency Risk Driving International Investments: Edelweiss' Alok Saigal

The realisation of being invested in one asset class is driving rich investors to diversify currency exposure, says Alok Saigal.

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