Reading the Tea Leaves Surrounding the Personal Asset Allocations of India’s Super Rich

How has current uncertainty impacted where they choose to put their money? And what does it say about their confidence in a quick economic revival?

India’s super-rich often tell us a story more eloquent than what the fall by a quarter in GDP numbers can convey about the country’s economic recovery prospects. Where they are putting their money is a commentary on where they expect growth, wealth creation and higher financial returns.

And while a slump may be only a bump on the road to wealth creation by the uber-rich, their view of the real economy matters for the ripple effect it can potentially create. And for all the talk of the India growth story, the chosen asset allocation avenues may be displaying a dim view of an early revival.

The clouds of uncertainty are looming large with no silver or satin lining and the road to recovery rather long and arduous. The result? A significant number of India’s wealthiest are setting aside their personal wealth into gold and foreign equities, predominantly in the US. Also, they are not fully deployed and are holding dry powder.

Also, it is not just COVID-19-related uncertainty that is the villain of the peace. There are other concerns too. The investment decisions or asset allocations are also guided by what is perceived as the regulatory hurdles, lack of investment-enabling environment and the resource allocation disincentives that come with it.

For instance, those who angel invest are opting to back their existing investments into start-ups and ensure these sail through the turbulent times rather than fund new ideas. This being driven largely by a capital gains tax structure that is unfavourable to angel investing and more attractive to fund flow into the stock market.

Clout that matters

The super-rich or the Ultra High Networth Individuals (UHNIs), mostly from family-led businesses are a very small number in India (as compared to the country’s population) but then this group enjoys sizeable economic clout.

Back-of-the-envelope calculations throw up different estimates depending on how one defines UHNWIs and their wealth. But if we take those sitting on Rs 300 crore to Rs 500 crore as a yardstick then there are an estimated over 2,000 UHNWIs with all of them put together sitting on Rs 10 lakh crore of investible wealth. Hence, what they do with it all may be worth looking at.

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Strategic allocations

Soumya Rajan is someone who should know. She is not only a family business expert but also the founder of Waterfield Advisors that deals with over 80 business families and managing assets worth around $4 billion or close to Rs 30,000 crore.

“Most of our clients are about 60% to 70% deployed in their equity allocations. They won’t completely sit out of the market and wait for it to correct, as Family Offices believe in strategic asset allocation, using market corrections to rebalance their portfolios,” she says.

“For the last six months, these funds were getting deployed and are continuing to be deployed. But we are not fully deployed and holding dry powder – amount committed but not yet allocated – because this is not a bull market and there are corrections we expect down the road.”

‘Family offices’, a growing trend among the UHNWIs, have today emerged as a major force helping the ultra high networth individuals spot opportunities for their personal wealth.

Rajan says the two areas they are putting money into are gold and international equities with a large share in it finding its way into equities in the US market. That in turn is triggered by the correction in the US markets that created an opportunity to invest there.

COVID-19 lockdown in Bengaluru on July 15. Photo: PTI

Perceptions matter

It is also backed by the perception that the US is likely to recover faster than many of the other geographies, including India. Aiding this process is the money the US Fed reserve has pumped in to keep businesses alive and left money in the hands of the people. This, in turn, will ensure they recover faster.

Today, Rajan says, about 10% to 15% of equity investment portfolios by the UHNWIs is into international equities, up from just about 5% in the pre-COVID days. International equities include US Equities and emerging markets – Brazil, China or Russia, though a significant portion is investments into the US equities.

Clients, she says, typically take international exposure through two routes – using the Liberalised Remittance Scheme (LRS) of the RBI (Reserve Bank of India) and through rupee denominated products available through various domestic Asset Management Companies.

The other area where funds are being parked is gold. ‘’In pre-COVID time, say about a year ago, there was almost no allocations made for gold and now it is about 5 to 10 per cent in a client portfolio.’’

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These allocations, she says, began only in the last quarter of 2019. This is partly because the dollar is getting devalued, with the large sums of money being printed by central banks and near-zero/negative global interest rates.

A larger problem

One could argue that uncertainty today is a global phenomenon. Be it around a COVID-19 vaccine, US elections, the tensions between the world’s two largest economies – US and China. And therefore, if there is investment in gold, it is to be expected given that it is seen as a hedge in an environment where there are negative real interest rates globally.

But then India? Consider this: If the interest rate is zero in the US, in the negative in Europe and in India with reverse repo at minus 3.35 and an inflation rate at 6.9 you effectively have negative real rates. All this means physical assets become more important and hence the demand for gold.

Corporate earnings are also expected to come back faster in the US than in India. Within India, there are at best pockets of opportunity in stocks of companies which are related to the rural economy. This is based on the hope that any kind of revival in India could be led by the rural economy as the demand there may not contract as much as in the urban pockets.

The super-rich are also seeing little incentive to angel invest, given that the capital gains tax is unfavourable for unlisted investments in India as compared to listed instruments.

Most importantly, of course, India’s GDP numbers, the latest figure show a fall by a quarter. The inflation rate has already gone beyond the RBI’s comfort zone of 6% (at 6.9% though it is being attributed more to food inflation). To top it all, the supply side seems weaker than the demand and the border tensions with China, still an important supplier across sectors, is only adding to the worries.

The dependence on China is still strong and deep – from pharma with the key drug ingredients (antibiotics to paracetamol) it supplies to several critical machine components used by many industries.

Recovery patterns

Even economists have now revised the Indian economic recovery prospects and expect it to take longer. The former Reserve Bank of India governor D. Subbarao had told this writer just about two months ago, in mid-July to be precise, that there were reasons to hope for a V-shaped speedy recovery for India. He then felt it was possible given that unlike in times of natural calamities like an earthquake or floods, the factories were still intact, transportation and infrastructure unaffected.

However, as the GDP numbers now reveal, things could be a lot more challenging. In fact, economic commentators are now discussing a possible K-shaped recovery where apparently some sectors recover strongly, while others will falter.

This is apart from all the other recovery paths in-between illustrated by the alphabets – U, L, W.

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Taking the long view

But then, not all people with wealth think alike and not everyone is about returns that are here and now.

“My philosophy is very different. I don’t like to time my investments or look at short-term opportunistic options. My investment thesis is guided by a long-term view while also keeping my wealth within the country and I do not invest in equities abroad,’’ says Kris Gopalakrishnan, the co-founder of Infosys and one who has over the past two decades invested huge sums to support research and in start ups.

“I typically keep it very simple and invest in the long-term potential of India. My investments are into three buckets: Of course one of them is investments in the equity market but then it is through mutual funds and not into individual stocks and is outsourced to professionals and it does not entail looking at it on a daily or weekly or even monthly basis. Then, I invest in start ups, which is again a long-term play and is about building India’s next generation of companies; and third, I invest in research for example into brain research and in computing.’’

In startups, he sees a momentum gathering in the area of digital and says, ‘’there are some new ideas that are coming up in the digital space and I have invested in them.’’

Doing reasonably well

But then, what about the returns in the current environment of uncertainty and the dim view many seem to have on the economic revival. To this, he says: ‘’I believe I will do reasonably well. May not be spectacularly well and it is an individual call. Some looking to spectacular returns may try to time the market and take advantage of choppiness of the market. I also see increased support for philanthropy by the UHNIs.’’

So, what does he think about the recovery potential prospects of India at the moment? Though Gopalakrishnan is upbeat about India, he is still worried and says: ‘’The fundamentals for the India growth story are still very strong and there is recovery potential provided there is control over the virus and some of the other challenges are addressed.’’

For instance, he points to regulatory hurdles. “I strongly feel that we have a long way to go when it comes to ease of doing business in a federal system like ours where states also play a big role. Addressing this will improve the business climate. We also need to improve the confidence of the consumer and stimulate demand.’’

A bird flies past a Reliance Industries logo installed on its mart in Ahmedabad, India January 16, 2017. Credit: Reuters/Amit Dave/File Photo.

Enabling climate

The point about regulatory hassles and the need to improve the business climate seem to have compounded the problems. Gopal Srinivasan, a highly regarded guru in the family businesses arena and the Chairman and Managing Director of TVS Capital Funds, says for the super-rich the current slump in an economy would at best be like an air pocket in their journey to protect and grow their wealth. To him the nature of their asset allocations is arguably guided by other concerns.

“Families allocate investments in their portfolio based on expectations of returns, balanced for risk and time-horizons. The objective of asset-creation or job creation is part of their business’ goals, and CSR goals, and not directly their wealth management goals,’’ he says.

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The investing behaviours induced by the spectre of COVID, he says, “resulted in people rushing to invest—even trading—in equities, to catch the wave of asset-price inflation arising from the surge of liquidity, due to the central bank stimulus. Exotic investments such as overseas trading accounts, investing in the volatile brand names such as Tesla and Kodak are some of the examples. This is despite listed investments abroad are being taxed at a much higher rate than the STT based investments in India.”

The bigger worry, he points to ” is a lack of a truly investment-enabling environment”.

“It is time to address the question of why they are not putting more money into new businesses and ventures in India; why are we investing in the secondary market, which creates no jobs? What investors need is measures to spur private investment.’’

Investment, to him, ”is after all the mother of job creation”. Therefore, what could change the investment incentives could be measures by ”the government to remove the disincentives for investing in unlisted securities and into start-ups. If you need primary capital to flow into domestic companies and businesses, then removing the misalignment in the tax structures will be critical. For instance, aligning the long term capital gains tax between listed and unlisted, foreign and domestic investor for both listed and unlisted entities, will go a long way to draw real investors into real economy leading into physical asset and job-creation.’’

The government, he feels, also needs to invest in a slew of large infrastructure projects to trigger job creation. Finally, to create the jobs and the demand creation that comes with it, yet another impactful measure could be advancing the cycle of government job recruitments for FY22. ”Start recruiting them now,” he says.

To him, bringing the economy back on track has all to do with containing the virus and taking the appropriate health measures decisions and any progress on that front will help contain the drag on the economy but to get investors to real economy growth triggers, much more fundamental shifts would be needed.

Demand revival

As is apparent, the importance of demand creation is central. And the conversations on this reveal family offices are being more cautious on new investments into businesses or startups, because many of the newer economy businesses are dependent on a demand revival, which may get delayed if the uncertainty around COVID-19 gets prolonged. Family Offices are therefore holding dry powder, in anticipation of better valuations, to enter businesses, in the next few quarters.

Though we are looking here at the personal investments of the wealthy, a quick mention of what companies with deep pockets or those keen to pare debt are doing is inescapable. India has seen its share of activity in this space with the one of the biggest deals in times of the pandemic being the one between Mukesh Ambani’s Reliance and Kishore Biyani’s Future Retail. It ensured Reliance was able to add, in one shot, close to $ 5 billion to its core retail business. But then, such deals are few and far between.

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Capital protection

Some of the concerns summed up by those who study the uber-rich centre around the need to ensure capital protection, which remains a top priority for many. Kavil Ramachandran, the executive director of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business and one who specialises in family business, entrepreneurship and strategy, says: ‘’Capital protection is found to be the top priority for most ultra high networth individuals/ families across the world.’’

He says, ‘’gold is one of the safest bets found around the world. Of course, they keep growing their wealth but they are prudent in choosing their investments. They are more active in secondary market and are not heavily influenced by IPOs and many of them are not in a hurry to somehow grow their already large base.’’

In conclusion, he says, ‘’in essence, they are cautious about choosing locations for investment. Since India, like many other countries, is experiencing high level of vulnerability, it is not surprising if they do not make major investments in India.’’ It may therefore be sometime before all can start harbouring hopes for a panglossian future.

E. Kumar Sharma is a senior business journalist.