Volatility: An equal opportunity offender
How do wealthy individuals react when the market turns jittery? Do they take it in their stride or get shaky like the average retail investor?
They may have money to lose, but, like any other investor, they hate to lose it.
High-net-worth individuals (HNIs), who continue to have a high degree of exposure to the equity market, are feeling the pinch from the current bout of global market volatility, with both direct equity holdings and indirect holdings through hedge funds, taking a beating.
According to the 2015 edition of the ‘World Wealth Report’ from Capgemini and RBC Wealth Management, equities remained the dominant investment for HNIs, with 27% of their wealth invested in stocks. In the Asia-Pacific region, the wealthy increased their equity allocations to 22.8% from 21.7% the previous year.
While allocations to different markets and individual securities will determine the actual performance of any portfolio, broader equity market indicators have not been encouraging. The MSCI World Index has fallen nearly 5% year-to-date. Individual indices like India’s S&P BSE Sensex have fallen more, with the index down about 7% since the start of the year.
Those who chose to invest through hedge funds—the so-called smart money—have done only marginally better. According to Hedge Fund Research, a firm that tracks the global hedge fund industry, a composite index of global hedge funds was down nearly 2% in August and is flat year-to-date. Emerging market-focused hedge funds, however, have fared much worse, falling 4.5% in August and 9.2% of the past three months, said an 11 September report from Hedge Fund Research.
What could possibly make things a little worse for HNIs is the fact that many of them tend to invest on credit. According to the Capgemini-RBC Wealth report quoted above, 18% of all HNI assets are financed through credit. And 40% of credit taken is being used for investments, showed the report. This essentially means that when the market turns, not only do HNIs take a hit on their investments, they also need to worry about repaying the capital they may have borrowed for these investments. Not surprisingly, the younger HNIs are more likely to fund investments through credit, making them more exposed to the double whammy of a fall in the value of credit-funded investments.
So, how do wealthy individuals react when the market turns jittery? Do they take it in their stride or get shaky like the average retail investor? Those in the private banking industry say that the reaction from HNIs is not very different from retail investors, although it differs based on the sources of wealth. HNIs with inherited wealth tend to follow a more structured approach to investment and often invest through professional setups like family offices. Such HNI investors exhibit greater staying power. Entrepreneurs and wealthy professionals feel the pinch more. Entrepreneurs are more reactive to volatility, particularly if they foresee the need to liquidate their investments for their own businesses.
A more common consequence of volatility is the reluctance to commit fresh capital until a clearer picture emerges on the medium- to long-term outlook for the asset class. This played out in recent weeks when HNIs pulled away from the primary markets after a bout of extreme volatility in the secondary market. A number of initial public offerings (IPOs) that came to the market after mid-August saw limited subscriptions with the HNI portion of the issues remaining under-subscribed. Some HNIs invest large chunks of money in IPOs with the intention to exit after capturing the initial gains seen on listing. However, with the equity market turning volatile, the potential for such gains was limited and hence, the HNIs stayed away.
In the longer term, though, HNIs in India are slowly changing their investment style and moving towards a more structured way of deploying their surplus funds. The growing segment of alternative investment funds (AIFs) is an example of this.
AIFs, divided into three different categories, include hedge funds, private equity funds and real estate funds. Most such funds are tapping into HNI wealth to get subscriptions to their planned funds. According to a 22 August Press Trust of India report, 158 entities have been allowed to set up AIFs in the past three years by the capital market regulator. In the April-June quarter, AIFs made an investment of over ₹ 9,094 crore compared to ₹ 7,357 crore in the preceding three months. The growth in this segment is reflective of the desire of HNIs to invest professionally through well-managed and professional entities. Investing through such funds also allow HNIs to cash in on emerging themes in the economy such as the rise in e-commerce.
Furthermore, the concept of family offices is picking up. While such offices, specialised in managing resources of wealthy families, were limited to the ultra HNI segment in the past, they are becoming more common, say bankers. With professionals coming in to manage this wealth, deployment of money will also move towards formalized channels.
Ira Dugal is assistant managing editor, Mint.
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Business NewsOpinionVolatility: An equal opportunity offender
First Published:28 Sep 2015, 12:45 AM IST
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