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Here is the question we asked some of India's experienced and successful IFAs from different cities.
Question: Are you tactically advising reducing equity allocations now or are you staying invested?
Background: There are enough red flags on valuation metrics we all track. The very popular IDFC MF PE scale is now clearly in red zone at a trailing market PE of 21.2. The highly popular I Pru BAF has reduced equity weight from 77% in Jan 2016 to around 57% now, in response to a rise in market valuations. Yet, in recent months, we are flooded with expert views suggesting that a tidal wave of money is coming and will keep coming from NIRP impacted developed markets to emerging markets - and specifically to India. There is a strong argument being put forward on why historical PE bands are out of context in a negative interest world - thus justifying elevated and perhaps more elevated market valuations. There is another dimension - that our economic recovery is gathering momentum and that earnings will shortly justify stretched valuations - so staying invested is what is right.
Amidst these seemingly conflicting views, what are you advising your clients to do now on equity allocations and why?
Responses
We have divided the responses broadly into two camps: Camp A is of the view that it is time to take profits from tactical allocations, bring in fresh money into lower risk products and generally reduce overall portfolio risk. Camp B is of the view that its best to stick to plan, ensure periodic rebalancing, and increase client communication. Some of the responses are more nuanced and therefore could fit into both camps for different client segments. However, with a view to enhancing readability, we have placed them in one of the camps.
Camp A: Time to take profits from tactical allocations / reduce portfolio risk
Mukesh Dedhia, Ghalla Bhashali Securities, Mumbai
There is no one right answer and there should not be. It all depends on your strategy. It will be a different advice to different clients . In general I believe everyone should have a 'Core ' & "Satellite' portfolio.
Your CORE should follow a Strategic Asset Allocation and rebalanced at proper intervals and SATELLITE could follow a Tactical approach. On the Tactical front we are moving on to cash. It makes lot of sense to play the Tactical side with ULIPs ( higher premium ULIPs have very low to no allocation charges and half the fund management charges). Advantages are there are no exit loads and no tax.
Shyam Sekhar, I-Thought, Chennai
We are redeeming thematic funds like banking and small/midcaps and moving to liquid funds. Our decisions are borne from our basic belief that investing should be driven by valuations and not by flows. If liquidity stays higher, we still will reduce our equity exposure on seeing higher valuations. Our approach would not shy away from holding higher cash levels in the event of markets losing their sanity under a flood of liquidity. We would prefer to stand in a dry place.
Shrikant Bhagavat, Hexagon Wealth, Bangalore
Firstly, we use any such tactical moves only with reference to a long term asset allocation, previously agreed to with the investor. Secondly, yes, I agree that our markets may be valued beyond fundamentals.
For those that have subscribed to our active strategies, we have reduced exposure to equity slightly, less than what we might have otherwise, simply because we have given a premium weightage to liquidity. In the Indian perspective I do not think we are in bubble territory, overpriced, yes - global risks are more challenging. Even assuming the economy will pick up, and enjoy average earnings growth of 14% in FY18, we are beyond fair value. In a highly strung global market, we believe we will get enough opportunities to buy back when there is some kind of panic. Also, fresh exposures are being moderated.
Brijesh Dalmia, Dalmia Advisory, Kolkata
Yes we are. For few clients. On a case to case basis. Depending on clients appetite, risk ability, comfort, behavior, time horizon. We have spoken to each and every client in last 2 weeks and explain the risk reward from here (markets at 52 week high and near all time high with trailing PE above 20 for BSE and 24 for NSE)
Most clients are comfortable. But we are booking profits in small cap and mid cap funds. Historical evidence suggests markets are expensive. We are going safe and measured. Fresh inv mostly in balanced and debt. If markets go up further, the ROI will anyways shoot up for clients even if we keep booking profits.
I would say 30% clients, we are doing partly booking of profits.
Nipun Mehta, Chennai
WE ARE SWITCHING CLIENTS MONEY WHEREVER POSSIBLE TO BALANCED FUND , AS THE VALUATIONS SEEM EXPENSIVE ON THE BACKDROP OF THE RUN UP, WHICH HAS BEEN VERY FAST, WE FEEL MARKETS THOUGH IN LONGER RUN WOULD GIVE GOOD RETURNS ON A 3YEAR PLUS HORIZON, BUT IN THE SHORTER PERIOD, THE CLIENTS MIGHT GET CHANCE OF ENTRY AT LOWER POINTS DUE TO VARIOUS FACTORS INCLUDING GLOBAL FALL IN EQUITY MARKETS AND FAST RISE IN THE MARKETS, AND NEW INVESTMENTS WE ARE TRYING TO DO STP/SIP RATHER THAN LUMPSUM DUE TO ABOVE FACTORS
Mukesh Gupta, Wealthcare Securities, Delhi
We are cautious about equity allocation. We are not recommending pure equity funds. Either we are recommending Asset allocation funds or Balanced funds by way of SIP in staggered manner over 1 year period. As per our experience, when fund manager start to justify the valuation on one ground or other, that rally normally does not sustain. We have to decide whether we need good return or maximum return. For good return, we are moving money from equity funds to asset allocation funds/balanced funds. for large portfolios, we have devised a system of trailing stop loss systems.
Deepak Chhabria, Axiom Investments, Bangalore
Many of our clients have their portfolios tagged to their investment goals but re-balancing has become imperative, especially at this juncture. Last 1 year has seen Small & Midcap returning 18-20% and the 3-year return is healthy 35-40% for a large number of schemes in this category. Though domestic fundamentals seem to be improving and do not warrant the large shift in allocation away from equities, it's the Global situation that is cause for worry. Central Bankers across the globe are talking about tightening the liquidity tap and change in monetary policy stance. A possible rate hike in coming weeks by US Fed also needs to be taken into consideration. Widely tracked market indicators are pointing towards stretched valuation, in many cases, valuation is ahead of fundamentals. Historical PE's may not be true indicator all the time and in all the cases, but surely cannot be totally ignored.
Taking some profit off the table and using this opportunity to restructure the portfolio by exiting the laggards is what we are doing. Any fresh allocation to equity is being spaced out.
However, the heartening ingredient of the rally that we are observing over last 3 years is the return of domestic investors. To a large a measure the current rally is also being fuelled by domestic money, with alternate investment opportunities like Gold and Real estate being out of favor, the flow may remain favorable. But, any slowdown in foreign flows may halt this rally, albeit temporarily, here one needs to be prepared for the same, higher cash can be helpful during such corrections.
George Joseph, Bangalore
My general advice is
go slow on Equity this time is not different, even if it is different, wait and watch, because the returns from equity may not be able to beat the returns on debt, based on valuations. We can invest when the earnings justify valuations.
Fresh Money - If the time horizon is more than 3 years, invest through STPs spread till March / June 2017. For those with an outlook of less than three years, park in liquid funds till valuations are attractive or invest in products similar to BAF, like DSP Dynamic Asset Allocation Fund, DHFL Pramerica's POWERGOALS or MOSL MOVI.
Clients who may require funds in the near term - move your funds to liquid funds and hold. Clients who are in it for the long term - Hold, we may see a "low return" year ahead, while earnings catch up with valuations.
Past experience in the market shows that liquidity is like a balloon filled with water, the money from foreign sources can evaporate at speeds we cannot imagine.
Raj Talati, ABM Investments, Vadodara
Like you briefed we are red zone as far as P/E band, yes, we have stopped any additional allocation of our investor in Equities except by way of SIP's. For Mid and Small cap we had stopped any further investment since last 1 year.
Yes, your points on relevance of historical PE bands in a negative interest rate world, the point on economic recovery gathering momentum - all of these sound logical. But one negative news can change picture completely in such costly market the way it happened in 2008.
But we are also not taking any tactical call on existing equity investment reason being investors are sitting in good profit and if market corrects by 3-4000 points will not have much of an impact on long term returns. Other reason is as you rightly said due to global liquidity market can take rally much further, so alteast clients have an existing portfolio from which they will have benefit of pocketing gains.
Rashmin Deshpande, InSync Wealth, Pune
Yes, we are suggesting profit booking at the current level.
Sandeep Gandhi, Mega Financial Planners, Rajkot
First, there is no one ideal scheme for all weather. These type of funds ideally should have little exposure in every client especially retail, as they are not very active. The basic of these fund is to protect down side and not to participate fully in upside movement. Remember, it is said that 4 most costliest words in Investments world are: 'This time it's different', which in my career of 30 years have proved correct. To go wrong one time is acceptable.
We are talking to clients on one on one and informing them the current scenario. If his risk quotient is not allowing him to be long on equities and either there is change in his current life style or he is near to his goal, he may reduce his long only equity scheme. Actually right now my clients are shifting to this type of schemes and reducing the risk of the entire portfolio.
But the story is totally different for the new, young clients who have a time of more than 5 years' time. We still suggest them the diversified equity schemes. The reason is that if they don't have equity exposure and they are ready to start with equity, and are ready to commit more funds in future and have long time frame, this time also is suitable for them. The basic reason is that they should not loose on value of compounding of time.
Nitin Awasthy and Achin Jain, Client Alley, Dehradun
So the answer is Yes we are.
Reasonings ::( advisor view in relation to customer psychology and behaviour )
1. In March 2015 when market touched its highest everybody was shouting for next big levels in market and going gungo investing in Equity but market tumbled and what happened profits eroded .. all theories failed, Even healthy macro domestic parameters failed to hold markets.
2. Now two things
a) Markets reached almost 30k in March 2015; P/E went higher so it definitely alarms us one should not get greedy and atleast book profits as high PE cannot ignored.
b) at the same time P/E is not the only decision maker according to us sometimes higher p/e is also justified if it is coupled with other factors like as you mentioned favourable domestic economic conditions etc ...but then one cannot ignore other parameters like global economic situation as we are not immune to it and any dent there still shatters us emotionally or rationally.
c) P/E can be higher also coz of lower earnings and not because of higher price so one should not get distracted seeing P/E in isolation so if you see a visible earning as it seems now as economy is gaining momentum and lot of foreign money is chasing Indian economy.
So as an advisor, in layman terms, we are booking profits now and if for example in a portfolio of INR 100 if equity is INR 40 we suggest to liquidate atleast 50 % of it and divide it in 2 equal parts ( 1 part keep in liquid and other part do an stp of atleast 6 months with a flexibility to deploy it in lower markets , liquid part to be kept to be only deployed when markets go cheaper /fair in valuations as happened in feb 2016 near 23 k types ), for fresh equity allocations ( divide in 3 equal parts 1st part liquid , 2nd part stp 6 months and 3rd part in equity as customer psychology of not losing money not participating in rising markets has to be addressed )
Dillemma we face as an advisor:
During rising market :: Client behaviour is very confusing sometimes as they always like profits and if you reduce equity allocation :book profit - wait for markets to fall, clients don't like not participating in profit machine when market is going up.. During falling market :: when clients see profits being eroded / losses, they are very disappointed
So as an advisor, more than what we think is right, we have to strategize and plan our actions keeping in mind customer swinging behaviour as its a difficult task to explain to the client who goes miles away from market when it is falling as in feb 2016 (sensex near 2300 levels ) fearing a crash/using strong words like recession etc like of 2008 is about to come when one should think of participating because of cheaper valuation and the same cusotmer at sensex 26000 near brexit episode pressurize us to invest in equity as markets are going up but when we are not comfortable seeing higher valuations..
Camp B: Stick to plan, ensure portfolio re-balancing, enhance client communication
Vinod Jain, Jain Investment, Mumbai
I am not reducing equity... Clients who are not invested, I am advising them to invest lump sum before market makes new high.... Also i am telling them Indian mutual fund has delivered return even in absence of market movement...
Bharat Phatak, Wealth Managers, Pune
It is but natural that conflicting views would emerge on this question. It is the perennial choice between "loss of capital versus loss of opportunity".
Diverse output will come from the fundamental, technical, quant and macro view. Valuations are the mainstay, but they have to be looked at from two angles. Historical and Forward valuations on the one hand, and Stock-Bond relative valuations on the other. This does not work like algebra, but a "formula" is a helpful guide. We try to look at valuations in a band of "high" band and "low" band, and not work on a single number. Technical analysis will show a "momentum" which is always seen at high band of valuations. Quants will point to various mean-reversion possibilities. Improving domestic macro on the backdrop of decaying global macro is also a challenge. Zero interest rate situation globally and declining interest rates in our markets also have an impact on relative valuations and the hazardous tendency to indiscriminately lower risk premia across asset classes. Hence, the stance does depend on judgment and behavioural aspects.
All portfolios and all client temperaments are also not the same. In some cases, the portfolios have been held over past two cycles, while recently indeed a tidal wave of new money has been seen. We are devising different tactics for both. Where assets have been held for long term, asset allocation discipline is inculcated, the approach is stick to the formula of rebalancing. This addresses the "urge to act" but gives a satisfaction that the action is opposite to the markets. Individually, some client will override these signals and consciously take a deviation from their investment policy. In case of new money, we try to make sure that the horizon is definitely long term. This I think is a key attribute. We alert the investors that a 10 to 15 % price decline is "always round the corner" and possibly takes place 3 to 4 times every year. Experts can justify the reasons in hindsight, but rarely anyone will be able to predict these correctly on a consistent basis. A useful question is "What will you do in case of such a decline?". It prepares the mind not only to be ready for such a decline, but also look at it as an opportunity rather than a problem. We also try to convince clients to enter through the SIP STP route, and advance the future instalments in the event of a market decline.
Vineet Nanda, Sift Capital, Delhi
We are unprecedented times as far global economy is concerned wherein traditional economics, valuation models etc may not work. Hence rather trying to double guess the market movements we are focusing only on two basic things : Asset Allocation based on risk appetite of individual investors and sticking to good quality funds & fund managers.
Sangeeta Jhaveri, Prescient Financial Solutions, Mumbai
Our client portfolios have asset allocation to debt and equity plus long term investment horizon. We are not suggesting our clients to book profits. Also it is very difficult to time markets. However the clients had seen the markets move to 30000 index in the month of January 2015 and then corrected to 22500 in the month of February 2016. Hence very few savvy clients are booking profits hoping to re-enter the market at lower levels.
Rajul Kothari, Capital League, Delhi
You have already explained everything in the background. Our view: (a) One third of global sovereign debt today is fetching negative interest rate as a result of which asset prices (read PEs) are inflated compared to the past. Warren Buffet had warned of this phenomenon while addressing the AGM of Berskhire Hathaway in April, 2016. PE is basically the price one is willing to pay for one unit of earning. In a negative interest rate environment and with most global Central Banks following easy monetary policy, the premium on price for one unit of earnings increases. (b) This time around, stock markets in India have risen not only on foreign fund inflows but also due to higher allocation of domestic funds both from retail and institutions.This trend we believe will continue and accelerate with the reduced appetite for investment in real estate and gold due to various reasons. (c) Compared to 2007/08 when PEs were at 24-26X, the average PEs at 19X for one year forward earnings currently are just at the upper band of the long term PE range. Also there is absence of euphoria in the Primary markets compared to past periods of bubbles. (d) Lastly, we should not forget that the base in the PE ratio, which is the earnings is coming out from the bottom of the cycle and not vice versa. Hence, any upside in earnings will have twin effect on PE: PEs will automatically fall and markets will rerate the same stocks on pick-up in growth in earnings going forward.
Based on the above, we are not unduly worried and we are staying invested. However, as a discipline, we are going by the asset allocations for most clients and wherever they are off by 8-10%, we have been rebalancing the portfolios.
Ashwani Tiwari, WealthMate, Jalandhar
No, I am not advising clients to reduce equity allocations just because markets seem to be on higher valuations and some of the dynamic funds in the industry have reduced equity allocation based on their proprietary models. Some of the reasons I am not reducing equity allocations are that first of all markets discount earning much faster than any fundamental proprietary model so making tactical equity adjustments based on earnings can be very costly. Secondly, liquidity and momentum can drive the markets much higher than what one can anticipate, no doubt markets are slaves to earnings in the long run but taking tactical calls purely on earnings can prove futile. Finally, I think what decides the equity allocation for me is not the earnings but the client asset allocation, someone who has no equity exposure at this point has to have equity exposure as per his risk profile whether we are at 21 PE or 16 PE, the only challenge comes when someone already has the required asset allocation and wishes to make incremental allocations for which I think we have adequate tools in terms of STP, dynamic equity funds and so on.
Ranjit Dani, Think Consultants, Nagpur
We are staying invested in all our very long term allocations - say 5-15 years types. Wherever we were running ahead of the required run rate n the goal was nearly n nearly achieved, we are selectively reducing equity allocations. Another scenario where we are recommending reducing equity is where there was a loan on the books, we are using the cashflow from reduced equity allocation to make a larger bullet payment.
But everytime markets get overvalued we are presented a new story to justify these high valuations. In 2007-08, it was sum of parts n valuation of real estate held in books at book value, this time it is the opportunity cost of capital being zero and hence by corollary equity valuations can tend to infinity. Time to be cautious clearly especially for first time investors in equity, the advisor handholding has to be immaculate otherwise these investors will never come back to equities through MFs.
Mona Fakih, Allegiance Advisors, Mumbai
We are advising clients to an STP approach in equity with a 5-7-10 year view.....and would use this time as an opportunity. And would advise clients to stay invested...
Pramod Saraf, Swan Finance, Indore
We are more working towards asset allocation in client portfolio with a range bound tactical strategy. Market trailing PE are definitely hitting to red zone but in my view market is not readable with the help of 'Trailing PE' only and if it is the only or major contributing parameter to read the market clearly then there is no need of investment advisers / financial planners / fund manager. We are still allocating the investor funds to equity but looking over the portfolio requirement as suggested by their Investment Policy statement.
Ashish Modani, Jaipur
Based on determined Asset Allocation, we are reducing equity allocation but they are not tactical in nature. Generally, we avoid taking tactical decisions.
Hari Kamat, Panjim
Being more in retail business I still continue advising on SIP & STP in general. As regards Lump sum Investments I have been allocating substantial money in Balanced funds & Dynamic asset allocation funds which I consider as evergreen strategy.
N Krishnan, Value Invest, Chennai
No, We are recommending equity now. Lump sums can be invested whenever there is an opportunity at corrections. SIP is evergreen and it is going on to our clients at any point of time. We keep on track the portfolios of our clients and review will be done at regular intervals.
D Muthukrishnan, Chennai
Clients who invest through SIPs in equity funds are doing so for a long term, 10 to 20 years. So it does not matter if market is temporarily overvalued. For those clients investing in balanced funds and MIPs, automatic rebalancing keeps happening periodically. So we are not doing any tinkering now.
Bharat Bagla, Bees Network, Kolkata
No we are not tactically shifting allocations away from equity. Albeit for a very selective few clients who like to actively rebalance their portfolios. For the others... It's more about asset allocation. It's more about being in equity as an asset class. In recent times whatever has been allocated to equity has been well thought after money. So even the clients are fairly aware. However new allocations are taking time. Attractive entry level is missing.
Jignesh V Shah, Surat
Stay invested or put more money in to equity. Only PE is misleading. My Reasons are
You talk about only one scheme, but when we talk about investor portfolio, generally Indian investor is underweight in Equity asset class. In my opinion no sense to reducing equity allocation 10 year return is still at 9.2%: way below its average of 15.1% our market cap is 1.10 lakh crore and GDP IS ABOUT 1.42 LAKH CRORE , so still market cap is at discount of 22%. Capacity utilization is 70% , Credit Growth is 9.5% , ROE NIFTY is 13.8% all Data Points state that market well behind in compression of Dec 2007. GST bill ( Biggest Reform) is passed and Earning Growth is slow and has not picked up anywhere close to its best level.
This is the time to add to equity and get investors to first reduce their underweight position in equity.
Sashidhar, Wealthcare Investment Advisors, Hyderabad
I am not reducing equity exposure in my clients portfolios because of higher valuations. I believe even though there is a correction it may not be huge and should be shallow one. we may have time correction rather than price correction is what i believe. Looking at the interest rates, globlal liquidity and domestic growth, I am taking this call.
Javahar K P, Enhance Money, Bhopal
We are advising our investors to stay invested as there is no immediate risk involved as the three triggers of market have been met like GST,Monsoon and 7 CPC. However, we are very cautiously approaching the market due to trailing PE concern.
To conclude
There is, as Mukesh Dedhia says, no one right answer. But what is clear is that you must be clear about your strategy, and you must ensure that you have secured client buy-in for your strategy. This is the time for heightened advisor action - action in terms of higher client engagement, in terms of ensuring portfolio rebalancing execution or action in terms of taking profits tactically from the table.
Which camp do you favour and why? Which of the kaleidoscope of rich insights shared here appeal most to you? Share your views with fellow advisors and distributors by posting your comments in the box below - its YOUR forum!
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