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WF: In your roles first in an AMC sales function and now as an IFA, you continue to champion equity funds - first for one product provider, and now as an essential part of an investor's portfolio. Which is a more challenging task?
Ajay: It is very difficult to compare the two, though both involve expectation management of clients. In the former, your client is a distributor while in the latter your client is the end user of the product. The skill sets required to manage the two are very different. Explaining equity to a distributor is much easier than explaining it to a client as most of the distributors are very knowledgeable and would have invested their own money in equities at some point of time and would be well accustomed to the volatility involved. Explaining equity to an investor is a different ball game altogether. For an investor, you are the primary source and in some case the only source of information, which is not the case when you handle a distributor. Apart from handling clients, being an IFA also means you are the head of your organization, which means that you have to manage human resource, getting involved in office admin and other functions. Managing a distributor is very different from managing an investor and both have their own set of challenges, but still if I had to pick one then I would say being an IFA is much more challenging and with our Industry going through so many structural changes, it makes the job even more difficult.
WF: Getting conservative investors to allocate to equity funds must be quite a challenge, in the HNI as well as retail worlds. How do you get such clients to agree to make what you think is an appropriate allocation to equity? What strategies / communications have worked best for you over the years? Do these strategies vary vastly between HNI and retail clients?
Ajay: A majority of the clients I visit these days are conservative, be it HNI or retail. This could be the result of a great bout of volatility we saw between 2008 and 2012. Quite a number of clients are convinced that equity as an asset class can outperform all others but still wait in the sidelines not knowing when to take the plunge. This is where we come in. For the first time investor, we always suggest an SIP in a large cap equity fund to get him to test the waters. For slightly conservative investors, we suggest the SWP route. Ultimately it's all about confidence. Once the clients are comfortable with equity, we gradually increase the allocation into equity. Historical data which shows the outperformance of equity over the long term vis-a-vis all the other asset classes, comparison charts of MF schemes with conventional products and graphs showing the magic of compounding seal the deal. For retail clients, data which shows how inflation eats into their savings is a key to convince them into equities.
WF: It is often said that an advisor's "hand holding" during volatile times is what helps investors realise the full potential of equity funds. In your experience, is this "hand holding" for HNI/mass affluent investors more a case of presenting quality data on the benefits of riding out volatility, or is it more of emotional rather than rational support? How does this differ when dealing with more retail investors?
Ajay: I think it is a mix of the two and as far as I have seen, both HNIs and retail investors react the same way when equity markets tend to be volatile. After all it is the hard earned money for both of them. We have effectively used historical data to convince our clients about the benefits of long term investment and the effect of compounding. As it is impossible to predict the direction of the markets in the short term, we educate our clients about the benefits of long term investment and how the returns become more predictable as the tenure increases. So when a client agrees to invest in equity, we don't ask them how much they would invest. We ask them how long they would stay invested.
WF: Regular portfolio rebalancing is said to be one of the biggest services that an advisor renders towards his clients. Do clients readily agree to rebalance (buy when markets and market sentiment is low, and vice versa) functionally? What are some of the challenges you face when trying to get clients to execute periodic rebalancing and how do you try to overcome these challenges?
Ajay: Portfolio rebalancing and regular monitoring of the portfolio is extremely important in order to maximize the returns and keep the risk in check, but one has to keep in mind that rebalancing requires churning which comes at a cost. So at Allegiance we try to keep the rebalancing as minimum as possible. Equities are long term in nature and when we take a call on equities, we always discuss the volatility the product comes with. Churning the portfolio too often could be harmful and might not produce the desired results.
As far as convincing the clients on rebalancing the portfolio is concerned, I believe it is the easiest part. All you have to do is win the trust of your clients. That's what we try and do in the initial days of interaction with our clients. Building a bond with your client is very important. Once you have his trust, the rest is very easy.
WF: Many investors readily sign up for a long term goal based investment plan, but somewhere along the line look at exiting. What has been your experience in terms of what it takes to keep clients on track? What are the biggest reasons for wanting to opt out? What are some of the messages that you give that helps them remain on track?
Ajay: This is one of the major problems I had come across during the initial days as an IFA. It is easier to convince a client to take the plunge than to convince him to stay put. The reason for exit may vary from investor to investor but in most cases it could be the fear of capital erosion, lack of planning and patience and in certain cases it could also be liquidity issues. This is where financial planning plays a very important role. After the meetings and discussions with our client, we arrive at a decision as to what his goals are, how to achieve them and what should be the time frame. We always tell our clients that for equities, the most important factor for creating wealth is time in the market and not timing the market. So before a client commits into equity we ensure that the portfolio has a decent mix of asset classes to meet short term requirement and he also has a separate contingency fund to meet sudden unexpected requirements and only the balance money is invested into equity. Once we have taken care of these issues then it becomes relatively easy to convince the investor to stay put. Regular meetings with the investor, giving him emotional support and the regular reports will do the rest. For my clients I am the fund manager and he derives the strength from my confidence. So if I sound confident with sufficient backing of data then the client would not even think of exiting.
WF: We often say that investors indulge in "rear view mirror" investing - investing based on recent performance. In selecting equity funds for your recommendation list, what are the parameters you look at, to give a good mix between "rear view" and "front view"?
Ajay: Past performance (not necessarily recent performance) is just one of the key parameters for selecting equity funds for our recommendation list. Before this, there are several other factors that we look at before selecting the funds. In fact we prefer a top down approach while selecting schemes for the list. Before we look at schemes and their performance, we look at the fund house and their pedigree. The track record of the fund house is much more important than the track record of the scheme. We look at the approach of a fund house, their compliance, their team of analysts and fund managers. We take a cautious approach in choosing a fund house because ultimately it is them who you are entrusting your clients money with. Once we have zeroed in on the AMC then we look at the past performance of their schemes, and always prefer schemes with a ten year plus track record as that would give us an idea as to how these schemes have managed to tide over volatile and bear phases. Alpha generation cannot be the only criteria. It is not necessary that the schemes have to be the top performers in their category to make the cut.
As we have seen in the past, a lot of schemes have done well in the short term under favourable market conditions only to fizzle out with the market and never to regain the losses in the next bull- run. So, we always go for the tried and tested schemes. Equites are always long term and we never look at short term returns. We also give priority to fund houses where the attrition of fund managers is the lowest as we believe continuous changes in the fund management team could be a hindrance to the scheme performance as every fund manager has his own style of investing. We also look at schemes which do not deviate much from the given mandate. If we have a large cap fund which is performing well but has about 40% of the corpus invested into midcaps then we rather look at other schemes because we want the cat to behave like a cat and not a tiger. This simplifies decision making.
WF: As a corollary, when do you decide to take out an equity scheme from your recommended list?
Ajay: If a fund under performs consistently for a long period of time. Second, if there is a major change in the fund management team of that fund house and thirdly if the fund house decides to change the mandate of the scheme then we decide to have a relook.
WF: For an equity fund portfolio of say Rs. 50 lakhs, which has a time horizon of 5 years, how many equity schemes would you consider as adequate diversification?
Ajay: Diversifying beyond a point will not produce the desired result. At Allegiance, we don't look beyond 3-4 fund houses for a portfolio. The next step would be to decide what percent of the corpus should go to various categories like small cap, midcap etc. Once the classification of the asset is done, we try and stick to 3-4 schemes in each category. So, if we want to plan for Rs. 50 lakhs for 5 years, we would have 3 schemes in large cap covering 60% of the portfolio and the balance amount in a small cap and a mid cap fund. In case there is a liquidity requirement then a small portion into an arbitrage fund as well. This is the same procedure we follow for majority of our clients. We stick to 3-4 fund houses and 5 to 10 schemes depending on the time horizon and the goals.
WF: In the HNI world, do clients expect advisors to deliver alpha over market on a year-on-year basis to demonstrate value addor are they happy with a disciplined approach to investing that you promise, with no expectation to beat market on an annual basis?
Ajay: Most of the HNIs we deal with are very well informed and knowledgeable and when they hire our services, they have very high expectations. They always expect you to be much more knowledgeable than them and also generate maximum possible return in the shortest possible time. So, as an advisor when we start off a conversation with an HNI, the first thing we do is to try and bring down his expectations by explaining the risks involved. By providing data and charts we try to explain the benefits of long term investing, the value of being patient and not getting carried away by market movement and to stick to the plan. We always manage to convince our client that through our expertise and research we would definitely deliver superior returns, but over and above that there are other things we look at like minimizing the costs by limiting the portfolio turnover, maximum return by reducing tax out flow and giving time to the investments for compounding to take effect and show its magic.
WF: It is observed that world over, more information flow is tending to make investors more short term oriented. What is your experience with your clients and how do you deal with such expectations?
Ajay: Yes, I do agree and even we have noticed this trend. In the age of social media, information is flowing from all directions and from all kinds of sources. My clients have started calling me at mid-night to know what the US Fed had done to interest rates in their country. This information may not be of any value add to some clients but it does create some kind of panic. Today an investor feels (since he is privy to so much information) he has to be proactive with his portfolio all the time and needs to chop & churn his portfolio to insulate it from possible capital erosion as well as try and outsmart the market by trying to time the entry/exit. Our clients are no different either. Every meeting we have with them we keep on reiterating the benefits of staying put and the rewards of long term investment. We also talk about legendry investors like Warren Buffet, Benjamin Graham etc. and try and inspire them. Sometimes it is the simplest thing that is the most difficult to execute.
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Equity Insights: Advisor Perspectives