The importance of asset allocation

By Morningstar |  03-04-17 | 

Sunil Sharma, Executive Director and Chief Investment Officer of Sanctum Wealth Management, participated in a panel discussion at the Morningstar Investment Conference. Below is an excerpt.

The client segment that you're dealing with is slightly different, maybe HNIs or ultra HNIs. What approach are you taking? Are you looking only at pure equity or getting equity exposure through other sources like structured products and so on?

The one benefit of working with ultra HNIs is that they have the luxury of patience.

The common investor puts in some money and is feverishly looking for returns. The luxury of being in the ultra HNI space is you get to sit back and wait for opportunity and wait for the right prices. Patience is a virtue when it comes to investing in the market. We're fortunate that we work with ultra HNIs and we work in a way that is far more longer term. The horizons are far longer which again leads to higher return sets.

A lot of the investors we work with are sophisticated investors and they have seen the benefits that accrue from investing over longer-term periods. We try to educate the people we work with on understanding the key decision factors that are required at crucial times in the market and that can often mean the difference between a sub-par and a phenomenal return.

We have a model where we break down the asset classes into their individual flows. This enables us to compare equity, fixed income and another commodity and look at them on a relative attractiveness basis. What we're finding is on yield, equities are actually starting to look more attractive because we've had this decline in the tenure and so the forward expectations for equities, despite valuation concerns, are relatively more attractive today. That’s why we have a slight overweight currently on equities, we also have a slight overweight on bonds and are underweight gold.

Can you talk more about the kind of approach that you use when it comes to asset allocation? Do your clients look at strategic asset allocation, tactical allocation or just focus on a single asset class?

We meet guys who will tell us that are 100% into equities and some who are 100% in debt or fixed deposits. Our task is to ensure that the client is not doing something that we believe will be detrimental to their future returns. And if we feel that's the case, then we step in and we try and have a rational discussion around the goals. Generally, clients have a very set risk preference that they are looking to follow and then they also allocate monies to different managers. So, we don't always work with the entire portfolio that an HNI would want managed but a subset of that.

In the next 3 to 5 years almost all of us will be facing a decision under a certain amount of stress or duress. And how we respond at those times is what asset allocation is all about.

For me, asset allocation is about loss avoidance and creating a structure which allows clients to side step volatility. It is being positioned to be able to avoid making irrational and emotional decisions. It is about managing risk. Having a system where you know what your plan is going into a correction, not trying to figure out what your plan is when you're down 20%.

What are the key investment themes that you are looking at for the coming year or maybe the next couple of years?

In terms of investment themes, we are focusing on the automobile sector.

Energy is very interesting because there are a number of dynamics in terms of sectors that are changing. That is also reasonably valued.

There there is financial. Credit in India today is 52% of GDP. In the U.S. and in China, it's over 150% of GDP in each country. Our credit card penetration is somewhere around mid-single-digits. If we get to any kind of an emerging market average or a developed market average that number is multiples higher. So financial is another area we are very interested in.

Beyond that, the other typical area would be pharma and specialty chemicals. And then I would add cement.

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