Clients went overboard on equities in last two years, says Ashish Shanker

Don't get carried away by near-term point-to-point returns as it will often lead to losses, says the Motilal Oswal Private Wealth MD & CEO

Debt has become an attractive asset class as the yields on even good quality papers have risen to around 8 per cent, says Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth. Shanker advises investors not to fall prey to near-term returns when investing in mutual funds.

Here are the edited excerpts from an interview with Abhishek Kumar.

What asset allocation formula do you use for your clients?

Firstly, we prepare a blueprint called investor charter on the basis of a client's return expectations, risk appetite and liquidity requirements. For example, we would advise 70-75 per cent allocation to fixed income and rest in equities for conservative investors wanting 8-10 per cent return. Someone wanting 10-12 per cent will be given a portfolio with a higher equity exposure. There are also other nuances like tax considerations when designing a portfolio.

 Have you brought any changes to portfolios considering the 2023 market expectations?

There are a few trends which are clear right now. Firstly, fixed income has become an attractive asset class. Today, you can construct high-quality portfolios with 8 per cent yields. If you invest in structured debt, the yields can go up further. In the last two years, clients had gone overboard on equities leading to lower than planned debt exposure. We are now trying to bring the portfolios back in line. Fixed income allocation is rising in most of our client portfolios.

Secondly, we are also ensuring that the equity allocation is in the right sectors. The growth is comparatively more broad-based now. Sectors like industrials, metals and real estate, which were out of favour before the pandemic, have come back on the growth path. 

 How do you ensure allocation is right for different sectors considering fund managers take this call?

You can get an idea by looking at the fund managers' style. We have a framework known as 4C for selecting fund managers. It stands for consistency of philosophy, consistency of returns, fund management capabilities and class. There are two broad styles of fund management: growth and value. Fund managers generally stick to one of them. This analysis gives a fair idea of where they would be investing.

Your tips for fund selection for retail investors?

Don't get carried away by near-term point-to-point returns. It is easily available and very compelling but will often lead to losses. Future returns have very little to do with past performance. In fact, it's the reverse. Our studies show that 70-75 per cent top performing fund managers turn bottom performing in the next three years. The way to identify the right fund is to look at rolling returns (which is a better indicator of consistent performance than point-to-point returns). Secondly, look at the track record. Ensure that the fund manager has at least 10 years of experience. One secret to making extra money is to give money to a reputed fund manager who has not done well in the last three years. There are always high chances of them making a strong comeback.

For an investor who is just starting, what would be your asset allocation tip?

New investors should keep it simple. There are three simple portfolios from which they can choose. 25 per cent in equity and 75 per cent in debt, 50 per cent in equity and 50 per cent in debt, or 75 per cent in equity and 25 per cent in debt. If you are investing for the long run, start with 50: 50. Once you are comfortable, raise equity allocation to 75 per cent. Rebalance the portfolio once a year to ensure that the allocation is in line with the plan.

Which international market is most attractive right now?

We recommend only US exposure even though at present we are more bullish on emerging markets (EM). But beyond China and India, there aren't any EMs that can be considered. In the case of China, there are a lot of fundamental challenges. People are investing there just because it’s cheap. Hence, it's better to invest in the world's most developed market. Globally, 60-70 per cent allocation goes to US stocks because it's the widest, most liquid and a vibrant stock market.

What is the ratio of passives in your portfolios?

The point is to strike the right balance between the two. There's room for both in every portfolio. For example, the largecap allocation can be through passives. Very few largecap fund managers are able to beat the benchmark and identifying them beforehand is a tough task. Overall, 30-40 per cent allocation can be in index funds. The rest can be allocated in active funds to generate outsized returns.