With the market closing in on its earlier peak, it's time investors looked at alternative assets to grow their portfolios
NORMALLY, you will hear phrases like 'book profits', 'sit on cash' and so on when the stock market inches close to psychologically significant figures. However, this time around, if you pin back your ears, you may also hear someone whispering 'alternative assets'. It is not just the stock market which is close to breaking a historical high, other traditional assets like gold are also hovering around record highs. Things are fluid on the fixed income side as well. And, with interest rates hardening, it is not a great time for long-term investors in debt either.
With the markets touching new highs, we are asking investors to book some profits in equities and hold cash or build their alternative assets portfolio.
Alternative assets are non-traditional assets with potential economic value that is not found in a standard investment portfolio. Alternative assets could be precious metals (gold and silver), private equity funds, real estate funds, commodity ETFs (exchange-traded funds) or structured products.
According to Karvy Wealth Report 2010, the total assets under management under alternative assets are currently pegged at around 18,575 crore With Indian investors looking for different options for portfolio diversification, alternative assets will grow at a rate of 100% over the next three years.
Alternate products are offered to clients who already have some experience with equities and bonds and are looking for portfolio diversification. They could constitute about 10% of the portfolio, depending on the risk profile of the client. Generally, alternative assets are recommended to clients who have already built a large portfolio comprising equity and debt and are looking for an opportunity to invest in some uncommon assets.
Precious Metals:
Despite gold prices moving up in the past one year, it is the most preferred alternative asset. Gold is a hedge against inflation. The yellow metal is preferred by one and all not only in India but across the globe. It has a low correlation with other asset classes such as equities and debt and is considered a safe haven during times of economic crises. Some even regard it as an alternate currency.
Gold is a safe haven, liquid asset and acts as a hedge against inflation and currency shifts. Hence, we recommend clients to allocate around 5% of their portfolio to gold. Experts say investors should hold gold in the form of exchange-traded funds (ETFs), as there is no risk to storing them, the cost of buying is low and the asset has high liquidity.
We have also been recommending silver ETFs as an add-on to gold ETFs to high net wroth individuals. However silver ETFs are listed in the UK and the US, and investors would have to buy using the $200,000-window for overseas investments offered by the Reserve bank of India (RBI). This is tough as you would need to have a trading account with an overseas broker.
Structured Products:
Simple structured products with capital-guarantee products are offered to clients, with some participation in the Nifty/gold upside. Take the case of an investor who invests 100 in this product, with a maturity of three years. The fund will allocate 80 to debt and 20 to equity (Nifty). An 8% interest on the 80-debt component will give approximately 24 as interest in three years, which ensures that the principal (100) is intact. If we assume that 20 allocated to Nifty futures or gold futures doubles in three years, the investor will get 40. Thus, at the end of the term, the investor gets 144, or an absolute return of 44%, on his investment. While this is a simple structured product, there are more complex products with Nifty participation, gold as an underlying — they are created on demand from clients and market situation.
Private Equity:
Private equity funds typically make investments in companies with a short established track record and are in need of funds to expand. It is a pooled investment vehicle. This route is used to make investments generally in unlisted entities, with a high growth potential. The returns could be high, in case the company succeeds, as you invest in it in the early stages of its growth. Typically, you need a time horizon of around 5-7 years for such an investment. While you go for diversified private equity funds, you can invest in thematic or sector-specific private equity funds. Sector-specific private equity funds have a far higher risk than diversified funds, since investments could be limited to a single sector and in case of a downturn, things could turn ugly. Some recent sector specific funds include Kaizen Education Fund, Asian Healthcare Fund, Tata Capital Healthcare Fund and Enam Infrastructure Fund.
Real Estate:
Indians have an intrinsic liking for real estate, and many of them buy land. It has been considered as one of the most tangible sources of wealth accumulation. With land growing increasingly scarce in India, the value of real estate holdings is expected to grow. Real estate investors earn returns by way of rentals and value appreciation of the property. One can choose to invest in commercial or residential properties. Real estate funds are better vehicles to invest in real estate opportunities.
Anand Rathi and Knight Frank recently launched a rental yield fund. The fund is based on rental yields and invests in commercial real estate. Rental yield funds invest in properties that have been rented out based on the premise that such properties have lower risk compared with properties under development. In addition, rented properties also provide a regular income to investors. The total assets in real estate funds in India is around 6,753 crore, according to Karvy Wealth Report 2010.
Agriculture ETFs:
There are very few agriculture companies in India. Hence, few wealth managers recommend such ETFs "Rising income levels are likely to lead to a higher demand for food. Hence, we recommend agriculture ETFs. Market Vectors Agribusiness ETF is one such fund that he recommends for high net worth clients. However, such funds have to be bought through an overseas broker using the $200,000-RBI window.
Some TIPS
How to go about building an alternative asset portfolio
1 Buy alternative assets after you have built an equities and debt portfolio
2 Alternative assets should typically not exceed 10-15% of the total size of your portfolio
3 Invest in private equity funds and real estate funds only if you have an investment horizon of 5-7
4 Structured products offer twin benefits — capital protection and participation in an upside in the underlying asset
5 Buy overseas ETFs if you must. But remember, that you will have to open an account with an overseas broker and go through several cumbersome RBI procedures to buy ETFs
6 Choose private equity funds with care. Sector funds are risky and are likely to go out of fashion soon
