How Wealth Managers are Rethinking Their Asset Allocation Strategies

Wealth management firms have seen a flood of money flowing in from high-net-worth individuals (HNIs) and ultra HNIs in the country over the last few years. Growth in business and earnings by business houses, along with a rise in the number of crorepati salary earners, has created a huge base of clients who are using the services of wealth managers to get expert advice.

Conventional Portfolio Creation Tools

Wealth managers have been using conventional portfolio creation tools that balance risk diversification while trying to allocate money across assets that may provide higher returns over time. To be sure, they also factor in the objectives, time horizon of investment, risk appetite, and aspirations of the HNI clients.

Traditional Investments

The wealthy have traditionally invested in real assets like property, gold, and fixed deposits as the default mode of parking and growing money, albeit with a conservative strategy. As the capital market has developed, professional wealth managers have introduced bolder and more aggressive asset classes for the rich.
 

Equity Investments

Direct stock market bets and equity-oriented mutual funds have served the HNIs well, especially for those with higher risk appetites. However, some have experienced losses with specific stocks failing to meet expectations.
 

As a result, most wealth managers have started advising clients to allocate a larger chunk of money to mutual funds rather than direct stock picks. Many have also introduced their clients to the merits of passive investing with index funds.
 

Diversified Asset Allocation

These are in addition to the allocation of some of the overall pie to various other assets such as gold, bonds, government treasury bills, international stocks, credit risk funds, and real estate. New-age assets like NFTs and cryptocurrencies, once essential additions, have lost favor. Niche and fancy strategies like art and antiques remain a small part of the allocation and that too for only a minuscule proportion of HNIs, given the complexities involved, lack of a ready liquid market, storage concerns, and lack of knowledge about the asset by most HNIs as well as their wealth managers.

The Latest Trends

The latest asset allocation calls by wealth managers are a mixed bag of short-term plays and medium to long-term strategies. Essentially, there are three assets that are the flavor of the season.
 

Large Cap Stocks

In particular, wealth managers are suggesting their HNI clients switch to large caps in the stock market as the red-hot valuations have raised concerns of risk in the small and mid-cap space. Although even the large caps have risen beyond the comfort levels of market experts, they feel the probability of a sharp downward swing is much lower for large-cap stocks or large-cap-oriented mutual funds.
 

If we look at the asset returns quilt of the past decade, there are three categories that have been among the top performers in terms of annual returns at least five times: small caps, large caps, and international stocks. Given the volatility expected due to the upcoming US presidential elections and the continuing war in Europe, international stocks are not the most favored currently, though they provide a risk diversification option from the domestic market.
 

There is a wider concern about overvaluation in small caps due to the gush of liquidity in the system. This makes large caps the best suited for stock market and equity mutual fund asset allocation. While they have been among the best return generators, unlike small caps that have also frequently been at the bottom of the asset heap, large caps have not been frequent underperformers.
 

Commercial Real Estate

Another asset class that is being pushed by wealth managers these days is commercial real estate, including rent-yielding properties under the aegis of real estate investment trusts (REITs) and other securities that give exposure to commercial realty. The sector had temporarily fallen out of favor during the pandemic as the work-from-home phenomenon caught up with workspaces. But as the return to the office happened over the last year and the robust growth in the economy has boosted the stable and yet attractive returns profile of office and commercial retail assets.
 

Alternative Investments

The third asset class that wealth managers have gone overweight on and are advising their clients to bet on for the long term is alternatives. HNIs have already been building their exposure to the private capital market, having committed an estimated over $50 billion over the last decade.
What started as an indulgence due to the success stories of some names like Flipkart and Myntra has become a full-blown magnet as HNIs discovered the potential of being an early-stage investor in startups looking to disrupt legacy companies in their domain. However, startups and venture capital, besides angel funds, are just one part of the jigsaw. A significant chunk of HNI money has actually gone into private credit, which is being preferred as another fixed returns product in addition to the safety but low gains from G-Secs, credit risk funds, and corporate bonds.
 

Alternatives also offer the opportunity to participate in the pre-IPO frenzy via PIPE funds as well as thematic funds, such as those aiming at infrastructure for a long-term play and traditional sector-agnostic private equity and real estate-oriented funds.
 

Conclusion

Wealth managers are adapting their asset allocation strategies to balance risk and return while accommodating the evolving preferences of high-net-worth individuals. By prioritizing large-cap stocks, commercial real estate, and alternative investments, they aim to mitigate volatility and capitalize on long-term growth opportunities. Traditional assets like property, gold, and fixed deposits remain foundational, but the inclusion of mutual funds, index funds, and private capital markets provides a diversified approach. As the financial landscape changes, wealth managers continue to seek innovative ways to maximize returns and ensure the financial stability of their clients.