Wealthy investors rework portfolios amid sharp run-up in equities

Shift portion of investments towards real estate, credit funds

Wealthy investors are reviewing their asset allocation after the sharp run-up in equities over the past two months, reallocating gains to either fixed income assets or residential real estate.

“We have downgraded eq­uities from overweight to neutral since September. While the economic recovery has been better than expected, valuat­ions are rich and seem to have run ahead of fundamentals,” said Rohit Sarin, co-founder, Client Associates, a private wealth management firm.

The benchmark BSE Sensex has gained 25 per cent since November and is up more than 90 per cent from its March lows.

Within the fixed income space, investors are looking at corporate bond funds and ba­nking and public sector undertaking (PSU) funds, which have done well in the past year with returns of 9.55 per cent and 9.5 per cent, respectively. Corporate bond funds have to invest at least 80 per cent of their portfolio in ‘AAA’-rated papers. Some of the funds now hold 100 per cent ‘AAA’-rated portfolio, said experts.

“Investors are revisiting their asset allocation as valuations are stretched. It is prudent to keep money in assets that can be liquidated easily to guard against any adverse events that may materialise,” said Raghvendra Nath, managing director, Ladderup Wealth Management.

Corporate bond funds and banking and PSU funds have seen inflows of Rs 19,703 crore and Rs 5,946 crore, respectively, in the last two months.

Those who are less risk-averse are turning to credit risk funds.

“Over a three-year investment period, credit funds over a three-year investment period, offer a significant spread over conventional ‘AAA’ corporate bond funds. This offers a decent cushion for any accidents or possible defaults in the future. Yet, one needs to dig deeper into the constituents of the portfolio before investing,” said Umang Papneja, senior managing partner and chief investment officer, IIFL Wealth.

Wealthy investors are also parking their money in residential real estate as mortgage rates have fallen to record lows and affordability is at an all-time high. Developers’ focus on liquidating inventory to prioritise cash flows and the widening spread between mortgage rates (6 per cent plus) and rental yields (3 per cent plus) has also spurred interest in the segment, said analysts.

“Pent-up demand, developer discounts and stamp duty waivers have created a temporary spurt in demand. Covid-19 has led to a clear preference of staying in an owned home, which will give rise to a new phase of growth in residential real estate, led more by volume and less by price,” said Sharad Mittal, chief executive officer and head, Motilal Oswal Real Estate.

Real estate investment trusts, or REITs, are another avenue that wealthy investors are exploring. “REITs have emerged as an important class as their relatively lower co-relation to mainstream asset classes has made them an excellent diversification tool,” said Papneja.

“India REITs performed well in calendar year 2020 (CY20) given resilient performance of commercial real estate. We are positive on Indian REITs, given the favourable outlook for tech and BFSI sectors (Rs 50 per cent absorption over CY14-Q1CY20). Potential consolidation benefits explain premium valuations (30-40 per cent premium to net asset value). Flexibility in lease arrangements, increased use of technologies and de-densification are notable trends to watch, whilst we prefer Bengaluru/Hy­derabad, given better infra and favourable demographics,” said a note by Ambit Capital released on Wednesday.