Global Wealth Trends

Season’s greetings to everyone as we all celebrated Diwali!! All of us work so hard to earn money and also plan our finances so that we are able to generate wealth in the long run. As we become global citizens, a good reference is the 2018 Credit Suisse Global Wealthreport which compiles and reports data on wealth generation across the world.

Global wealth trends

  • Globally wealth grew by 3.6% last year to 317 Trillion USD (adjusted for population growth) with 42 million millionaire’s world wide
  • The United States has generated 58% of incremental wealth over the last five years. This is even higher than the 40% share over the last ten years
  • Wealth distribution is extremely unequal. If you had more than 7.3 lakhs INR (10,000 USD) then you are richer than 64% of the world’s adult population

Global Wealth Trends Credit Suisse 2018

Wealth generation trends in India

  • At 6 Trillion USD, India accounted for less than 2% of the world’s wealth. This is despite a fivefold growth from 2000 to 2018
  • Wealth in India has actually grown at a slower pace than mature markets. We have 91% of our wealth in physical assets (real estate and gold)
  • We have only 9% of our overall wealth in financial assets. This is 8 times lesser than market leaders in wealth generation like the US (72% of the wealth in financial assets)
  • If you had more than 73 lakhs INR (100,000 USD) then you are in the top 1% of Indian families in terms of wealth

Key Takeaways

As we look at the trends across 15+ major economies, three key points stand out:

  1. Looking at wealth generation patterns globallythe move from physical (read as real estate and gold) to financial assets (mutual funds, insurance plans)is a once in a life time opportunity for wealth generation which has happened in mature markets. India will go through a similar trajectory and this opportunity is to be fully capitalized in the process of wealth creation
  2. We have global opportunities for wealth generation. Diversification into international asset classes is to be considered once we have built a firm base of assets in India
  3. Wealth inequality in India is worse than other markets. For many of us, education, family support, corporate growth and our skills have helped us move to the top of the wealth pyramid in India. We should be thankful that all of this has come together for us at the right time.

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Age and Equity exposure has little correlation – A study by Vanguard

Over the last five years, we have seen an increase in investments in equity. One common question is how much equity should we hold as we grow older!! There are various theories on this which range from simplistic thumb rules (equity exposure = 100 –age (in years) to complicated asset allocation models and calculators!!

What are investors doing globally

We recently came across a very interesting study in the US. A 2018 Vanguard studyof four million investors showed how the equity allocation varies with the age of the Individual.

Let us understand this better

  • The overall % of asset allocation to equity is much higher than what we expected. Equity allocation drops with age but the median still is 90% amongst the millennials (those born after 1980) and 63% for the silent generation (those born before 1945)
  • The minimum age of a person from silent generation is 73 years. And the average equity holding is 63%!!  Let us look at why is there is such a high asset allocation to equity.  Probably, those in the baby boomer and silent generation have seen significant gains from equity over the past 15 years and this has encouraged them to stay on in equity irrespective of advancing age
  • On the other hand, quite a few have zero equity exposure

It would be fascinating to analyze these numbers from an Indian perspective.NCAERand RBIhave done the most detailed research in this regard.

  • A 2016 NCAER study showed that between 70 to 90% of the wealth in India is locked up in physical assets (real estate, durables and gold bullion)
  • The interesting thing is that the asset allocation hardly seems to vary by age!! We hold 60-70% of our money in real estate and this does not reduce over time

How does this matter to us in India?

Too often our personal experience (how our equity portfolios have done for us over the last 1 or 2 years) influence our asset allocation decisions. The age of the individual or our past experience should not be the criteria to determine the level of equity exposure. More mature markets like the US are showing increased equity exposure over age and time.

As we keep emphasizing, asset allocation is a key decision which determines how we grow our wealth over time. While there are various thumb rules and calculators available, the allocation will depend on each family’s unique needs and it will also evolve over time.

Overall as Indians are making the shift from physical to financial assets like equity, an understanding of the risk adjusted returns and taking long term decisions ignoring short term fluctuations will help investor optimize their wealth and returns.

Global sell off – contagion effect

Today’s market fall is possibly the result of the weakness seen in US markets overnight.  US equity markets have corrected more than 3% yesterday.  Taking cue from there, Asian markets opened weak and Indian markets followed that.  Now the European markets are also in the red today.
The Indian market may continue to remain volatile over the next few weeks still clarity emerges in the global markets. The quarterly results of the companies which are expected over the next few weeks are expected to be positive.
The key things which help to change the sentiments for Indian are oil prices, USD-INR exchange rate and US Government securities yield with regard to global markets.  If any or all of them start going down, then we can see a quick turnaround in Indian equities.  The results of September quarter will also be able to change the mood of the market, if the hope of growth in earnings holds good.
This is not a time to panic and book losses.  We shouldn’t be converting the notional losses to actual losses by exiting in panic.  This is the time to buy,  if you have cash.  If you are fully invested, then stay put.  The key thing is to see if you have adequate resources to meet your short term needs and are insulated from the market movements.  If yes, there is nothing to panic.  The panic in the markets happen for different reasons.
In these kind of markets the recovery can also be swift and furious.  You need to stay invested to take advantage of the swift changes as and when it happens.

Managing our behaviour – Lesson from a legendary IIM Ahmedabad marketing teacher!!

This week has been challenging for investors with constant flow of news about falling stock markets, raising crude oil prices, falling Indian Rupee and the stable interest rates etc. As reiterated last week by us here, 2018 continues to be volatile. The best thing for us to do as long-term investors, is to ignore the short-term noise and stay focused on the long-term goals.

While the logical part of our brain accepts the need to ignore short term signals, the emotional part is often in denial. This is wonderfully illustrated by Daniel Kahneman in his Nobel prize classic “Thinking Fast and Slow”. We are bombarded by news from social media, TV channels like CNBC, business newspapers, Whatsapp etc. How do we ignore all these short-term signals?

Today I would like to share a lesson from an IIM Ahmedabad professor. From personal experience, I can assure you that it is very useful. Harish Bhat, ex COO of Titan pays his tributes to his marketing guru – Prof Abhinandan Jain. Do read this moving note.

Prof Jain used to ask a simple question in class – “So?”It is the most powerful question we can ask!! Let us see why this is so relevant for us as Investors today.


Prof Jain was a teacher for 44 years at IIM Ahmedabad and he retired last month after guiding 40+ batches of CEO’s, IIM Directors in Marketing. One of his most powerful lessons was to teach students to think things through and not to be a “lazy thinker”.

The IIMs follow the case study methodology of teaching. The students would be given notes for a case study (e.g. how a company had to address a demand problem) prior to the class. The students are expected to read the case study and come prepared with their insights.

Typically, the class would be a discussion with inputs and views from students rather than a teacher reading out notes. The professor is more a facilitator who guides and shapes the thinking rather than reading out notes.

The Power of “So What?”

Whenever a student used to give an insight, Prof. Jain used to typically ask “So?”. I had a teacher from IIM Ahmedabad who used to ask a similar question, but he was more generous – he used to ask two words!! – “So What?” Whenever you are tempted to arrive at a conclusion based on a data point this will tempt you to think further towards a logical conclusion.

Let me give an example. Try applying this question to some of the recent news triggers

  • Media and research analysts have opposite views – Morgan Stanley says that the Sensex will go to 42,000 by Sept 19 while Goldman Sachs downgradesIndian Equities – So What?
  • The markets have fallen 10% in Sept 18. I have a notional loss of X lakhs – So What?
  • Crude oil prices have increased 15 $ in the last quarter – So What?
  • Rupee has depreciated 15% in the last quarter – So What?

This “So What” question will help us to think deeper than just reacting to the market movements.

  • Have we not seen crude oil price raises and the falling Indian Rupee before?
  • Have we not seen deep market corrections before?
  • Have we not seen market recover from the lows?
  • Have we not seen the Indian companies weathering these kind of storms before?
  • Have we not seen the Indian companies grow their earnings over the last many years?

You will see that the logical chain of thoughts for each one of us should be as follows:

  • Equity investments are a way to achieve long term goals (children’s education, retirement etc.). These are typically many years away
  • Equity returns in the long run are driven by earnings growth of underlying stocks which are recovering and remain positive for Indian equities
  • Equity investing will always have periods of volatility, like we are having now. We need to endure that to earn above average returns
  • Continuing to invest in volatile times is rewarding and stopping investments now reduces your long-term returns.

We appreciate your patience in continuing your regular investments.  In fact, this is the time for long term investments which will pay handsome dividends in the future.  We would reiterate the importance of remaining invested. The bouts of volatility will cease after some time and the markets will move up from the current levels.  But you should have remained invested in order to take advantage of the future price increases.  Do remember that this mature investor behavior will give you the edge over other investors who are redeeming in panic. Correction is temporary, growth is permanent!!

When in doubt, always ask the magic question – So What? and stay calm and continue to invest!!


Return of the market volatility in Indian Markets

This week we have completed nine months in the calendar year – after a one way upward ride in 2017, we are now seeing significant volatility and valuation corrections in the equity markets.

Let us take a quick look at the market performance, the key events and what we should be doing.

Impact on the Equity Markets

The Indian equity markets saw a correction of 9% this month (we consider Nifty 500 to be more representative of the market than the Sensex or the nifty 50). This is the single largest monthly drop over the last ten years (from October 2008) onwards. Specific sectors were impacted in a significant manner

  • From a sectoral viewpoint, the worst hit was banking and financial services (average fall of 14%), and Infrastructure (average fall of 11%). Pharma (down 4%) and Technology (down 1%) were relatively stable
  • From a market cap viewpoint while the large cap (6.5% fall in the Nifty 50) corrected, the real fall was in the mid cap (down 13%) and small cap space (down 19%)

This correction has come after a steep rise in the past five years. Even now the Nifty small cap has five year annualized returns of 19% with several funds doing much better.

As always movements in the individual stocks are much more volatile. Various individual stocks have fallen between 35 to 50%( Dewan Housing Finance, Yes Bank, Infibeam, Indiabulls Real Estate, Jet Airways etc.).

What is possibly causing the turbulence in Financial Markets in Sept 2018?

There are some external and some internal events leading to this situation.

  • Continued increase in crude oil prices (above 80 USD/barrel for Brent crude) and Indian rupee depreciation against the rupee (INR has depreciated 12% in the last six months)
  • Regulatory action by RBI against banks (capping CEO tenure), Bandhan bank (freeze in branch expansion)
  • A large financial institution (IL&FS) with total borrowings of Rs.100,000 crores has defaulted on commercial paper
  • Federal Reserve interest rate increase by 0.25% and the expected upward trajectory
  • Worsening fiscal deficit

What’s the silver lining at this juncture?

As we all know, ultimately in the long run, earnings growth of the Indian companies will drive market returns. The broader economic growth continues to be robust.  The consumption demand has remained upbeat, investment in building capacities have started although in a smaller scale.

A Mint analysisof 1462 companies showed that aggregate net profits rose 22% in Q1 of 2018-19. Bloomberg consensus estimates for the Nifty 50 earnings growth this year is also positive.  This is a silver lining in the horizon.

In fact, the rupee depreciation will give a boost to Nifty earnings (earnings could go up by 3% this year as per Credit Suisse).

While the current quarter earnings will provide additional insights, the micro indicators for various manufacturing industries continue to be positive (e.g. acquisitions by Tata Steel, Amazon in September). Also as and when NPA recognition by banks peak, the pressure on the P&L will ease for these institutions.

Keep Investing and do not stop!

Equity investments are always made keeping long term goals in mind.  In the long term, we want our purchasing power to be protected.

We would like to reiterate the key messages we shared in this blog in Julythis year as well in our earlier newsletters. We would encounter this market volatility during our long-term wealth creation journey and continue to focus on basics (correct asset allocation, risk management and ignoring noise). We cannot stress enough on the importance of not only staying invested but also adding to your investments when the prices fall. Equity investing will continue to remain volatile, while producing long term returns which beats inflation.

Too often in the past, individuals have put in money when the market was at a high and stop their investments at exactly the time the markets fall. This trend is visible already this time also. AMFI data shows that net inflows into equity oriented mutual funds have dropped 60% from 20,000 crores in August 17 to 8,300 crores in August 18.

The ability to ignore the noise and remaining invested for the long term will give us the behavioral edge which helps us achieve superior portfolio returns in the long run!! Easier said, than done 😦

Continue with your SIPs and STPs, add more, if you can.  There is definitely light at the end of the tunnel.


India’s Largest Equity Oriented Fund – HDFC Balanced Advantage – An Overview

India’s largest equity oriented fund (more than 65% equity) in 2018 was HDFC Prudence with assets of Rs 36,000 crores in early 2018. It has now been renamed as HDFC Balanced Advantage Fund (BAF). Today let us take a deeper look into this fund to see how the reclassification has impacted the fund.


In 2018 the market regulator SEBI has asked mutual funds to reclassify their funds so that investors can be clear about where they are investing. SEBI has created 36 categories of funds and several fund houses have had to merge and align funds so that they fit into a category.

India’s largest equity oriented fund – HDFC Prudence was impacted as HDFC Mutual fund had two funds in the erstwhile balanced category – HDFC Balanced and HDFC Prudence. Both these funds used to have between 65 to 75% equity allocation and they had an excellent track record.

Fund Changes

HDFC Prudence was merged into HDFC Growth and it was classified as a balanced advantage fund. Hence, the fund was renamed as HDFC Balanced Advantage fund. As per the mutual fund website page for HDFC BAF (click here), the Investment objective is as follows “To provide long term capital appreciation / income from a dynamic mix of equity and debt investments.”

No additional information is available. The SID (scheme information document) link given in the Documents tab in the website is for the SID of HDFC Growth from April 2017. There are no leaflets or product presentations for HDFC BAF. In the overall SID section a SID for BAF is there (click here).

In their product positioning document in April 2018 (click here), HDFC BAF is at the extreme right end of the expected risk return spectrum for hybrid funds. This is above HDFC Hybrid Equity which is a Hybrid aggressive fund with an explicit mandate to invest in equity

Current Fund Portfolio and Category Comparison

With a change in mandate from HDFC Prudence to BAF let us take a look at the portfolio between April 18 (Prudence) and Aug 18 (BAF).

  • There is no major change in the portfolio either on the debt or equity side
  • The Equity allocation has actually gone up from 75%in April to 78% in August (for comparison, the average BAF fund has 40% in Equity)
  • The Cash holdings of the fund is 1% (The average BAF fund has 28% holdings in cash)
  • The standard deviation and beta of the fund is twice that of ICICI BAF (the pioneer in this category)
  • The debt portion of the fund has an average maturity of 5.25 years, against the peer group average of 1 year
  • The top 10 holdings on the equity side and the top 5 holdings on the debt side has remained constant during the last 6 months or so
  • The portfolio turnover is around 14.5% compared to ICICI BAF Portfolio turnover of 500%

Based on current information, it is clear that HDFC has retained the HDFC Prudence portfolio in BAF without making major changes to the portfolio. This has helped the fund house retain nearly 39,000 crores of assets in a fund with a great track record.

What should Investors do now

Investors looking for a high-risk hybrid equity fund similar to erstwhile HDFC Prudence can continue to hold on to the fund. This is an excellent high-risk hybrid fund run by a superb fund manager.

Investors looking for lower risk balanced advantage funds may look at other funds in the category. The biggest mismatch is for those investors who are investing in HDFC BAF treating it as a balanced advantage fund as per it’s stated objectives.

What is the best way to invest in Small Cap Stocks?

Investing in equities for the long run requires a variety of skills, both technical (understanding of the business, future prospects, industry scenario, relative valuations) and emotional (managing volatility and emotions of fear and greed). This is particularly true in the case of small cap stocks.

We have received multiple queries from clients about Research services from various firms, reputed and otherwise. How good are these research services and are investors better off investing based on this research?

What is a small cap?

As per SEBI classification, any stock which is ranked 251 and above from a market capitalization viewpoint is considered a small cap.  You can access the list here. The largest company in this segment has a market cap of 9800 crores and there are more than 1000 stocks with a market cap greater than 300 crores.

This is also a segment where various market related news, rumors, insider information is all peddled as “expert views” and claim to provide an edge to the investors.

Let’s look at the long term returns of the small cap index over the last 10 years.  The NIFTY Small Cap 250 Total Return Index has an annualized return of 11.75%.  This is an interesting number! But, we believe that the index returns hides more than it actually reveals.

–        The volatility of small cap stocks are much higher than their large cap peers.

–        The small cap valuation is very cyclical in nature.  Small caps have had a great run over the last five years.  But today, there are more than 1700 stocks which has corrected above 25% from their January 2018 peak levels.

We believe that individual passive investors are better off by investing in well managed “Small cap funds” as compared to investing in small cap stocks. Why do we say that?  Because, after analyzing the stock recommendations from a well-known research outfit in small cap space and comparing the performance of small cap funds, we have come to this decision. 

What has been the performance over the years?

Equity Advisory Firm Recommendations:

One of the leading stock advisory research firms to which we subscribe has a separate section for small caps. We were looking at their recommendations from Jan 2017 to June 2018.  Over an 18-month period 17 recommendations were made!

–       Out of 17 stocks, positions in 2 of them were closed with an average gain of 45% within six months of the recommendation.

–       The remaining 15 continue to be open and they are all down with the average notional loss at 25%.

–       Even going back over the past ten years, they have recommended exits in 56 stocks. There is only one stock for which they have a buy record which is still open after five years.

One thing which becomes clear is that it requires too much of action, nimble footedness, constant monitoring of the portfolio and quick entry and exits in identified stocks.  Is it all possible for a passive investor?

Small Cap Mutual Funds: 

On the other hand,  Small cap mutual funds offer exposure to a diversified set of small cap stocks across industries. Many of the bigger funds have strong track records over the long term.

Fund Names@ 3 year 5 year 10 year
Franklin India Smaller Companies 15.01% 31.46% 19.61%
DSP Small Cap Fund 13.76% 34.76% 20.73%
HSBC Small Cap Fund 12.15% 31.67% 12.07%

@These funds are not recommendations but just to show the performance over 10 years

While liquidity and valuations continue to be a challenge for the small cap fund managers also, they have access to management, ongoing tracking and the ability to re-balance.

What should we be doing?

There is no doubt that small cap investing adds an amount of “spice” to our portfolios. But it is not mandatory for all investors. Even if someone fancies small caps, rather than making individual stock selections or looking at paid research services, investing through quality small cap funds seems to be the “safer if less adventurous” way.