India's Ultra High Net Worth Individuals (UHNWI) population is growing exponentially with some studies expecting an 80% growth over next 3-5 years. While businesses in India are growing, many of them have or would soon see substantial liquidity events as they monetise what the entrepreneur and his family has created over the past few decades. Monetisation of land holdings has brought in many new UHNWI as land prices have soared over the past decade.
New-age entrepreneurs and senior professionals too are contributing to this pool of increasing UHNI’s as they realise the value of their holdings in their companies. And, this growth in the UHNWI is across metros and smaller cities of India. As UHNWI’s wealth increased, the need for Family Office structures became evident and we have witnessed several new Family Offices come up in the last 3-5 years.
It is interesting to observe the transition in investment philosophy, risk appetite and instruments as investors move up the wealth cycle from HNWI to UHNWI to Family Offices. Their perception and understanding of capital markets evolve as they start comprehending the risk-return aspect of their decisions. While a lot depends on the UHNWI’s risk appetite, market cycles and investment psychology have a role to play in their investment choices and allocation decisions.
To understand how investment choices have moved in the past few years, it is important to take a step back to the pre-pandemic era. Globally and in India, inflation was at its lowest. USA’s pre-covid 20-year average inflation was at 2.1%. India was in a structurally low inflation era with inflation in 2019 at 3.7%.
These low inflation periods pushed down interest rates and the pandemic saw central bankers loosen their monetary policies. This led to a sharp drop in rates through 2020 and 2021. The US Fed dropped their rates from 1.25% to 0.25% during 2020, RBI dropped Repo Rates from 6% to 4%, and global bankers pumped enormous liquidity into the hands of individuals and businesses alike.
A low-rate environment typically pushes investors to seek higher returns. This quest for better returns leads to a change in their investment thought process. Available surplus cash then tends to seek out the best returns possible. Other asset classes and investment options saw a healthy inflow as UHNWIs moved from debt to equity, alternates and even crypto.
Added was the rise in commodity prices leading to all asset classes like equity, alternates, crypto and non-precious commodities reaching new highs. Real Estate demand soared as UHNWIs started buying luxury homes across the globe.
While pushing up growth globally, inflation reared its ugly head up. Many central bankers were caught on the wrong foot expecting the inflation to be transitory in nature. Their narrative changed from transient to short-term to sticky in a matter of few quarters. That’s when the walls were pulled back up, the flow of monies was tapered, stopped, and the excess liquidity was withdrawn.
Interest rates were increased to tame inflation. Yet, inflation peaked globally, and the US saw multi-decade high inflation of 9.1% while in India we saw CPI touch 6.7% in 2022 from 3.7% in 2019. Fed raised rates by 450 basis points to 4.75% while RBI raised rates by 250 basis points to 6.5%.
High inflation and interest rates pushed down global growth expectations, and in 2022 equity markets fell to factor in slowing growth and even possible recessions in a few large, developed nations. With rising interest rates the bond markers saw equally sharp drawdowns. Commodity prices cooled off as demand waned and geopolitical tensions remained high.
Outside the US, Russian equities fell 51% followed by China at 45%. Bond returns too nose-dived as yields rose. On very rare occasions do bonds and stocks have an almost similar drawdown. Bonds and commodities typically form a hedge against falling stock markets, 2022 saw these markets with typically a low correlation to stocks actually move in tandem in the same direction.
UHNWIs are looking at 2023 as a year of opportunities. Many family office clients have reduced cash exposure as they grab opportunities in the listed equity space. With yields remaining high and downside being very limited, monies are flowing into target maturity funds, Bharat Bond ETFs, high yield and performing credit funds. Budget 2023 (not yet approved) has withdrawn the tax benefits on market linked debentures.
Hence, many UHNWI investors are looking at higher yield options like structured credit and venture debt funds that give a pre-tax & post-expenses return of around 9% to 15% p.a.
In the past few years, we have seen UHNWIs and family offices participate actively in the private equity space, with investments being made across life stages of a start-up, beginning from Angel investing to pre-IPO opportunities. We have also observed a preference towards single opportunities that rank at par with institutional investors as opposed to blind pool private equity funds.
We have noticed that many new-age and tech-oriented promoters, who have made their wealth through private and public market exits, have a far larger allocation to private equity. The next-gen in family offices are relatively more active in analysing such opportunities as they understand the tech-led business environment better.
Global investing has taken centre stage with most families as they look to remit the entire limit of USD250,000 per individual per financial year. While we strongly encourage currency and geographical diversification, we find that this missing bucket in many UHNWI portfolios is now being addressed as a serious allocation.
For most, it has graduated from being a hobby to have a few listed stocks like Apple, Alphabet and Berkshire to now having portfolios that straddle various buckets like market-neutral strategies, differentiated stock and bond ETFs, and even direct bonds.
The Budget 2023 has increased the TCS on LRS remittances from 5% to 20%, we believe that investors would now time the remittances so that the TCS payments can be taken as a credit against their Advance Tax payments. We believe that global investing would surely form 15-20% of a client's portfolio over the next 3-5 years.
There is also growing interest in investments to secure residency in a foreign jurisdiction like the US, Portugal and Dubai which have investments linked to residency schemes.
A recent trend we are witnessing is in re-balancing the equity portfolio between Mutual Funds and PMSs. Over the last 3-4 years, UHNWI has increased exposure to PMSs and in many cases it is more than the equity MF portfolio. We are finding UHNWI’s increasing exposure to mutual funds to benefit from issues like taxation, paperwork and custody.
In the aftermath of the volatility and drawdowns witnessed in 2022, UHNWIs and Family offices have surely realised the importance of strategic asset allocation, diversification and staying invested. Most UHNWIs and family offices now have an investment policy statement in place, and large families have a family office governance charter with outside members on their investment committee.
Nimish Shah is the Managing Director, Family Office & Portfolio Analytics at LGT Wealth India.