Nitin Singh: We tell our clients very simply that instead of looking at conventional asset classes, it is very important to look at your portfolio, in terms of three parts.
The first piece of the portfolio, the safety net, which is a portfolio that even if the world comes to an end, it will be protected, it will give you income, it will give you performance, it will give you whatever. And depending on your risk appetite, depending on your need for liquidity, that will vary between you and me. Typically, that portfolio will never outpace inflation because it’s “fill it, close it, forget it, stay completely safe.”
The second part, and which normally ranges between 5% and 20% of client portfolios, depending on liquidity needs, is usually the market-linked portfolio.
The market-linked portfolio varies between Fixed Income, REITs, InvITs, Mutual Funds, Public Equity, Large Cap, Mid Cap, Small Cap. But that’s where all of us spend most of our time to say that if the market is offering a 6-8-10% return, how do I make sure I get 2-3% alpha? with managers, you tend to identify actions,… and that’s where everyone’s energy goes.
The third part of the portfolio is the strategic portfolio, which is a bit more illiquid (in) nature, which is normally supposed to provide you with that 15-18-20-25-30% alpha, which for entrepreneurs includes shares of your strategic in-house investments, private equity, venture capital, venture debt, real estate.
What we are telling our clients is to first think about what the mapping between these three buckets should be.
Usually what we end up telling people is that a third segment should be 20-30% of their portfolio if they are, say, a moderate to aggressive client.
The second thing is that the only thing that is shaping India today is the digital revolution. We strongly believe that over the next 10 years, the kind of value creation will happen in India.
To give you an idea of the last 10 years, he saw approximately $1.5 trillion in value creation across the public and private markets.
Before that, the number was similar, maybe a little lower. Our thesis and our premise is that in the next 10 years, you’re going to see it triple thanks to what’s happening structurally, which essentially means you need to have a presence in these two spaces. A big part of that is what will drive digital businesses. Now, whether it’s public or private, it doesn’t matter because a lot of these companies will go through the cycle and go public at some point.
But, as a UHNI, as a millionaire, if you want to future-proof your portfolio, and I use this word a lot because entrepreneurs understand how to future-proof their businesses, they also need to understand how to future-proof their portfolios.
To prepare your portfolio for the future, you must have at least a 20% allocation to such businesses over a period of time. If it’s at zero today, it will take 3-4 years to build up, but it has to. That is what will drive the next level of growth.
The second piece that you tell your clients is that perfect markets are getting more and more perfect if you look at public stocks, if you look at traded fixed income. Globally, perfect markets give you little opportunity to generate alpha.
But you have to be exposed to that, you have to have 60-70% exposure to that, but it’s really imperfect markets and imperfect opportunities that are going to give you the opportunity to do alpha. But you need to have a mix between them.
The third piece is we’re bullish on large caps today, we’re saying be within your stock portfolio, be exposed to 60-70% of large caps. We believe that this is high quality fixed income. There’s a great opportunity today to fill your portfolio with good tax-free AAA because you haven’t seen these returns, if you want to lock it in and hold it.
We’re bullish on venture debt, an interesting category, because if you’re saying there’s pain on the venture capital side and if fundraising cycles are going to get longer, therefore the cost of getting venture capital is a lot higher than the cost of increasing risk debt and good quality companies can enter.
Therefore, we remain bullish on the topics of digital venture capital and good quality consumer venture capital.
What has happened with the price outlook in the market is basically you’ve gone back a year, you’ve basically seen a 20-25% decrease in prices across the market.
But today, we have raised Rs 8000 crore as venture capital. Of that, only Rs 2,000-2,500 crore have been deployed. The rest of Rs 5,500 crore is still sitting like dry dust to be called.
When I talk to fund managers, they tell me two things. One is that there is greater sanity. They have pricing power. They are looking for higher quality companies. There is more and more focus on companies, on operational excellence and on the duration of the life cycle.
There will be consolidation over the course of the next year because many of the companies will end up establishing themselves as market leaders. So being someone starting out with cash or entering the market today, that’s a great time. Have you lost about a year of return? That’s fine, but for a 10-year fund, it doesn’t matter.