‘Investors book profits in weaker stocks, never fully exit equities’

Investors never fully exit equities because it’s all about strategic asset allocation, according to Soumya Rajan, founder and chief executive officer, Waterfield Advisors.

“If an investor's allocation is 70% in equities, there’s a tolerance band—say 5-10%. When it exceeds that, they book profits by trimming weaker stocks, but they don’t exit entirely,” Rajan said. “They hold cash until a better opportunity arises. But also, the worst thing an investor could do is stay in cash for too long, as it would hurt returns.”

Rajan recommends having a portion—perhaps 5% to 10%—of one’s equity in international markets.

Edited excerpts:

What's the overall sentiment you're picking up from your investors?

Clients are clear that their focus is long-term. While there will be short-term bumps, they think in terms of 10, 15, or even 20 years when it comes to building wealth—not just the next one or two years. Our role is to help shift their mindset away from short-term returns and towards embracing volatility for greater long-term rewards.

Do you think investors have reached a point where they're looking to exit equities, feeling confident enough to shift their investments into a different asset class?

Investors would never fully exit equities because it’s all about strategic asset allocation. If an investor's allocation is 70% in equities, there’s a tolerance band—say 5-10%. When it exceeds that, they book profits by trimming weaker stocks, but they don’t exit entirely. They hold cash until a better opportunity arises.

The worst thing an investor could do is stay in cash for too long, as it would hurt returns. We encourage clients to stay invested, even through passive index funds, which offer a safer, benchmark-based approach. Different indices like Nifty 50 and Next 50 can show varying returns, so a wealth manager helps position clients based on market conditions. Today, most clients hold at least 10% in cash, waiting for the right moment to reinvest.

When you mentioned booking profits and waiting for the right opportunity, where do you see those opportunities in the current market? Are you looking at unlisted space for that?

No, I stick to asset allocation. If I'm trimming equities in public markets, I don't shift to private markets. I stay within public markets but explore other opportunities—whether through mutual funds, index exposure, or direct stock investments.

The beauty of today's markets is the variety of choices, including passive and smart beta strategies that offer low-cost options. Clients can explore momentum strategies based on their risk appetite, liquidity, and return expectations.

It’s crucial to revisit your strategic asset allocation regularly. For example, if you're planning a major expense like buying a house, you might reduce equity exposure and increase fixed income for stability.

The key is financial planning, not just chasing hot tips. While we allow clients some tactical investments, we limit it to 5-10% to protect their overall portfolio. The role of a wealth manager is to help clients stay on track and avoid costly mistakes.

How important is exiting at the right time?

It's crucial because everyone talks about when to enter a product, but no one focuses on when to exit. While distribution channels are incentivized to push entry, they rarely guide you on exits.

You won’t always time it perfectly, but sticking to your asset allocation gives clarity. I recommend selling your worst-performing investments during market peaks, especially if they’re underperforming peers or benchmarks. This clean-up is essential for maintaining a healthy portfolio.

What would you recommend as an ideal asset allocation for a savvy investor with a medium risk appetite?

In the present context, I would recommend 60% in equities, with 10% in unlisted and 50% in public markets. Allocate 25% to fixed income, 15% to alternatives, and 5-10% in cash. This offers a balanced strategy for a medium-risk investor without over-concentrating in any one area.

What does it take to generate alpha in the current market? Is it primarily about adhering to asset allocation?

You'll need to choose wisely because passive investing only tracks benchmarks, offering no unique insights. When you shift to active management, the approach changes entirely; it involves evaluating market trends and diversification. By overweighting or underweighting asset classes you can potentially capture excess returns. Here, choosing the right fund manager, who can generate the alpha also becomes important, e.g. managers focussed on small or mid cap stocks, emerging markets or niche sectors.

What exciting investment trends are emerging in the equity market right now, and are there any standout sectoral shifts that investors should keep an eye on?

In terms of sector performance, healthcare has shown some resilience but is facing challenges that may linger, especially with the upcoming US elections. Financial services, on the other hand, might struggle due to rising deposit costs, which could compress margins for banks. For the long term, we prefer allied financial services like insurance, as they might offer more growth potential over the next decade.

We also like FMCG as we see rural demand returning.

When it comes to sectors like industrials, defence, and power, capital expenditure is key, and valuations have seen a significant upward movement in recent years. Rising interest rates, higher raw material costs and global uncertainties could put pressure on these valuations. It’s essential to look beyond broad sector statements and focus on specific companies that show solid fundamentals and growth prospects. In today’s market, a nuanced approach is crucial, focusing on individual stocks rather than broad sectors.

When you talk about having 60% in equity, does that include US and other international equities along with Indian stocks?

It's essential to either diversify your investments or explore international funds. We recommend having a portion—perhaps 5% to 10%—of your equity in international markets, with 5% being a more balanced exposure.

How do you intend to approach this international exposure? Which countries are you considering for equity investments?

Interestingly, over the past 10, 15, and even 20 years, the two markets that have yielded the highest returns are India and the US across all three timeframes.

What’s particularly intriguing is that the US and India are largely uncorrelated; when one market declines, the other often doesn't follow suit. This means that by investing in both, you're effectively hedging your equity risk.

You want to focus on a dominant market, especially in declining conditions, since there's little value in being in a stagnant market. Given the low correlation between the two, allocating 60-70% of your international equities to the US, across market caps, would be a good strategy.

Talking about gold and silver, what is your perspective?

Our team emphasizes commodities, and most clients typically have at least a 5% allocation to gold. This is particularly relevant for Indians, who often invest in jewellery. Thus, the commodity allocation often centres around gold and silver.

However, we view gold primarily as an investment, rather than just jewellery. It's more of a safety net during crises. While gold is currently performing well, particularly in this high-interest rate environment and as a hedge to inflation, it's essential to understand the associated risks. There’s still considerable interest in both gold and silver among our clients.

When foreign clients approach you for investment advice in Indian equities, what is their perception of the market? Are they eager to invest now, or are they hesitant due to current valuations or concerns about entering at a market high?

It's quite tricky. Even now, many global clients consider India part of their emerging market allocation, while they have separate allocations for China. Those who do allocate to India usually limit it to mid-single digits.

The key issue is the entry and exit points of investment. If you're investing at current valuations, what exit are you anticipating? For instance, if the Nifty is at 25,000 now, are you expecting it to reach 50,000 in five years?

Your approach should mirror private market logic: evaluate your entry price and determine whether a 2X or 3X return is achievable. If you can underwrite a target of 50,000 within five years, then it makes sense to start building your position in India.

When considering potential interest rate cuts, do you think we might see an uptick in FII inflows? Could this lead to a larger allocation to India, given the current small percentage many investors have?

The allocation to India in foreign portfolios will likely increase, but not dramatically at first. While there's growing interest, many foreign investors are still cautious, especially compared to China. They're visiting India, learning about the market, but won’t immediately allocate 10%. It’s more likely they’ll start small, say 3%, then gradually move to 5% and beyond over the next decade.

As India’s presence in global indices, like the MSCI Emerging Markets Index, grows, passive inflows will naturally rise. So, while it won't be a sudden surge, steady and increasing allocations are expected.