HSBC Global Asset Management, India Creating Wealth through Asset Allocation. March 2018

Transcription

1 HSBC Global Asset Management, India Creating Wealth through Asset Allocation March

2 Why invest? 2

3 Changing social demographics Stress at work leading to early retirement People are living longer life expectancy has increased Nuclear families Reduction in social security Rising health care cost - Old age is not covered Increased income but is it enough to cater to your post retirement needs? 3

4 Greater demand to spend Emergencies? Children s Marriage Retirement Car Support old parents Children House Children s Education Do you want to compromise on your living standard after your retirement? Marriage Savings / Investing 0 Birth and 25 Earning Life 60 Retired 75 + Education Age Life 4

5 If our expenses are real, our returns should also be real Real cost of today s expense over time Value of today s INR 100,000 over time Years Today At Inflation of 7.4% At Inflation of 7.4% Savings is not enough; you also have to beat inflation! 5

6 High focus towards perceived safe investment avenues According to 12 th Five Year Plan ( ) Household savings expected ~24% of GDP ~41.6% of household savings is expected in physical assets (including Gold and Real estate) Shares and debentures (inclusive of Mutual Funds) form ~4.5% of household savings Asset Class Distribution : Individual Wealth Asset Class Performance* Equity 26% Debt Gold 12% 14% Deposits Rate Inflation 7% 6.9% % Source : Reserve Bank of India, Currency - INR Expected average savings for 12th Five Year Plan ( ) Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 6 Period : 1-Jan-2002 to 31-Dec-2017, Source : Bloomberg, Ace MF, World Bank *Real Estate data not available, Average deposit rates, SBI Interest Rates on Term deposits(1 year)

7 What worked yesterday, may not work tomorrow Pre inflation performance Post inflation performance 30% 25% 28% 26% 25% 20% 23% 19% 20% 15% 10% 5% 0% -5% -10% 14% 14% 12% 11% 7% 3% 4% 6% 9% 7% 9% 8% 13% 8% 12% 7% -2% -5% 1 Year 3 Years 5 Years 7 Years 15 Years Equity Debt Gold Deposits rate 15% 10% 5% 0% -5% -10% -15% 9% 7% 5% 2% 3% 1% 4% 2% 3% 1% 6% 0% 5% 0% -1% -2% -9% -11% 1 Year 3 Years 5 Years 7 Years 15 Years Equity Debt Gold Deposits rate Equities and debt have outperformed other asset classes in above alternative periods Period : 1-Jan-2002 to 31-Dec-2017, Source : Bloomberg, Ace MF, World Bank, CAGR Returns, Average deposit rates, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 7

8 Where to invest? 8

9 Traditional fixed income instrument bias in India Traditionally, Indians have been in favour of debt investments, primarily bank fixed deposits Post office saving schemes and provident funds (public and employee) are close behind The fixed instrument bias is reflected in India s household savings data Of the total financial savings by Indians, deposits dominate with about 31% Components of household savings (%) Physical Savings, 40.3% Currency, 5.7% Bank deposits, 30.3% Non- banking deposits, 0.3% Shares & debentures, 4.3% Claims on Government 3.0% Provident and pension fund, 6.0% Life insurance fund, 10.0% Source: Reserve Bank of India (RBI), Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 9

10 Fixed income bias weighs heavily on investments Most people are unaware that the fixed income bias erodes their investments significantly as inflation eats into the portfolio A hypothetical example of Mr A and Mr B reveals that if funds are kept idle in a debt instrument, the real return is marginal. On the other hand, if the fund invests in a high-yielding asset class such as equities, it negates the impact of inflation and grows better 30% 25% 20% 15% 10% 5% 0% Mr A Mr B Amount Rs 1 lakh Rs 1 lakh Nominal Return (a) 8%^ (invested in debt instrument) 12%^ (invested in equities) Average Inflation* (b) 6% 6% -5% Real return (a)-(b) 2% 6% -10% CPI-IW Inflation* Debt Growth of amount after 5 yrs Rs 1.10 lakh Rs 1.34 lakh Source World Bank CY inflation Debt Index - I-BEX (I-Sec Sovereign Bond Index) As at December 2017 Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 10 *Average five years CPI industrial worker inflation data assumed at 6%. ^Average return from debt and equities assumed at 8% and 12% for respectively a period of five years.

11 Fixed income bias despite a young population Higher preference for fixed income instruments persists despite India having one of the youngest populations in the world Not only do we have a young population now, but will continue to do so in the foreseeable future Why highlight a young population? Because young populace tends to have a long-term investment horizon and higher risk appetite; thus, the ability to invest in risky asset classes Population break up Source: United Nations 11

12 Does that mean equity investment is the way? While equity is a good investment instrument for a young populace, the asset class is only beneficial in the long term Equity is exposed to volatility in the short term As seen in the chart, while the linear trend of the asset class is positive in the long term, the short term shows volatility An example of this volatility is the subprime crisis in early 2008, which lopped nearly half of the market gains, while the quantitative easing by global central banks subsequently pushed the markets higher S&P Sensex Anatomy of Corrections Apr '00 - Sep '01 Tech Bubble Sensex lost ~ - 32% S&P Sensex Anatomy of Corrections Apr '03 - Dec '07 Bull phase Sensex rose ~ 49% Jan '08 - Mar '09 Subprime crisis Sensex fell ~ - 45% Apr '09 - Dec '10 Bounce back post sub prime crisis Sensex rose ~52% Jan '11 - Jan '12 European crisis Sensex fell ~- 21.7% Sep '13 - Feb '15 Post European crisis Sensex rose by ~62% Nov '15 - Jun '16 Chinese slowdown Sensex fell by ~ - 6% Jan '17 - Dec '17 Post Demonetisation Sensex rose by ~28% Nov '16 - Dec '16 Demonetisation Sensex fell by ~ - 8% 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Ace MF, BSE, Bloomberg, As at December 2017, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 12

13 Returns (%) Volatility (%) Probability (%) Equity high potential in the long term Equity gives the best results in the long term It can be observed from the return distribution chart given below that as the investment horizon increases, the percentage of positive returns increases The chances of an investor earning between 15% and 20% is 83%, if he is invested for 30 years, while it is 31% for 10 years Similarly, it can be observed from the holding period returns chart that there are no negative returns for an investment period above 15 years Minimum return over 30-year rolling period is 13% Another benefit of long-term investing is that volatility decreases with an increase in the investment horizon Holding period returns Return distribution across horizons* 60% 50% 40% 30% 20% 10% 0% -10% -20% 5 Year Holding period 10 Year Holding period Average Returns Minimum returns 15 Year Holding period 20 Year Holding period Maximum return Volatility (RHS) 25 Year Holding period 30 Year Holding period 14% 12% 10% 8% 6% 4% 2% 0% 13 9% 8% 1% 0% 0% 0% 20% 17% Daily annualised rolling returns since inception (1979) of S&P BSE Sensex considered across various holding periods Source: BSE, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 31% 83% 17% 7% 6% 0% 0% 0% < 0% 5% 10% 15% 20% 25% 30% > 30% Returns distribution (%) 10 Year Holding Period 30 Year Holding Period

14 What about gold, commodities and real estate? Gold: Allocate in moderation While the asset class tends to have a positive growth trajectory in the long term, it is prone to fluctuations in the short term Investors should invest in the asset class in moderation and primarily use it for portfolio diversification Real estate: Tough to call, comes with significant risks Project delays Title Illiquid Varied returns Commodities: Regulations still evolving Gold - Not so glittering returns Gold Calendar Year Returns 40% 30% 20% 10% 0% -10% -20% -30% International gold prices as on last day of the calendar year as at December 2017, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 14

15 What should an investor do? 15

16 Asset allocation: Key determinant of returns Factors that explain variation between portfolio performances Other Factors Asset Allocation Disproportionate focus on 6% viz. security selection, market timing Source: Brinson et al,

17 Asset allocation: Key determinant of returns Allocate funds across various investment classes optimally based on an individual s risk-return profile The basic premise of asset allocation is - To spread risk emanating from more risky asset to less risky asset class To earn efficient risk-adjusted returns as per the risk profile In simple terms, asset allocation is an investment strategy to figure out how much of one s portfolio is to be invested in different asset classes depending on one s risk-taking abilities and financial goals The right asset allocation helps to counter market uncertainty as it diversifies investments not only within an asset class but also across asset classes Asset allocation can be a good medium for meeting financial goals and wealth maximisation 17

18 Performance of asset classes varies across time periods To reiterate, different asset classes tend to outperform each other across time periods Allocating all funds to a single asset class is not a prudent investment approach as it may not garner efficient inflation and risk-adjusted returns Different levels of correlation among different asset classes provide an effective hedge to the portfolio The best asset changes every year 100% Debt Equity Gold 80% 60% 40% 20% 0% -20% -40% -60% December, 2017, Source Bloomberg, Ace MF, ICRA MFI Explorer Equity, debt and gold represented by Sensex, I-BEX (I-Sec Sovereign Bond Index) and International Gold prices, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 18

19 Different correlation of performance provides effective hedge Low or non-correlation among asset classes ensures that movement of a particular asset class does not influence the performance of other asset classes For instance, equity has very low correlation with debt and negative correlation with gold Different correlation among different asset class provides an effective hedge to the portfolio emanating from any one asset class Correlation Matrix Debt Equity Gold Debt Equity Gold Equity, debt and gold represented by Nifty 50, CRISIL Gilt Index and LBMA prices converted in to Rupees 19

20 Priority Need Want Goal-based asset allocation approach The goal-based approach involves investing to achieve specific goals (small, medium and long term) by allocating money to different asset classes in sync with one s risk capacity and time horizon For better understanding, let s take the hypothetical case of a young professional His/ her priorities in different time horizons are captured in the table below Based on that he/ she can allocate funds across asset classes Goal Buying a car Goal Buying a vacation home Goal Foreign vacation, estate planning Investment objective Stability Investment objective Stability and growth Investment objective Growth Asset allocation Moderately conservative Asset allocation Moderately aggressive Asset allocation Aggressive Goal - Child care expenses, down-payment for home Goals Children s education, old-age parent care Goals Retirement, Children s marriage Investment objective Stability Investment objective Stability and growth Investment objective Growth Asset allocation Conservative Asset allocation Moderate Asset allocation Moderately aggressive Short term Medium term Long term Time horizon For representation purpose only, it may differ on a case-to-case basis) 20

21 Asset allocation should be as per risk profile Risk profiling involves investors assessing themselves on various parameters to evaluate their risk-taking capacity and accordingly allocate money to different asset classes Usually, risk profiling is undertaken through a formal questionnaire-based process where investors have to answer questions that probe their goals, risk-taking capacity and suitability For representation purpose only, it may differ on a case-to-case basis) 21

22 Asset allocation approach aims for higher risk-adjusted returns Prudently allocating assets across asset classes in sync with the risk profile can help generate efficient riskadjusted real returns The illustration shows a combined portfolio of debt and equity gave higher real (inflation-adjusted) returns vis-à-vis only debt and also reduced the risk compared to an-only equity portfolio 35.00% 30.00% 29.9% 25.00% 20.00% 15.00% 15.16% 11.86% 12.1% 10.00% 5.00% 0.00% 8.56% 7.95% 5.7% 4.65% 1.35% Debt Equity Debt + Equity* Nominal returns Real returns Risk Returns Average of 10 year CAGR on a daily rolling basis since 1997 Volatility Standard deviation of a daily returns since 1997 Debt and equity represented by CRISIL Gilt index and Nifty 50 Average month-wise annualised CPI IW inflation since 1997 is considered for calculating real returns ^ Assuming equal weighted asset allocation, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn t guarantee the future performance 22

23 Asset allocation through mutual fund Investors may not have the wherewithal to manage their money and allocate assets across asset classes Further, allocation is not just restricted among asset classes but also, within the asset class Equity sub-asset allocation based on market cap (large, mid and small) and sector or theme-based Debt sub-asset allocation based on maturity (short and long term) Professional management is an option for consideration Investments can be routed through mutual funds Benefits of mutual fund Professional management A dedicated team helps better analyse investment opportunities in the market Research and credit function An independent research and credit function aids investment Focused risk management Imperative to manage inherent risks in the asset classes 23

24 Potential Investment / Market Risk Mutual funds available as per investor s risk-return profile Mutual funds offer variety of funds in each asset class and investors can choose funds based on their risk-return objectives and time horizon Active Asset Allocation : Across horizons Investment horizon: 5 years & above Investment horizon: less than 6 months Liquid and Ultra Liquid Investment horizon: 6 months - 3 years Short term bond Investment horizon: 1 year - 3 year Long term & flexi bond Investment horizon: 5 years & above Large cap equity Investment horizon: 5 years & above Flexi cap equity Mid cap equity Potential Returns Note: For debt funds potential risk involved indicates interest rate risk and is not an indicator of credit risk. 24

25 Takeaways Impact of asset allocation Lowers volatility Encourages stable investor behaviour and therefore, could achieve better results Rebalancing - a key supporting factor Asset allocation is an excellent tool for addressing the volatility of investment markets 25

26 Thank You 26

27 Disclaimer This document has been prepared by HSBC Asset Management (India) Private Limited (HSBC) for information purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of HSBC Mutual Fund. All information contained in this document (including that sourced from third parties), is obtained from sources HSBC, the third party believes to be reliable but which it has not independently verified and HSBC, the third party makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information. The information and opinions contained within the document are based upon publicly available information and rates of taxation applicable at the time of publication, which are subject to change from time to time. Expressions of opinion are those of HSBC only and are subject to change without notice. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding future prospects may or may not be realized. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Copyright. HSBC Asset Management (India) Private Limited 2018, ALL RIGHTS RESERVED. HSBC Asset Management (India) Private Limited, 16, V.N. Road, Fort, Mumbai Mutual fund investments are subject to market risks, read all scheme related documents carefully. 27