PPP Products & Platforms Should Be The Focus Areas: Ashish Nanda, EVP & Business Head - PCG, Commodities & Currency Business Kotak Securities

How has the demand for alternative investments shaped up over the past couple of years? Do you see the demand for AIF’s continuing to pick up over time?

Alternative investments have become an important part of the overall allocation of HNI portfolios. AIFs consist of 3 categories – Cat I, which includes Infrastructure, Social Venture, VC and SME fund, Cat II includes Real Estate , Private Equity, Distressed Assets and the like while Category III includes managed funds which can take long as well as short exposure. The demand for these would continue to pick up over time as these help provide non-correlated returns to client portfolios along with an opportunity to invest in sophisticated / thematic / high risk ideas. The total commitments raised in the Sep ’19 quarter stood at 3,16,864 Cr as against 2,17,229 Cr in Sep ’18, which is a jump of more than 45% and we expect the trend to continue.

What are some of the key trends in Wealth Management that you see unfolding over the next phase of the industry’s growth?

From a transaction-oriented revenue model (based on flows), the Wealth Management industry is focusing on raising the share of stable granular revenue by aggressively expanding the advisory platform. In the MF space, with the advent of direct plans, there has been a clear move from regular to direct plans. The percentage of investments of individual investors in equity schemes through the direct mode has gone up to 9% in 2019 from 5% in 2015. SEBI has also helped rationalize and regularize the expense charged with regular interventions, which has reduced cost for the clients. The industry is focusing on providing value add services and creating differentiated strategies by segmenting the clients into family offices, business owners, first-generation entrepreneurs, foreign residents et al. Also, technology has become pivotal in delivery as well as execution of the advice. At the same point in time, ETFs are also going to gain momentum in the UHNI portfolios.

Do you see a growing demand for commodity and currency products within HNI’s in India? What avenues are available for those looking to dabble, at this point?

Globally, FX is the most traded product with ADV of $6.59 trillion, as per the latest BIS Survey 2019. In India, FX was mainly restricted to corporates and banks before currency futures and options was launched on Indian exchanges. For the first 5-7 years, participation was mainly from the corporate side on the exchange platform, as awareness was limited, but in last 5 years we have seen a gradual increase in the retail and HNI participation. Retail and HNI share in total volume on NSE has gone from 15% in 2015 to 23% today. This clearly shows that retail and HNI participation is increasing and is likely to grow only, with a lower cost of the transaction (no STT) and more new products getting introduced on the exchanges. 

We are seeing an early trend, where many HNIs use currency futures and options to hedge their children education overseas, in addition, to express price view. 

In a world of open architecture, how can a PCG/ Wealth Management business compete effectively in today’s day and age? How have you tried to differentiate your proposition at Kotak, and what have your key learnings been?

In today’s day and age clients value wealth managers who minimize the conflict of interest through open architecture advisory, and help with access to products and ideas across platforms, both proprietary and external. 

We, at Kotak Securities PCG, provide an open architecture platform where clients have access to products and ideas across providers – including MFs, PMS’, AIFs, Structures and the likes. It ensures that our client can satisfy all their financial needs and that we can act in each client’s best interests by recommending the financial products best suited to that client, even if they are not proprietary products. We have tried to leverage our equity expertise to create differentiation along with providing other wealth management services. One of our key learnings has been to stick to our strengths and instead of being a me too player in an already crowded market, using our research prowess to guide clients build wealth in the long term.

What’s your take on the domestic equity markets right now? Are small and mid-caps looking attractive? Do you foresee markets breaking out any time soon?

We expect Nifty-50 to be range bound with a downside bias from current levels. Within the large caps, we find risk-reward ratio quite unfavorable for many of the ‘growth’ stocks. We continue to see more value and upside in the mid & small caps Vs the large caps in the longer run. Based on Bloomberg consensus estimates the Mid Cap Fw PE is 14.4x Vs Nifty-50 Fw PE of 18.2x (i.e. 21% discount to Nifty-50 Fw PE). Today there is lack of buying interest in the mid & small cap space due to rich valuations of Nifty-50 and some kind of risk aversion. Broader participation in the market could take some time and improve as the micro lead indicators show signs of improvement. However, this lean period also offers a very good opportunity to long term investors with a two-three years view to accumulate good quality mid & small cap stocks trading at reasonable valuations (i.e.<15x). One needs to have a proper check-list and avoid stocks which have any concerns linked to financials or management quality.

Lastly, do tell us about some of your business goals for the upcoming fiscal.

The market is growing at a frantic pace. Every advisory/brokerage firm will have enough and more business coming its way if it sticks to the basics. PPP- People, products and platforms should be the focus areas, the client will automatically benefit.