Ganesh Rathnam is the Founder and Chief Investment Strategist at boutique, fee-only wealth management firm - Arkanis Capital, a SEBI-registered investment adviser. Arkanis manages its client funds across a portfolio of Indian equities, International equities and precious metals using a contrarian, bottom up “value investing” strategy. After earning a Master's degree in Aerospace Engineering & Mechanics and later also an MBA from the University of Minnesota, Ganesh worked at Morningstar, Chicago, heading the bank's research team before moving to Fidelity Investments. All that was before Arkanis. Alongside a deep interest in history, travelling and gaming his writings have been published at the Ludwig von Mises Institute, FirstPost, the Industrial Economist and the Money Mantra Magazine, besides others.
The world around us is changing at a rapid pace, more so the investment space in India. So much so,the upwardly mobile have a few things to watch out for in 2014 to keep up with the Joneses and Jamsheds as far as their wealth is concerned.
Move from Commission-based to Fee-based Management: Nearly all competent asset managers in the developed world work on fee-based compensation schemes. Most commonly, in the US or UK, asset managers charge a percentage of assets under advisement as a fee for their services. Several elite managers such as hedge funds charge performance fees as well. Moreover, the fee structure is much more transparent and only a tiny fraction of wealth is managed via commission-based products, from the likes of insurance companies.
Unlike the developed world, compensation for investment advisers in India is still overwhelmingly commission-based product sales,such as ULIPs. However, over the past few years, there has been an increasing shift to feebased compensation where advisers, rather than charge a commission for selling a product, charge a fee for their services. This move has recently received a fillip from SEBI, as the supervising body has sought to separate out product selling from investment advice, and has asked advisers to choose one or the other, i.e., the commission or fees way, to be compensated but not both.
Still, only a fraction of investment advisers have registered with SEBI, as many fear a drastic reduction in their compensation and most of all, accountability to their clients. An adviser who works on commission gets paid a large sum up front and after that, the performance of that product isn't really his problem. Moreover, most commission products offer the seller a trail income for the entire period the client holds the product. An adviser who works for fees typically cannot charge large fees up front, and must return to the client at the end of the contract period to collect his compensation at which time he will be answerable for its performance. And his future compensation is based on satisfactory performance over the previous period.
All else being equal, I believe fee-based management will produce superior long-term results for investors which, happily, are the end goal of wealth management. This is mainly for two reasons, the investment costs are transparent and cheaper as they come directly from the client (who hopefully will negotiate a good deal) and this setup holds the adviser accountable for his investment choices. Since all investment advisers desire to build a financially rewarding career over many years, and because they must meet clients periodically to collect fees and additional investment contributions, they must do a good job with their investment choices.
Given this, I believe it is the responsibility of clients to educate themselves more about fee-based wealth management and push for this change from their advisers.
Optimal Asset Selection: As an investment manager, I believe today's generation, unlike past generations, perhaps spoiled by the (relative) abundance since the 1990s reforms, has moved decisively to a “spend first, save later” mentality, i.e., India has moved from Thriftville to Squanderville in the space of 20 years. In my view, this shift, if left unchecked, will result in a society eating its seed corn or, like in Aesop's Ant-Grasshopper fable, burning through the “winter” reserves. We all know how that story ended.
However, with a little bit of imagination, one can have their cake and eat it too, albeit a bit later. The first step is to begin investing early, really, there's no excuse to not begin investing right from your first ever pay check. The next step is to invest in a careful selection of dividend paying stocks of great businesses instead of bank FDs, etc. and reinvesting dividends to enable compounding. If this process is maintained for a decade or so, then the dividend income from this portfolio alone should provide the wherewithal for splurging even as the principal grows over time along with the business.
Return of Inflation as the Bogeyman: In my opinion, inflation will be the biggest story over the rest of this decade. The argument for inflation is simple: nearly every nation state in both the developed world and the developing world is heavily indebted. Politicians have promised, and are still promising, their citizens ever greater benefits and freebies to get elected, and this is now catching up with world governments. To give someone something for free, it must first be appropriated from someone else, and therein lies the problem. When the appropriated is unwilling or unable to carry the load, the system will eventually collapse.
In the beginning stages of this collapse, politicians can resort to money-printing or inflation to paper over the cracks of the welfare state. In fact, that is exactly what the governments in the West have done using a sophisticated euphemism called “quantitative easing”. However, if prosperity could come from a printing press, why isn't the whole world full of millionaires? Eventually, this will end in tears with massive wealth transfers from holders of paper assets to holders of real assets.
If an investor hasn't already done so, he must sit down with a knowledgeable adviser and inflation-proof his portfolio, such that his portfolio returns match or outpace the inflation rate over the coming years.
Internationalize Investments, Look Beyond India: International investing is a much neglected area. Nearly all investors suffer a home bias, Indians are no exception here, and therefore keep over 99% of their assets within the borders of their home country. The fact is, India represents only 1/40th of the global economy. Several countries are less corrupt and more business friendly than India. Therefore, by extension, some of the best companies such as Johnson & Johnson, Apple, etc. are domiciled abroad. Also, industries such as energy, basic materials and high technology are more advanced in foreign countries with little to no government intrusion. Therefore, handsome rewards await the intrepid investor who is willing to look for decent investment options outside India.
I suggest investors look to invest at least 20% of their investable assets outside India for starters. Keep in mind, simply buying foreign investments doesn't guarantee success. All the usual caveats of investment success are still applicable. Only invest in assets, securities or businesses you understand. And keep an eye on valuations. All else being equal, starting valuations will determine eventual returns. Lower starting valuations will produce superior returns and vice versa. If necessary, the help of a knowledgeable adviser is a must.
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