Abhenav's inspiration to seek global diversification in his client portfolios is not only unique, but also showcases his ability to connect seemingly unconnected events to add meaningful value to his clients. A quip by the protagonist in a Hollywood movie got Abhenav thinking about how different are the outlooks towards equity between investors in the developed and developing worlds. And, as he understood the cause of these divergent views, he formulated an investment strategy for his clients that has seen offshore equities climb to 20% of equity allocations in his client portfolios. Read on to understand why Abhenav is seeking to step this up further to 25% this year.

There's a famous Hollywood movie that I saw a few years ago, called "The Taking of Pelham 123". It's a star studded cast, with John Travolta and Denzel Washington. In the movie, there's a scene that's stuck in my mind. John Travolta is taking a set of people hostage and he and his team have made a huge ransom demand. One of the hostages asks John Travolta what he will do with 5 million dollars that he will get from this ransom. Travolta replies, "Nothing much. I'll invest it in Volvo shares, they pay 5% dividend, I can live off that comfortably".

Outlook towards equity is so different

The psyche of an investor from the developed world is so remarkably different from our world. People in US and Europe look at equities so differently from the way we look at equities. We consider equities as high risk, high volatility, high return. We prepare ourselves and our clients mentally for huge market volatility which is a necessary evil in the quest for higher returns than what fixed income offers us. And, in another part of the world, you have investors who look for stable lifelong income from dividend yields that are well above their own bond yields. You have investors who are able to get better returns from equities than fixed income, but without the mind numbing volatility that we associate with equities.

Volatility levels are very different

We all have clients who aspire for more returns than what fixed income provides them, but who shy away from domestic equities because of the high volatility that's associated with it. Travolta's retirement income plan in the movie kept coming back to me, as exactly the solution that so many of our clients are really seeking - healthy returns with low volatility. That thought led us to start researching equity markets in US and Europe. And, when we saw the numbers, we noticed a stark difference in the volatility levels of developed markets vs our own market. There clearly was a case to look at overseas equity markets as something between domestic debt and domestic equity allocations in terms of the risk-return spectrum.

Our first step worked out well

Doing the research is one thing, committing client money to offshore funds is quite another. We made our first tentative beginning with global diversification with I-Pru's US Bluechip Fund. The fact that it invested in US largecaps, and was managed out of India through fund managers that we are very conversant with, was reassuring for us, since it was our first step with offshore investing. This worked out well for our clients. In 2013, when our equity markets and our debt markets were not performing, the pressure to look for alternative assets naturally increased. That got us to focus more on global equities. The depreciation of the rupee was also a timely reminder to diversify appropriately into global equities.

Stable equity is what clients look for

The other factor that has been worrying us is that as we study Indian markets and their response to overseas flows, it is becoming increasingly clear that overseas flows are the dominant driver of Indian markets, and also perhaps the cause for our volatility. It is not a comforting feeling that the Indian equity funds we recommend in our client portfolios are so heavily influenced by volatility of short term global flows. That enhanced the desire to look for stable equities, to complement our rather volatile equity allocations. Stable equity allocations became a new focus area for us, as we do have clients, especially those who are not very young, who do yearn for stable portfolios and reasonable returns.

When we look at investors in the developed world, a majority of them have equities in their core long term holdings, they have equities in their retirement savings plans, they have equities in their retirement income plans. Contrast this with our situation - only a tiny fraction of Indians have equities in their core long term savings. The biggest reason for this is volatility. I think if we do our homework on global equity funds with stability as the main focus, we will be able to come up with a good short list of funds to offer to our clients that can offer stability along with equity.

Today, about 20% of all our clients' equity holdings are invested offshore, primarily seeking stability, not superior returns. We have set a target of scaling this up to 25%, which I think we should be able to do this year. For us, global diversification is not about going after more alpha from other emerging markets, and adding their volatility too into our client portfolios. It is more about seeking a stable allocation, which offsets some of the volatility of our own markets.

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