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Where Are HNIs Investing? HNIs and family offices are embracing the 'core and satellite approach' in equity investment

By Prashant Joshi

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Investment strategies in 2022 for the high-net-worth individuals (HNIs) and the ultra HNIs are reshaping post-pandemic. With so many moving parts (economic factors, social factors, geo-political events, asset cycles, etc.) and structural changes underway, the investment environment is continuously transforming for the better amidst unforeseen challenges, which, in turn, are ushering in new investment opportunities.

Some essential HNI investing trends to watch for in 2022 are as follows.

Equity trends

HNIs and family offices are embracing the 'core and satellite approach' in equity investment. This is a departure from their earlier 'buy and hold strategy' stance. Gradually HNIs and family offices are accepting the importance of economic cycle and business cycle investing and hence are carving out an allocation for the same. This may sound risky on the surface; however, when done wisely, economic and business cycle investing brings the much-needed diversification to a 'long-only' portfolio in addition to agility, market adaptability and a robust portfolio structure.

A business cycle is generally defined as periods of expansion, contraction, slump and recovery. For instance, cyclical stocks tend to outperform during the early expansion phase. At the same time, the defensive sectors such as healthcare, consumer staples, etc., tend to do well in the contraction period because of their stable cash flows and dividend yields.

Debt market trends

A lot has happened and is happening in the debt space. The HNIs and family offices are opening to structured debt products and venture debt, evident from the slew of new offerings in the debt space. These funds are structured for lower tax incidence when compared to other debt instruments, making them a good fit for the HNI portfolios. The venture debt funds offer returns of 10-13 per cent.

Other asset classes

The other asset classes making inroads in the HNIs and family offices are private equity, venture capital fund and REITs/ InvITs, and are here to stay.

As a result of COVID-19, most companies all over the globe accelerated their digital transformation process. New-age tech firms in fintech, agritech, greentech, edtech, and pharmatech are among the few industrial sectors embracing technology on a broader scale and have gained investor focus over the past few years. The startups in the tech-based business transformation are gathering the attention of HNIs and family office, and the increasing number of Unicorns is influencing the incremental allocations.

The problems of bigger ticket size and inadequate liquidity have traditionally hampered real estate and infrastructure investments. However, HNIs have started to participate in this space which provides adequate liquidity through new product categories such as REITs and InvITs, and is witnessing a gradual upward trajectory. This new asset class is allowing investors to diversify across real estate and infrastructure as an asset class while also providing liquidity and intermittent income flows (SEBI requires that the funds distribute 90 per cent of their income to unitholders).

Across various asset classes, the AIF (Alternative Investment Funds) is emerging as a preferred investment route for the HNI's & Family Office. Table 2and graph 2shows the growth in the overall AUM of AIF and across categories since December 2017.

Category - II include private equity funds, pre-IPO funds, real estate funds, structured credit funds and venture debt. They provide low correlation to public markets, diversification from traditional equity, debt and other asset classes and are geared toward high risk-adjusted returns. Category – III AIFs employ diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives and include funds such as hedge funds PIPE Funds. Both categories are garnering assets under management at a rapid pace. While Category I & II AIF are passthrough vehicles, which means tax has to be computed and shown in the books of investors. In the case of category III AIF, taxation is at a fund level which means that the investors get only post-tax returns; they need not worry about showing tax on their books and it is increasingly becoming popular. This is evident from the fact that from category -III grew at 36.04% coming close to category – II growth of 40.34% (dec'20 to dec'21)

Focus on Sustainable Development Goals (SDG)

Investors are increasingly seeking transparency and alignment of investment strategies with the ESG policies, be it any asset class. Investors have shifted their focus to Socially Responsible Investing (SRI) and embrace funds whose investment framework factors EGS policies. The age of the passive, unconcerned investor, who would see nothing beyond profits and dividends, is now behind us. They're keen to know the impact of investments on society at large.

To conclude, over the past few years, the HNIs and family offices' outlook on investments has changed significantly. While the whole world is recovering from the impact of the Corona pandemic and the geo-political tensions, the investment world is brimming with new investment opportunities, and HNI's and Family Office are eagerly waiting to embrace such opportunities.

Prashant Joshi

Co-Founder and Partner, Fintrust Advisors


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