Large-caps & Reits: India’s largest investment adviser’s shifts

Over the past year, Rajan has moved from small-caps to large-caps, seeing froth in the mid- and small-cap rally. She has also invested her fresh fixed-income money in Reits and InvITs—instruments investing in real estate and infrastructure that offer a yield to investors.

Rajan’s financial portfolio of course excludes her stake in Waterfield Advisors,which is looking to raise a fresh round of equity funding from global family offices. Rajan had founded the multi-family office and wealth advisory firm in 2011 after a long career in banking. With about ₹45,000 crore in assets, Waterfield is currently India’s largest registered investment adviser. The firm is majority-owned by Rajan but has minority stakes held by the Patni Family Office and Zephyr Management, its overseas partner.

Personal portfolio

Excluding her stake in Waterfield, the bulk of Rajan’s money is in the public markets. This money is invested in equities—both direct stocks and mutual funds. The rest is split almost equally between debt funds (target maturity) and Reits/InvITs.Most of this (75%) is in large-cap stocks with the balance in mid and small caps. Rajan also mostly uses passive funds (index funds) for her large-cap allocation because active mutual funds have stopped outperforming benchmarks in the past several years.

Worried about the froth in mid and small caps, Rajan shifted from them to large caps last year. She also added Reits and InvITs to the fixed-income part of her portfolio. The 2023 Budget made debt mutual funds taxable at a slab rate regardless of the holding period. Hence, Rajan has been putting her fresh debt money in Reits and InvITs, which invest in completed and revenue-generating real estate and infra projects, and are relatively stable.

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Rajan stopped renewing her life insurance policies once she had accumulated a sufficiently large portfolio. She continues with this stance.

Rajan has also begun putting more of her money in private markets (unlisted space) such as venture capital and early-stage growth funds. About 30% of her portfolio sits there—in FoFs launched by Waterfield itself andfunds run by women managers.

The maiden Waterfield FoF was launched in 2022, predominantly investing in venture capital. The firm is now launching a second fund with a ₹2,000 crore target.

Rajan doesn’t invest in real estate except for owning her primary residence. While she has no life insurance since she feels she has sufficient cushion in the form of investments for her family, she has a health insurance policy of ₹1 crore in addition to medical insurance coverage from her company.

Commenting on the growing entrepreneurial interest in setting up investment advisory firms by senior private bankers, Rajan says, “I like it when people move to start a new firm. I want the advisory profession to grow."

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Deployment strategy

Rajan expects the market volatility to continue in the coming weeks until a stable functional government is created. “So far, net flows have been favourable, but hereon, the market trajectory will be driven by continued good earnings performance," she says.

“As a house, we had encouraged investors to keep some dry powder (depending on their objectives) given the magnitude of the event risk that general elections pose. We have avoided Fomo (fear of missing out) despite the markets’ strong performance in recent months."

Currently, stock prices have both good and unattractive traits, says Rajan. “P/E (price-earnings) ratios are moderate to slightly elevated, business profits are substantial and balance sheets are solid. However, there are geopolitical concerns and worries over the continuation of the previous government’s policies. As a result, we propose to negotiate the transition from a current cash position to a neutral (fully invested) position depending on current and changing market valuations.

“This is the most objective way to deploy money in an unpredictable market environment owing to a strong causal relationship between valuations and future returns. If valuations remain stable, allocations can be spread over the next three-four months. If prices moderate, deployment can be accelerated. If weakness in markets persists this week, then we advise allocating 25% of dry powder and staggering the remaining.

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“As advisers, we focus on capital-preserving tactical shifts. In other words, when prices in certain sections of the market are significantly higher than typical, it is sensible to reduce the allocation. We continue to favour large caps based on our analysis of the relative valuations of large versus mid/small caps. We propose making these tactical tilts inside the stated strategic ranges for each of these market subsectors, specifically in the upper and lower bands of the defined strategic ranges," she says.