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Top 5 New-Age Investment Options for Experienced Investors – Forbes

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In terms of those who hold wealth and those who create wealth, an interesting metamorphosis is currently underway. 

  • First, wealth is changing hands as it gets transferred from the older generation to the new generation. 
  • Second, sources of wealth creation are changing as new-age tech entrepreneurs and even corporate personnel, armed with employee stock options (ESOPs), have created wealth. 
  • Thirdly, an increasing number of people from diverse backgrounds and with varying perspectives about wealth, join the ranks of the wealthy. 

It is important to note that because of all these changes, the ability to take risks by wealthy and sophisticated investors has gone up significantly in the recent past. 

Correspondingly, the investment landscape has also undergone some modifications and inclusions. Traditional investment avenues which do not generate positive real returns are being replaced with innovative solutions, which are to the further right of the risk-return spectrum. In the backdrop of such an environment, ultra high net worth (UHNW) investors are looking for new avenues to both preserve as well as grow their wealth. 

Here are five emerging avenues that such investors can consider include:

Equity-linked Market Linked Debentures (MLDs) and Non-convertible Debentures (NCDs)

MLDs are usually issued by non-banking finance companies (NBFCs) and offer returns that are linked to specified equity indices based on an underlying condition. For example, a 30-month MLD would pay the investor a predefined internal rate of return at the end of the tenure if Nifty 50 Index does not fall by more than 75%. 

Proceeds from MLDs have a tax advantage compared with regular debt instruments but also have issuer risk as repayment of principal and defined IRR is at the end of the tenure. On the other hand, lower rated NCDs are debt products that offer higher interest rates than common debt instruments with the option of having regular coupon payments. These avenues are high in terms of risk and return as opposed to conventional debt instruments. 

Additionally, both these products are rated by credit rating agencies and hence, can give investors a clear idea of the amount of risk involved. It must be noted that the options in the secondary debt market have increased significantly and while a lot of money goes into direct secondary debt portfolios made up of a mix of highly rated secondary bonds or deposits a small portion is also being used to increase portfolio returns through calculated decisions of investing in higher risk fintech companies that are backed by strong investors.

Venture Debt

While equity participation in early and growth stage unlisted companies is known to all, one more avenue is venture debt which refers to providing short-term loans (18 to 24 months) to established early and growth stage venture capital backed companies. Venture debt is underrepresented in investor portfolios in India and provides a healthy mix of high yield, regular coupons and equity participation through warrants. 

In India, venture debt funds that provide investors an option to participate in this debt financing option are fast gaining momentum. According to data from private company tracker Venture Intelligence, the total amount raised by venture debt funds through private equity and venture capital debt funds jumped from $62 million in FY 2019-20 to $85 million in FY 2020-21. 

Private Equity

Over the last decade, private equity and venture capital has metamorphosed from a nascent alternative asset class to a mature ecosystem. As a result, in the year 2019, private equity and venture capital investments in India grew to USD 48 billion or 1.7% of gross domestic product (GDP).

Buoyed by a thriving start-up ecosystem and strong exits, private equity is becoming an attractive investment option for an increasing number of UHNIs. The rally in the markets as also the immense money being made by the start-up founders and promoters has created an appetite for early-stage investing ideas or even ideas in listed companies targeting new sectors.

As a result, UHNW investors are looking to invest for the future whether in the unlisted or the listed space to reap benefits in the long run. They are interested in futuristic themes such as consumer tech, retail fintech, renewable energy, electric vehicles and associated components. 

International Investing

In addition to asset class diversification, it has now become equally important to achieve geographical diversification. As a result, international investing is beginning to assume a key role in sophisticated investor portfolios. 

Firstly, there is the potential to invest in innovative global companies that are currently not listed in India but have a place in the consumption basket of India. Secondly, investors can enhance the risk-adjusted returns of their portfolio by generating higher returns while reducing overall portfolio risk through diversification. And, thirdly, investors who have liabilities in a foreign currency can hedge the risk of rupee depreciation through exposure to international investments. 

Indians can invest in international markets either through international mutual funds or directly under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI) that allows resident individuals to remit $250,000 during a financial year outside for the purpose of investment. Interesting options are also available now via direct stock investing internationally into US stock exchanges, where one can invest either into growth stocks directly or indirectly participate in new opportunities like a Bitcoin ETF or a new listing on the day of the IPO.

Real Estate Investment Trusts (REITs)

Traditionally, real estate has been a significant part of high net worth individuals (HNI) portfolios. However, due to the illiquid nature of real estate and the fluctuating real estate market, there has been a clear shift towards reducing real estate exposure. This does not mean that real estate no longer holds sway. What it means is that HNIs are now gaining real estate exposure through instruments like into Real Estate Investment Trusts (REITs). These are investment companies that either directly own real estate or have a share in the income of real estate properties. Thus, HNIs can gain the relevant real estate exposure by investing in REITs.

Bottom Line 

We live in an era where innovation is enabling investors to create optimal investment portfolios that can meaningfully straddle their risk-return requirements. In these exuberant times, increasingly the concept of core “asset allocation-based” portfolios, which are stable and managed for the long-term, balanced alongside “tactical portfolios”, where profits booked can be put into well-thought-out investment opportunities, seems to be the flavor of the sophisticated investors mindset.

Finally, it must also be noted that UHNW clients are also increasingly interested in ensuring their investment portfolios are protected and optimized through professional legacy planning and tax planning. 

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Oil rises as investors focus on OPEC+ decision amid growing Omicron fears

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Oil prices rose on Thursday, recouping the previous day’s losses, as investors adjusted positions ahead of an OPEC+ decision over supply policy, but gains were capped amid fears the Omicron coronavirus variant will hurt fuel demand.

Brent crude futures rose 85 cents, or 1.2%, to $69.72 by 0402 GMT, having eased 0.5% in the previous session.

U.S. West Texas Intermediate (WTI) crude futures gained 85 cents, or 1.3%, to $66.42 a barrel, after a 0.9% drop on Wednesday.

“Investors unwound their positions ahead of the OPEC+ decision as oil prices have declined so fast and so much over the past week,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

Global oil prices have lost more than $10 a barrel since last Thursday, when news of Omicron shook investors.

“Market will be watching closely the producer group’s decision as well as comments from some of key members after the meeting to suggest their future policy,” Ueno said.

The Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, will likely decide on Thursday whether to release more oil into the market as previously planned or restrain supply.

Since August, the group has been adding an additional 400,000 barrels per day (bpd) of output to global supply each month, as it gradually winds down record cuts agreed in 2020.

The new variant, though, has complicated the decision-making process, with some observers speculating OPEC+ could pause those additions in January in an attempt to slow supply growth.

“Oil prices climbed as some investors anticipate that OPEC+ will decide to maintain the current supply levels in January to cushion any damage on demand from the Omicron spread,” said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.

Fears over the impact of the Omicron variant of the coronavirus rose after the first case was reported in the United States, and Japan’s central bank has warned of economic pain as countries respond with tighter containment measures.

U.S. Deputy Energy Secretary David Turk said President Joe Biden’s administration could adjust the timing of its planned release of strategic crude oil stockpiles if global energy prices drop substantially.

Gains in oil markets on Thursday were capped as the U.S. weekly inventory data showed U.S. crude stocks fell less than expected last week, while gasoline and distillate inventories rose much more than expected as demand weakened. [EIA/S]

Crude inventories fell by 910,000 barrels in the week to Nov. 26, the Energy Information Administration (EIA) said, compared with analyst expectations in a Reuters poll for a drop of 1.2 million barrels.

(Reporting by Yuka Obayashi; Editing by Tom Hogue)

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Toronto market hits 7-week low on Omicron uncertainty

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Canada‘s main stock index fell on Wednesday to its lowest level in over seven weeks as the United States reported its first case of the Omicron variant that investors fear could impede economic recovery, with the index giving back its earlier gains.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 195.39 points, or 0.95%, at 20,464.60, its lowest closing level since Oct. 12.

Wall Street also closed lower as the U.S. Centers for Disease Control and Prevention said the country had detected its first case of the new COVID-19 variant, which is rapidly becoming dominant in South Africa less than four weeks after being detected there and has spread to other countries.

It might take longer than expected for supply chain disruptions to abate, “especially if we have renewed shutdowns in Asia,” said Kevin Headland, senior investment strategist, Manulife Investment Management.

Still, Headland does not expect the new variant to lead to an economic recession or a bear market for stocks in 2022, saying: “Reaction to headline news provides opportunities for those that have a longer-term timeframe to add in the equity markets.”

The TSX will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.

The technology sector fell 2.7%, while energy ended 1.9% lower as oil was unable to sustain an earlier rally. U.S. crude oil futures settled 0.9% lower at $65.57 a barrel

The materials group, which includes precious and base metals miners and fertilizer companies, lost 2.2%.

Financials were a bright spot, advancing 0.4%, helped by gains for Bank of Nova Scotia as some analysts raised their target price on the stock.

Bombardier Inc was among the biggest decliners. Its shares sank 10.4%.

 

(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Peter Cooney)

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Canada’s TSX to extend record-setting rally; pace of gains to slow: Reuters poll

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Canada‘s main stock index will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.

The median prediction of 26 portfolio managers and strategists was for the S&P/TSX Composite index to rise 9.1% to 22,540 by the end of 2022.

That’s a move that would eclipse last month’s record high of 21,796.16 and compares with an August forecast of 22,000. It was then expected to edge up to 23,150 by the middle of 2023.

The index had advanced 18.5% since the start of the year, putting it on track for its second biggest gain since 2009.

“We think the economy and markets will continue to progress further into the mid-cycle phase next year,” said Angelo Kourkafas, investment strategist at Edward Jones. “We are past the strongest point of the cycle, but there is plenty of runway ahead, especially from an economic standpoint.”

Canada‘s economy https://www.reuters.com/world/americas/canadian-economy-posts-annualized-gain-54-q3-october-gdp-seen-up-08-2021-11-30 grew at an annualized rate of 5.4% in the third quarter, beating analyst expectations, and growth most likely accelerated in October on a manufacturing rebound.

“Banks can continue to benefit from an improving economy and reducing loan loss provisions and resource companies can benefit from higher commodity prices,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

Combined, the financial services and resource sectors account for 55% of the Toronto market’s valuation.

Nearly all participants that answered a separate question on the outlook for corporate earnings expected earnings to improve. But the pace of growth could slow.

“We expect a decelerating pace of (earnings) growth,” said Chhad Aul, chief investment officer & head of multi-asset solutions at SLGI Asset Management Inc. “In particular, we expect the recent strong earnings growth in the energy sector to begin to moderate.”

The price of oil, a key driver of energy sector earnings, has tumbled 24% since October, pressured by rising coronavirus cases in Europe and the detection of the possibly vaccine-resistant Omicron variant.

Another risk to the outlook could be a reduction in policy support, say investors.

With inflation climbing, the Bank of Canada https://www.reuters.com/world/americas/bank-canada-signals-it-could-hike-rates-sooner-than-expected-2021-10-27 has signaled it could begin hiking interest rates as soon as April and the Federal Reserve https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 is mulling whether to wrap up tapering of bond purchases a few months sooner.

“The key is the pace of both fiscal and monetary policy normalization,” said Ben Jang, a portfolio manager at Nicola Wealth. “This process will likely lead to more volatility in markets, potentially returning to an environment where we will see drawdowns of more than 10%.”

Asked if a correction was likely over the coming six months, nearly all respondents said yes.

 

(Reporting by Fergal Smith; polling by Mumal Rathore and Milounee Purohit; editing by David Evans)

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