Mumbai: Wealth managers are faced with a plethora of questions as they try to optimise returns, with radical uncertainty taking centrestage in the current testing times, says Navneet Munot, Chief Investment Officer of SBI Mutual Fund.
“We are in a world of radical uncertainty. We are in a world which moves a lot faster,” he said referring to the speed at which the Covid-19 crisis has transformed the world, the quick response of policy makers and the rapid surge in the markets over the past couple of months.
The Covid-19 pandemic has had serious and sudden repercussions on businesses, economies and lives of people across the globe, and the world is far from being out of the woods.
Economies across the globe are staring at sharp contraction in growth. Expansionary central bank policies, though, have led to a gush of liquidity, sending asset prices soaring, even as economic uncertainties are far from over.
Speaking at CFA Society India’s Fifth India Wealth Management Conference, Munot said another big challenge faced by the wealth managers in separating signals from noise, as information now moves at the speed of light.
Handling tail risks is a key challenge for wealth managers. “As wealth managers, when you are in a world with such uncertainty, how do you handle the tail risk — of impact on portfolios, of events which have a low probability of happening, but have huge consequences on the portfolio,” he told wealth managers.
“Thanks to liquidity, gold, equity, bonds — all are moving in tandem. With that, how do you arrive at the right allocation? How do you participate in each of these asset classes in the right manner? Those are the questions haunting money managers consistently,” he said.
With each asset class, there came specific doubts making asset allocation tougher when abundant liquidity pushed prices higher, while the ground reality of the economic scenario was haunting.
“Should you keep higher cash? Should you keep more bonds? To hedge against the possibility of higher inflation, should you have more precious metals like gold in the portfolio? But then, gold does not earn anything, and reduces the overall income of the portfolio,” he said.
“Should you invest more in equities from here on? But there, you have valuations that are higher than long-term averages, and that in times of such economic uncertainty,” he said of the wealth managers’ dilemma in these extraordinary times.