Q&A with Yogi Dewan: Why everyone misunderstands risk
For high net worth families, preserving wealth for future generations is more important than risking it for an outsized return.
“Financial markets are environments for preserving wealth,” explains Yogi Dewan, chief executive and founder of boutique wealth management firm Hassium Asset Management. “But whether you invest in equities, real estate or government bonds, there’s no guarantee you’ll see your investment back. And market volatility around geopolitical events shouldn’t affect the money you’ve spent a lifetime making.”
Having started his career in pharmaceuticals, Dewan then spent 10 years at Goldman Sachs before founding Hassium in 2006. Working with just 25 to 30 high net worth families, Dewan pursues a strategy of capital preservation and then growth, so clients can take on greater risk in areas they know best. He talks to Morning Wire Money about beating inflation, qualitative risk, and why he is sanguine about the world economy.
What is your investment strategy for preserving wealth?
We typically hold only 20 positions for our clients, with a mixture of bonds, index trackers, forex trading and hedging, and we occasionally invest in direct equity. On our mandate, clients should expect a mid to high single digit return in the current climate. If we are generating 15 per cent, they should bank it and fire us.
We’re quite cautious when it comes to financial markets, and try to keep things simple for clients. Your first two priorities should be asset allocation and currency exposure. These decisions dictate around 60 to 70 per cent of investment performance. Third and fourth are geographical allocation and commodities exposure, which is directly linked with emerging markets. Only then should you settle upon a sector, be it finance, technology or healthcare – and finally, between Dell and Microsoft.
Our clients should be taking on risk in the areas they know best, which is often their own industries. That might be telecoms, real estate or retail, and that’s where they’ll get their home-run.
What are the biggest risks on the horizon?
Risk is a really misunderstood word in our industry. It is seldom used to refer to qualitative risks, around the law, liquidity, regulation and emotion which can impact investment decisions massively. When Lehman Brothers collapsed, it wasn’t because of a quantitative market risk, like a bad investment decision, but for operational reasons. If clients aren’t familiar with market volatility, there is a huge emotional risk at play because they might liquidate their investments in haste.
That’s why proper financial education is so important. Clients need to fully understand the risk their wealth is exposed to, and it’s not in the interest of banks to educate them in this regard, because they are incentivised to make revenues in the short term.
With a Fed hike coming up, and an EU referendum before the end of 2017, should investors be concerned?
I don’t think US interest rates are a big issue, regardless of whether the Fed chooses to hike this year or later. The Greek crisis came to nothing, with the EU and the euro remaining intact. And I don’t think the UK will leave Europe, because it makes no sense economically or on a corporate level.
Investors’ biggest concern should be not being invested in the market. Many are long on cash at present, but the consumer price index is zero in most developed countries. They may erode their wealth if they keep it in cash, and they’ll lose money in bonds as interest rates rise.
Global equities is the best asset class to be in right now, despite valuations being high. It is important to remember that share price appreciation is driven by earnings not geopolitical events or GDP growth. Europe is attractive because the euro is weaker and there is a high level of QE, so growth will follow. The case is broadly similar for Japan, except that its performance is closely tied to China. But I’m reasonably optimistic there too.
Why are you so positive about China?
China is a $10 trillion economy with 7 per cent growth. The biggest concern is the amount of bad debt, but the devaluation of the yuan was a welcome move and will boost exports. There may be currency wars as a result, but China is in a period of transition, and it will take time to adjust. There are transparency issues around reporting its production and unemployment figures. But every country, including the US and the UK, manipulates unemployment figures.
If you go there, you see the shops and restaurants are full, there are nice cars on the road. And most importantly, there’s a lot of business being done.
Are China’s prospects rosier than India’s?
India is a $2 trillion economy, with a less developed banking system, bureaucracy and corruption. But Prime Minister Modi’s reforms are encouraging and will bed in with time.
Largely, India is doing a better job than China on two fronts. First, it is deregulating and opening up to international investment flows, making it easier for global investors to get exposure. Second is the potential of its workforce. India churns out more graduates than any country in the world, including the US. They’re coming out highly skilled, speaking English, and going all over the world. But as the country grows over the next 20 years, they’ll return, and bring their skills back with them.