From Trump tariffs to interest rate cycles: portfolio analytics in action to create wealth

Time of India

22-04-2025

(The author Nimish Shah is the MD- Wealth Management & Analytics at LGT Wealth India)
In the last few years,
Indian equities
have performed very well. The Nifty 50 Index has delivered an excellent 5-year (as of 15 April 2025) price return of 21.19% CAGR.
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During the same 5-year period, the broader market has performed even better. The Nifty Midcap 150 Index (31.95% CAGR), the Nifty Smallcap 250 Index (34.71% CAGR), and the Nifty Microcap 250 Index (47.69% CAGR) have created wealth for long-term investors.
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However, some investors are unnerved due to current
market volatility
. The year-to-date (1 Jan to 15 Apr 2025) returns of the above indices range from -1.34% for the Nifty 50 to -15.71% for the Nifty Microcap 250 Index.
During the same period, gold and
fixed income
have delivered good returns. This highlights the importance of
portfolio analytics
.
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Portfolio analytics highlights the key trends and provides valuable insights that are important in investment decision-making.
Role of portfolio analytics
As the complexity of the Indian capital markets increases, the need for effective tools to analyse client portfolios is becoming increasingly important. Increasing market volatility is leading to fluctuations in portfolio values, which is unnerving clients.
For example, in November 2024,
Donald Trump
was elected the US President. Since then, the Indian and global stock and debt markets have become highly volatile due to the threat of tariffs imposition and their repercussions.
In this environment of heightened uncertainty, clients want to know the contributors to the rise in risk on their portfolio, which can be best provided by in-depth portfolio analytics.
Portfolio analytics helps break down complex and voluminous investment data into bite-sized information. The information further helps comprehend the risks and returns in a portfolio across asset classes and products.
Asset allocation: Portfolio analytics at a broader level
At a broader level, analytics across asset categories brings forth asset allocation. The asset categories can include equity (listed and unlisted), fixed income, gold and other commodities, REITs and InvITs, hybrids and multi-asset class products, alternatives, cash, etc.
A periodic review with portfolio analytics can identify any deviation from the risk appetite, and corrective action can be initiated.
For example, if equity outperforms significantly in a particular year, its weight in the overall portfolio will increase. As a result, the weights of other classes will go down, and overall asset allocation will deviate from the base ratio.
Portfolio analytics helps identify such deviations and initiate action to revert to the base asset allocation.
Applying quantitative methods and using modern-day technology, portfolio analytics can analyse various parameters to bring forth the contributors and detractors to risk and returns. When backed by quality research, portfolio analytics can help objectively analyse an investment portfolio.
Equity analytics
Once your broad level asset allocation is sorted, portfolio analytics can help you delve into each asset class. For example, portfolio analytics for equity investments would aggregate investment at an individual stock level.
Underlying investments of mutual funds and
PMS
would be aggregated with direct stock holdings. The resultant analytics would bring forth various aspects that affect risk and return.
The equity portfolio can be designed using the core and satellite model. The core part can consist of exposure to broader indices based on market capitalisation. The satellite part can include exposure to sectors, themes, smart beta strategies, etc.
One can start with the market-cap allocation across large, mid, small and micro-cap stocks. It helps understand whether the equity portfolio suits a client's investment risk appetite.
The allocation to respective categories (large, mid, small, micro, etc.) can depend on various factors. Some of these include investor's age, risk profile, investment time horizon, major life events, category valuations, etc.
Currently, many portfolios are skewed towards mid and small cap stocks. It is due to the superior performance of these categories in the last few years, as discussed at the beginning. However, these categories are currently seeing far more volatility than large-caps, thus unnerving investors.
Now, let us move from the core to the satellite part of the equity portfolio. Equity analytics can also bring forth the sectoral allocation, thereby giving insights on under or over-allocation to sectors.
For example, in the current environment, with tariff threats looming, exposure to export-oriented businesses may be reduced. On the other hand, investors can increase exposure to domestic-oriented businesses that are relatively less affected by tariffs.
Portfolio analytics driven appropriate allocation to sectors based on the situation can bring more stability to the portfolio.
After reviewing broad market capitalisation and sectoral exposures, with portfolio analytics, you can assess stock-level exposures to balance portfolios.
Analytics can help gauge the concentration risk due to over or under-exposure to a fund manager, sector or stock.
A long-term attribution and contribution analysis helps understand the performers and laggards in a PMS or a fund.
And, an over-lap analysis of the underlying stocks of a fund and PMS brings forth the schemes with a large percentage of common stocks between them.
When such varied analytics are available to an advisor and investor, it leads to effective, well-informed, unbiased decisions.
Fixed-income analytics
Fixed-income analytics will aggregate the underlying debt investments across mutual funds, direct bonds and fixed-income PMS.
Credit analysis becomes even more relevant when the analytics shows the portfolio exposure across the credit curve AAA & G-Sec to C & D rated papers.
Analytics can aggregate investments at a corporate group level and ensure credit risk caps and floors to manage risk.
Portfolio duration and average maturity profile are analysed to stress-test the sensitivity of the fixed-income portfolio to interest rate movements.
Effective decisions can be taken to increase or decrease duration and credit profile depending on the expected economic situation.
For example, currently, we are in an interest rate easing cycle. Thus, exposure to long duration bonds that benefit more from interest rates moving lower can be increased.
Portfolio analytics is important and indispensable
In today's world of ever-changing market dynamics and geopolitical uncertainties, portfolio analytics is important and indispensable.
Key trends and insights from a good-quality portfolio analytical report help investors manage portfolio risk, return and complexity effectively.
(
Disclaimer
: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the
Economic Times
)