If you are a high networth individual and have at least Rs 5 lakh to invest, you have most likely been introduced to the portfolio management services (PMS) product. While a mutual fund (MF) is akin to public transport, a PMS is like your own vehicle where you, at least theoretically, decide where you want to go and at what speed. Like funds, PMS providers offer options across several asset classes including equities, debt and gold. They also offer real estate investment options, something that funds do not. In fact, they would even invest on your behalf if the agreement mandate says so—though we do not recommend that you sign off that.
Mint Money advises caution while signing up for a PMS due to loose regulatory environment here than in MFs. While a MF’s performance, costs and fund managers are tracked and recorded, there is little data available on the performance of PMS companies and products. One reason is that PMS returns vary from person to person and tracking returns of so many separate portfolios is difficult.
In this scenario, when it comes to choosing the right PMS provider, it becomes a challenge for you, the investor. There are no benchmarks or data to help you make an informed decision. Until all that happens and regulations evolve enough to make PMS more transparent, we tell you some basic checks you can run before choosing this service for yourself.
Before you buy
Basic checks: The most basic check you need to run is the fact whether the company you are approaching is registered with the capital market regulator, the Securities and Exchange Board of India (Sebi). There are about 265 PMS providers that are registered with Sebi at present (go to http://bit.ly/gY4qcY)
A word from close friends and relatives may also help. “An investor can act upon the feedback provided by their close friends and relatives whose portfolio is already being managed by some PMS company. They know the company and the working style much better and hence, can help investors in selecting a company,” says Surya Bhatia, certified financial planner and principal consultant, Asset Managers.
But remember that PMS returns depend on case to case, so just because your friend made good returns with a company need not imply that you would do too. However, the overall experience with the company and the credibility aspect can be checked.
Track record: While it goes without saying that comparison of returns by various PMS providers would really give the true picture, in the absence of data in the public domain, that’s not possible. The closest you can come to this criterion is by checking the track record of various portfolio managers.
“Analysing track records of PMS providers includes checking their credibility. Companies with very good reputation certainly do few things better than their peers,” says Madhumita Ghosh, head of research and PMS, Unicon Financial Intermediaries Pvt. Ltd, a broking house.
One way is to go for big and established brand names.
Also, see how long has the company been around. “While the longer duration of business does not automatically mean that the company is good, the fact is that a company with poor track record will not be able to survive in the business for long,” adds Ghosh.
Initial fee: To buy a PMS, you need to pay a fee. But just because a company is charging a lower fee does not necessarily make it a good choice. For one, just like the returns, the fee also varies from client to client. The bigger your corpus, the lower may be your fees. However, it’s worth comparing the fee among peers for the same amount. “A company with unproven record may charge less fees compared with established ones,” says Ghosh.
The fee also depends on the type of service you choose. There are mainly two types of PMS: discretionary and non-discretionary. Under discretionary PMS, a portfolio manager independently manages the funds, according to your needs, risk profile and objectives. On the other hand, under non-discretionary PMS, the manager consults investors before every investment decision. Since, the nature of job differs under the two options, the fee for both categories also differs.
Normally, the fees for a discretionary portfolio is in the range of 2-2.5% and that of a non-discretionary portfolio is in the range of 0.5-1%. the fee is higher for a discretionary portfolio since the fund manager needs to take all investment decisions.
But investors seem to prefer discretionary services over non-discretionary portfolio. According to Sebi data, 66,570 customers have opted for discretionary services, while only 3,657 have taken non-discretionary services. “If an investor has the requisite expertise to take investment decision, he should prefer non-discretionary portfolio. But since, most of investors do not have that expertise, discretionary portfolio services should be preferred,” says Gaurav Mashruwala, a Mumbai-based certified financial planner.
Performance fee: Don’t just go by the initial fee; considering performance fee is also important. PMS providers charge this fee. This fee is charged if the returns exceed a particular predetermined level, known as hurdle rate in industry parlance. “PMS companies corner a part of profits if returns exceed a certain level which is fixed at the time of investment. The performance fees charged ranges between 10-20% of the profit which exceeds the pre-decided level,” says Ghosh.
Staff concerns: Among 265 registered companies, there are some that use their staff for multiple purposes. For instance, the staff of a broking house offering PMS may be involved in day-to-day trading activities. This may mean that the client’s portfolio doesn’t get exclusive attention.
“Dedicated staff keep investors’ profile in mind while taking investment decisions, while a non-dedicated staff has a non-focused approach due to pre-occupation with several other things. Investors should prefer companies which provide dedicated staff for PMS,” says Kartik Jhaveri, founder and director, Transcend Consulting (I) Pvt. Ltd, a Mumbai-based private wealth management firm.
The quality of staff is also important. “There is less chance that a knowledgeable and experienced manager will commit a mistake compared with those with little knowledge and less experience,” Jhaveri adds.
Frequency of disclosure: Sebi has made it mandatory for all PMS companies to disclose their portfolios on a half-yearly basis. Portfolio disclosure consists of information regarding stock holdings, investment in debt instruments and frequency of trading, apart from change in management, the number of complaints recorded, total fund managed and average returns. Some companies have gone a step ahead and make these disclosure every quarter or in some cases daily. The shorter the period of portfolio disclosures, the better it is for investors.
“By going through the disclosures, investors would know where exactly their money is going and would be in a position to make suggestions, if need be. The shorter the disclosure period, the easier it becomes to track the portfolio,” says Anil Rego, chief executive officer, Right Horizons, a Bangalore-based financial advising company.
You can assess the information and take decisions accordingly. For instance, if the number of complaints made against the company is consistently high, it should ring an alarm bell. Similarly, if you observe an exodus of senior officials, particularly those with good reputation, it may not bode well for the company.
After you buy
It is not advisable to sit back once you have made the choice. After your initial investment, remember to assess the PMS provider to contain losses, if any, in the early days itself. Here’s what you should look into.
Performance: If the returns are not in sync with your expectation, you may want to rethink your decision. Though there is no benchmark as such for PMS, looking at broader market returns from the Sensex or the Nifty may give you an idea, especially if you are heavy on equities.
Investment mandate and timing: If you’ve asked your PMS to steer clear of stocks of a particular sector, but it is still part of your portfolio, there is a problem. A good PMS company will not only abide by the mandate given by customers, but also execute it instantly. Delay of even a minute can mean a huge change in your returns if you are invested in the market and that’s why timing becomes important.
Logic of investment: Since you can’t compare returns in the absence of a benchmark, a good way of judging PMS companies is by analysing the logic behind a particular investment decision. “One should continuously interact with managers and should question the rationale for making or not making a particular investment. If the reason sounds logical, it indicates that the PMS company is not involved in any foul play,” says Bhatia.
Churning: Each time, the fund manager churns your assets, he charges an additional fee and you get the intimation. The more the churning, the higher would be the brokerage fee. So, it’s worthwhile keeping an eye on what is happening in your portfolio. “Many brokerage houses have the mandate for offering PMS. Since, they undertake trading on their own platform, some of them churn a lot for higher brokerage income. While churning provides income to brokerage companies, it erodes the return for investors,” says the head of a PMS company, who did not want to be named.
By going through the disclosures made by the company, one can know the frequency of churning and whether the same stock has been bought and sold again and again.