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The rise and rise of portfolio management

There is interest in portfolio management services but investors need to remember that this is a buyer-beware product, targeted at high net worth individuals

The increased interest in portfolio management service (PMS) as an investment option is apparent from the 50% increase in number of their clients over the last 1 year (see graph). 

Portfolio management service invests directly in securities through focused portfolios. Unlike the mutual fund platform, here the assets of investors are not pooled into one large fund—rather, each account is maintained independently and separately, albeit the securities invested in them may be similar. 

The size of assets being managed for these accounts has also seen an incremental growth. The total assets under management (AUM) for discretionary and non-discretionary portfolio management services, stands at Rs2.14 trillion, a growth of 35% in 1 year. This compares to 24% growth in the preceding 12 months. The numbers do not include advisory clients and assets managed for provident funds and advisories. Not all portfolio management providers manage equity assets, but majority of the funds are invested in equity. 

 There are many types of PMS providers, ranging from asset management companies (AMC), which also have mutual fund schemes, to independent individual portfolio managers with small-sized funds of a few hundred crores and larger institutional managers who manage a few thousand crores of PMS assets. The popularity of this investment product is also supported by the rising earnings for AMCs from PMS. Out of the top 5 asset managers in terms of fees from PMS, four have seen earnings increase by at least 50% in FY16; out of which two have seen an increase of more than 100%. Data for FY17 is not yet available; however, the trend of growing interest in this space is firmly established. 

Capping of upfront commissions for mutual fund products and the shift to direct plan for large-sized investor accounts has resulted in lower margins for distributors. At the same time, upfront commissions for PMS portfolios, which have a 3-year lock in, can be as high as 4.5-5% in the first year (of a 3-year lock strategy) for the distributor.  According to Munish Randev, chief investment officer, Waterfield Advisors Pvt. Ltd, “In our experience with clients, in the last 1 year we have seen increased cases of PMS being propositioned. Even where the investor hasn’t previously invested in this structure, various advisers and wealth managers are pushing hard." Waterfield Advisors is a SEBI registered fee-only investment advisory firm, focused on managing family office.   

There are other factors too.

According to an established portfolio manager with a domestic advisory company, “While commissions earned can be higher, other factors like choice of fund manager matter. Invetsors are discerning and in the mutual fund space there is limited choice of stable fund managers. Moreover, broking has become a bad business, as a result advisory is getting scaled up." 

A number of mutual fund managers over the last 1.5-2 years have shifted to managing PMS portfolios. Plus, with low margins in pure broking, advise through managing a PMS can be more remunerative. The current bull market also supports PMS strategies. Many PMS portfolios focus more on mid-caps.

In a bull market mid- and small-cap stocks tend to rally more sharply; the BSE mid-cap index has returned 19% annualised return in the last 2 years, compared to around 8% for the BSE Sensex. For high net worth individuals (HNIs) who want to diversify, PMS is the next option after the handful of mutual fund mid-cap equity schemes that draw investor interest. 

Randev says, “In a bull market, mid-cap PMS portfolios tend to get sold. A similar trend happened in 2007-08 when such mid-cap strategies began performing well (before the market crashed)."  

It’s not meant for all investors. The entry barrier is high at Rs25 lakh minimum investment. Hence, it is best suited for HNIs. One advantage is access to portfolios that are concentrated around specific themes. 

PMS portfolios have holdings in say 15, 20 or 25 stocks. Some portfolios are as small as 5 stocks. Compared to this, in mutual fund portfolios one can see 60 to 100 stocks. If chosen right, these focussed portfolios can outperform, especially in bull markets.

Relatively good-quality stocks with small market capitalisation or low free float can be invested in. But, it is not just mid-cap strategies that can be bought into, rather there are several small but differentiated PMS strategies that are available. According to Vinod Jain, founder and Principal Advisor, Jain Investments, “We manage four different PMS strategies. One of the things we focus on is investing in market leaders where the free float available in the market is low. Usually, mutual funds with their large corpus size don’t have access to such shares, that’s where we can differentiate." Jain Investments provides financial planning and has asset management through PMS strategies.

Once invested, portfolio activity can be seen at every step. Stocks are bought and sold in individual investors’ names and held in the investors’ demat accounts. Alert for each transaction is received by the investor in real time. Securities and Exchange Board of India (Sebi) has prescribed a strict format of performance disclosure as well.  

The big advantage is that these are individual portfolios. Hence, one’s portfolio return does not get impacted by cash flows from other investors. Overall, it gives HNIs variety and choice of another platform and manager to access equity markets. 

PMS accounts are negotiated accounts between the investor, adviser and manager. Fee structures can vary although most portfolio managers offer both fixed fee and profit sharing over a hurdle rate. 

There is no standard prescribed fee; market competitive pressures have dictated a normal range of around 2-2.5% fixed management fee, which mostly includes the distributor’s commission. 

While transactions are transparent for an investor, there is no access to see performance of the overall proposition and other investors’ portfolios. 

Randev cautions, “Advisors must do their assessment properly with accurate scheme performance and risk data. Also, individual investors are unable to adequately judge the performance and suitability of the scheme since there is no public domain data available"  

A model portfolio shown to investors may or may not translate exactly into the final portfolio for each investor, selecting a PMS out of the many in the market is a formidable task for investors and advisers alike.  

It is a buyer beware product. You have to decide whether your adviser or distributor is selling you a PMS strategy due to higher commissions or if the strategy is a good fit for you. 

Ultimately, you will have to rely on the consistency of performance showcased by the manager and the trust you place in your adviser.  

According to Rajmohan Krishnan, principal founder and managing director, Entrust Family Office, “While choosing a PMS, one has to be cautious that the fund manager has seen at least two market cycles in the span of her career. We have taken a conservative approach with clients and look for mutual funds with good performance rather than locking into a PMS." Entrust is a boutique, fee-only Sebi-registered family office advisory firm. 

Not all PMS strategies perform well and the pressure of competing with their, tax efficient- easier access-lower expense mutual fund counterparts remains. 

As a thumb rule, stick to the basic principles of asset allocation and diversification that will help you minimize risk at the same time, to not miss out on the potentially higher returns of this product in a bull market.

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