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It’s been just a few months since the portfolio management service (PMS) industry that caters to high networth investors formally incorporated its industry association. Led by NJ India Invest, White Oak Capital Management and Marcellus Investment Managers (headed by Saurabh Mukherjea), the Association of Portfolio Managers of India (APMI) was incorporated in December 2021 and is in the initial stages of building its membership. In an interview to Mint, Neeraj Choksi, founder, NJ India Invest Pvt Ltd; Aashish Somaiyaa, CEO, White Oak Capital Management; and Rashim Bagga, principal officer, APMI, spoke on several industry issues and what the association intends to achieve.  Edited excerpts. 

What was the genesis of the association?

Neeraj: When the PMS regulations were revamped in 2020, Sebi had created a working group. Saurabh Mukherjea (Marcellus Investment Managers), I and a few others were part of it. So, many issues came out during our discussions and Sebi suggested that an association similar to AMFI be created as the portfolio management industry was becoming larger and there were several challenges. 

There have been instances when some stringent regulations were necessary and that could be done only by setting up an association. 

What are the big issues that you want to address? 

Neeraj: It always makes sense to have a body where people from the PMS industry can be represented properly and raise issues that need to be resolved. There was no specific issue, it’s an ongoing thing. There are close to 275-odd portfolio managers and this list may expand. 

So, we should have a body. It is not restricted only to representation, but is also about thought leadership and knowledge sharing. 

What percentage of the PMS industry have you signed up? 

Rashim: So, we have just started. This association was formed in December 2021 and I came on board on 2 May. There is an 11-member core committee. The organization is headed by a board which includes Aashish (White Oak), and Saurabh (Marcellus). We have started talking to the larger PMSes. We’re targeting 90-95% of the PMS Industry AUM in a short time. 

There are PMSs that invest only in stocks, while others are essentially wealth management PMS that invest in various other assets. So, how will you address this?

Aashish: Structurally, a PMS is not a fund. It’s a bilateral agreement between a portfolio management service provider and the client. And a PMS basically fulfils two purposes. It enables you to avail of investment management service and it also functions like an aggregator. That means, at one level, it could be an aggregator of just stocks but it can also be an aggregator of multiple asset classes. 

I don’t think that a PMS should be viewed like a MF when it comes to standardization and categorization. 

So, there is going to be that difference or challenge in terms of trying to standardize or compartmentalize not only because it’s not a fund, but also because it is bilateral and also because sometimes PMSes play the role of aggregation or just holding assets on behalf of clients. 

But don’t you have to begin with some classification at a broad level? 

Aashish: Yes, so there are third party aggregators who are collecting data from portfolio managers and aggregating and publishing it. 

For example, White Oak manages a multi-cap PMS which is perpetually 40-45% in small and mid-cap stocks and 50-55% in large caps. Now, you cannot compare that with a multi -cap MF because it follows some regulator-prescribed norms. So, it’s best if they are not straight jacketed. 

So,  aren’t these third party bodies essentially private players who are distributors? 

Aasish: The regulator has prescribed to us how to calculate our return. But the point is that even in the mutual fund industry, everybody looks at Value Research, Morningstar and Crisil. 

Yes, they are not distributors but they are also third parties in some sense. So, if we have to report our data to anybody, maybe my mutual fund NAV to Value Research and my PMS data to someone else, I cannot dare to give something which is not as per Sebi prescription on how returns should be reported. 

Neeraj: How and what to report is something which we will certainly discuss across various players. In terms of return, because of  Time Weighted Rate of Return (TWRR), already a lot of things have got resolved. 

Two, Sebi has also said that the investment approach has to be clearly defined.Now, having said that, the objective is not to give a comparison between schemes but authentic data. Also, a lot of grievance handling can take place at the association level. We will form various committees and will try to address these issues but it is too premature to comment at this point in time on how we will do it 

In the past, PMSs have delivered extraordinary returns, but unlike MFs, there are no risk-o-meters. So, what is being done in terms of risk labelling? 

Aashish: AIFs and PMSs, both by nature, are private placement and not a public offer.  We are not allowed to advertise PMS returns. In mutual funds, there is a formal format for advertisements and if you advertise the return, then you put the flag on the fund manager for all the other schemes that he is managing. Nowadays, people are buying mutual funds online on apps. 

But, look at PMS for instance, there is a whole agreement which is physically printed and handed over to the client. And the client would have to put in several signatures after reading all clauses. The point is that it’s, generally speaking, a private placement. It’s not a public offering.  In a PMS agreement, there is a section of several pages of risks and do’s and don’ts. 

In PMS, people have to give in writing that they agree to the fee structure and have read the terms and conditions. So, a riskometer is very relevant for a mutual fund but where it concerns PMS, I don’t think the mutual fund format may work out. 

Are there any safeguards in PMS that you think should be implemented? 

Neeraj: The same insider trading regulations that are applicable to mutual funds, apply to PMSs too. 

And again, it is a matter of corporate governance at the level of every institution, what are your risk management systems and how you are managing that? So, that is very critical.

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