The rise and rise of port­fo­lio man­age­ment

Mint ST - - PERSONAL FINANCE - BY LISA PALLAVI BARBORA lisa.b1@livemint.com 230 210 190 170 150 130 110 90

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.

WHY THE GROW­ING IN­TER­EST 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 Num­ber of clients get­ting added to PMS is grow­ing at a faster rate as com­pared to as­sets un­der man­age­ment

Change No. of clients

Change in AUM (Rs cr)

Pop­u­lar­ity of PMS as­sets has been in­creas­ing

Aug 2015- Jul 2016 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).”

WHO SHOULD CHOOSE A PMS?

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.

Aug 2016- Jul 2017 WHAT YOU NEED TO BE WARY OF 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 ef­fi­cien­teasier 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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