The uniqueness of PMS can also help family offices & investors navigate different market scenarios.
Jay ShahIf you are an equity investor, chances are that you might phase these three critical questions?
1) What to invest, 2) where to invest, and 3) how to invest.
If you think you can’t answer one or all of the above questions, chances are that you might need a professional investment manager who is equipped to ride through markets in both bearish and bullish scenarios.
The question now is: should we be saying Yes to PMS?
A PMS (Portfolio Management Service) is a structure regulated by SEBI and managed by an investment manager. All investments are through your Demat account under a POA of the investment manager.
While the total AUM of the regulated PMS industry (ex PFs and EPFOs) stands at close to $60 billion, there are certain entities that offer managed accounts in the guise of a PMS. Care should be taken to understand they are neither structured nor regulated.
There is also a flexible fee structure which is a combination of management fees, performance fees over hurdle rates.
This combination has given a good amount of comfort to investors who feel shortchanged by a flat fee structure that MFs offer, especially in times like now when most performances have been underwhelming.
The uniqueness of PMS can also help family offices and investors navigate different market scenarios.
1. High Beta: These are expected to do well in the bull market, and some have even given close to a 30 percent CAGR in the last five years. However, with high returns, we have to be conscious of the risk in these funds. High drawdowns, low liquidity and the fund manager’s track record are a few of the concerns.
2. Index ++ with Low Risk: These funds tend to stick to quality names that have MOATS around them from a business perspective. Most of them have proprietary models which ensure that they might not be always invested in an overheated market.
For these reasons, they are expected to underperform in a runaway bull market and will do better in a sideways/bear market. Through cash management, they have been able to reduce drawdowns to half of the benchmark and provide an enhanced risk-return profile.
3. Special Situations: These are tuned towards Open offers, Demergers, Mergers, Buybacks and typically uncorrelated to market risk. However, the risk involved are related to the number of opportunities reducing and regulations which might it difficult for companies to go ahead with the above special situations.
4. Debt PMS: We are seeing a new breed of debt funds through the PMS route - which is offering higher yields than mutual funds. These funds have been experimenting in credit that mutual funds are not allowed to trade. The edge for these comes in the process to evaluate credit and the mix of NCDs, MLDs and other credit structures.
The magic starts to form when you combine some of the above. Let’s combine Fund1 and Fund2 historically. Now, you have a portfolio that smoothens out the downside, gives significant upside when markets are booming and, overall, provides a higher historical reward to risk ratio.
From a taxation point of view, since the PMSs open a Demat account in your name, you can combine this LTCG/STCG with your other direct equity investments.
All of the above is great. But, how to pick a PMS from the 400 odd registered with SEBI. We find the below questions useful.
1. How long have they been running the PMS structure?
2. What is the size of the investment team, and how long have they been around?
3. Is there a standalone shop with a focus on one or two products, or will they get distracted with the other 10 businesses they run?
4. How effective are they in terms of communication with investors? Do they elaborate on their wins and losses equally?
5. Do they follow a model portfolio and give you a complete list immediately, or will they build your portfolio over time? What suits your need?
6. What are their performance characteristics – drawdowns, rolling returns, volatility, etc?
7. What is their style? Are they aggressive or happy to take a wait and watch approach or simply eager to sell a great story?
Mutual Funds toh sahi hai lekin PMS ko dekha hai?
This is a three-part series on Alternative Investments Funds. The author is Founder at One Tree Hill Wealth Partners.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.