Opinion | Regulation of PMS schemes a long overdue idea

Portfolio Management Service (PMS) providers have had a field day over the last few years but now the Securities and Exchange Board of India (SEBI) is planning to rein them in. The capital markets regulator is considering ways to standardise PMS schemes by setting up an industry body, the Business Standard reported on October 24.

PMS assets under management have now touched Rs 15 lakh crore, although most of it is in debt funds. A good portion is contributed by the employee provident fund organisation (EPFO) which, for some strange reason, is classified as a PMS scheme by the market regulator. Equity managers oversee about Rs 1 lakh crore of PMS assets, a sizeable amount considering the minimum ticket size for such schemes is Rs 25 lakh.

SEBI’s move to introduce checks and balances in PMS schemes is laudable. However, the regulator also has to take a lot of flak for the unmonitored growth of the schemes and mis-selling in the space. Fund managers, who either have no track record or showcase back-tested results for new schemes, have been able to raise money through the PMS or advisory routes.

While checks and balances are good, trying to introduce a template to bring uniformity in PMS schemes could be difficult given their structure. Unlike a mutual fund where a client is allocated units for the fund, there is no such provision for a PMS customer. In most cases, no two clients will have identical stocks in their portfolio. Thus, no two customers will have identical returns. The yields they enjoy will depend on the time of joining the scheme.

Suppose, a client joins a fund on January 1, 2018, when the Nifty was at 10,430 and another one joins the scheme on September 1, 2018, when Nifty was at 11,580. The fund manager would not like to buy a stock that has shot up between January and September in the second client's fund. In some cases, the client’s risk profile decides the composition of their portfolio.

PMS fund managers, however, do not showcase this discrepancy when they make the pitch to the client. The returns that are posted on the SEBI’s site lack transparency. SEBI does not have a standardised way of disclosing returns. Funds report performance either by weighted average returns of all the clients, annualised rolling returns or simply showing back-tested returns. At times, it is not clear whether returns shown are net returns 0 after deducting fees and other charges, or gross returns. With no way of checking the authenticity to the numbers, customers are sucked into schemes.

Despite all its faults, PMS is a very good investment vehicle. There are very good fund managers who have performed far better than any mutual fund. By its very structure, this vehicle gives the fund manager more flexibility than a fund manager of a mutual fund. A PMS fund manager can pick up shares irrespective of the size or market capitalisation of the company; SEBI has placed size restrictions for a mutual fund manager to pick up stocks.

A PMS fund manager can design an equity portfolio depending on the age and risk profile of the client. The same flexibility is not offered to the risk-averse subscribers who are generally offered a balanced or debt fund.

Sebi’s move of creating an industry body is good but it should not be driven by the grouses of low or negative returns. The guiding force should be transparency where the PMS scheme discloses the pre-fee returns of the best five and worst five clients along with the unadjusted weighted average returns. Further, as in the case of a mutual fund, there has to be a transparent way of disclosing the net asset value of the fund on a daily basis which will give a history of how the fund has done.

Equity PMS globally is a big business with wealth managers chasing good fund managers. Despite the heady growth in recent times, this investment vehicle is still in a nascent stage in India. Through its regulations, SEBI can give the sector a fillip by bringing in transparency and fair play.