Business Today

Profiting from PMS

Portfolio Management Services have become more transparent, thanks to a recent SEBI directive. Here’s how to choose one.

Clifford Alvares | Print Edition: October 4, 2009

Last year, not many portfolio investors had the good fortune of Ajay Parekh, a 38-year-old human resources professional in Mumbai. When Parekh signed up for Portfolio Management Services (PMS) with Mumbai-based Parag Parikh Financial Advisory Services 11 years ago, a long-term wealth-building strategy was the priority for him. His investments having successfully negotiated the ups and downs in the markets over the years, including the IT boom in 2000 and the asset bubble of 2008, Parekh is convinced that he has picked the right portfolio manager.

Parekh, who has 24 stocks in his portfolio, notched 20 per cent compounded, 11-year returns. Over the same period, the Sensex gave returns of 12 per cent. “I have seen two serious market volatilities and now know what preservation of wealth really means. Everyone promises you the moon, but creation of wealth requires patience and a long-term approach,” he says.

STYLE OF INVESTING: The style of investing should match your risk appetite and your core investing strategy. For example, portfolios are constructed as mid-cap or aggressive or value-investing strategy.
PORTFOLIO PERFORMANCE: Your fund manager should be able to better the benchmark indices. If your fund manager is lagging, then you need to change to a different PMS provider.
CHURN RATIO: A higher churn rate means that the PMS provider is not confident about the stocks and this also increases your expense through broking and Demat charges.
FEE STRUCTURE: Should combine both a fixed and a variable fee. Fixed fees range between 1-2 per cent. Variable fees are charged on different hurdle rates or on a minimum performance.

Last year’s crash left many investors in the lurch. In many cases, portfolio management firms like brokers and fund houses were not up to the mark in disclosing their investments and portfolios to individual account holders. PMS providers invested in stocks in bulk and later allocated the stocks to individual accounts. This created a time lag between the time of investing and the time of allocation to an individual’s account.

But timely intervention by the Securities and Exchange Board of India (SEBI) has made PMS attractive for investors once again. Though SEBI went into action in May, just when the market began its upward journey, it has taken these months for PMS providers to set their house in order.

SEBI’s new rules mandate that brokers and fund houses maintain separate Demat accounts for each individual client. Hitherto, PMS providers used to pool the stocks and later issue statements to their individual clients. With the new guidelines, although PMS providers have to incur more costs in maintaining their client accounts, the transparency of portfolio management services also increases manifold. Investors can know within a few days whether their account is debited or credited with the stock through SMS alerts.

Now, with the revival in the stock market and attendant increase in risks and rewards, more and more financial services companies are joining the PMS bandwagon. And many more have come up with different PMS solutions for individuals. For example, some portfolios invest only in mutual funds whereas others invest only in stocks; still others invest in aggressive mid-cap to sectoral strategies. Besides, you can also tailor your own portfolio requirements which can avoid certain categories of stocks—say, of liquor companies.

PMS Provider: Parag Parikh Financial Advisory Services
Years with PMS: 11 years
Human resource professional Ajay Parekh is delighted by the way his portfolio is managed as the focus of his portfolio is on sound and well-managed companies. Some stocks in his portfolio have been held for over five years.

Most fund houses have designed products that you can choose from and the options are plenty. Says Sudip Bandyopadhyay, CEO, Reliance Money: “We follow a mixture of topdown and bottom-up approach while investing. The portfolio is a mixture across market capitalisation with a view to capture either growth or value unlocking.”

The key is to know what your requirements are. If you want a longterm value building portfolio, then it’s better to go for those PMS providers that have the core philosophy of investing in value stocks. If you are an aggressive investor, then you may want to look at a more concentrated stock portfolio, like mid-caps or some other sectoral flavours. Says Rajeev Thakkar, CEO, Parag Parikh Financial Advisory Services: “It is critical for investors to know the investing philosophy. We are not bothered about market cap, but about good management, sound governance towards minority shareholders, entry barriers in the business, and finally, very good valuations.”

PMS is not a short-term product. If fund houses promise you unreasonably high returns when you take up portfolio management with them, be wary of such service providers. Be sure to keep tabs on what your fund manager is doing with the portfolio and how he’s diversifying it to make future gains. If you have too many momentum stocks in your portfolio, the fund manager has tuned your portfolio to maximise on the upside. You may want to review the fund portfolio every three months or so with your fund manager.

Ideally, you may also not want to have too many stocks in the portfolio. Fund houses typically keep the holding to about 15-25 stocks. This helps in weeding out companies when the market conditions have changed, and introducing new stocks in the portfolio where long-term prospects have improved. Says Thakkar: “A lot of study has been done on the number of stocks to hold in your portfolio. If you invest in too many stocks, the volatility does not go down significantly, and your portfolio begins to mimic an index fund.”

Finally, take a look at the performance benchmark of your fund. Over long periods, your fund should outperform the indices such as the Sensex in case it’s benchmarked to the broader market indices. If your fund is underperforming over a two-threeyear period, then you should switch to a different PMS provider. Fund managers have the option of going into 100 per cent cash if the market conditions have deteriorated or if there are no compelling value picks to invest in.

You may also want to check on the fees a fund manager charges. Experts say that it’s often best to choose a fixed and variable fee structure. A performance-based fee structure is an incentive for the fund manager to perform. Make sure that the minimum hurdle rate is a reasonably risk-free return of around 10-15 per cent per annum. If you opt for a fixed fee structure, in a down market, you will end up paying higher fees for a poor performance. And also make sure the fund manager does not unduly churn your portfolio to charge higher brokerage fees. If the broker or fund house has your longterm interest in mind, then they are likely to steer towards keeping your business for the long haul.

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