PMS Providers Underperform Due To Wrong Investments, Higher Cash Calls & Capital Protection Strategies
FUND managers overseeing portfolios of wealthy individuals are working overtime to catch up with the broader market that gained 75% since January this year.
Mistimed investments, increased cash calls and capital-protection strategies adopted by PMS fund managers have resulted in several PMS folios underperforming the broader index. According to wealth managers, PMS providers have underperformed broader indices by around 5-15%.
Surprisingly, PMS schemes are trailing at a time when the top-10 equity diversified mutual funds have delivered annual returns between 115 and 150%.
Ideally speaking, PMS schemes should have done better than mutual funds. But then portfolios managed aggressively have been able to outperform the broader market.
Mutual funds are pressurised to perform well as most funds are open-ended in nature and there is a need to bring in fresh money all the time.
The investment mandate given to a PMS fund manager could differ with each investor. If the fund manager is asked to hold a low-beta portfolio, the scheme will appreciate gradually during a surging market and decline very slowly in times of bad markets. Currently, most PMS schemes are structured giving high weightage to investment or market risk.
Portfolio values fell 40-60% last year as stocks plunged, prompting several PMS investors to liquidate their portfolios at huge losses. Fearing steep falls, fund managers have been keeping a higher portion of cash in their portfolios, by booking profits at regular intervals. Mid-cap stocks were sold at 15-25% price appreciation. Until a year ago, PMS fund managers invested up to 90% of their entire corpus. Cash component in portfolios, of late, has risen to 20-25%. Investment horizons (in individual stocks) have come down from 36 months to 6-8 months now.
PMS fund managers invest a large chunk of their corpus in mid-cap stocks. These, until a few months ago, lagged large caps in terms of price appreciation. PMS portfolios will look better once mid-cap stocks get fully priced.
Another reason for underperformance of PMS schemes is that most investors — after liquidating their portfolios at a loss in mid-2008 — re-started their PMS accounts halfway into the market rally. Almost all (new) PMS investors missed the bottom and mid-half of market rally started in the first half of 2009. Investors who have put their money in simple capital-protected schemes are underperforming by a wide margin as their exposure to direct equities has been capped.
