EQUITY portfolio management schemes (PMS) are today quite attractive from the perspective of high net worth individuals (HNIs) or ultra HNIs. However, investor and distributor awareness of this product category is quite low and one must understand the benefits of using this mode for investing.
Typically, the minimum application sizes in PMS products is rather high—with the minimum being Rs 10 lakh and some even having ticket sizes running into crores. Most equity PMS products could involve a slightly higher degree of risk as they are offered to investors who desire that extra bit of return. Investors need to make up their mind clearly—extra risk comes with volatility and sometimes even loss of capital in a cataclysmic year such as 2008.
So, where does PMS sit in the investor's overall asset allocation? Most investors desire to hold, buy or sell direct equity. However, as we all know, this is a specialised skill which requires a lot of time and attention and is best left to the experts. Equity PMS fits into this category of investor's overall asset allocation very well. Depending on the investor's profile and risk appetite, an equity PMS can be chosen. For example, a conservative investor can choose a portfolio that is made up of blue chip companies which have consistent operating histories, strong operating cash flows, low capital intensity and high dividend payouts. On the other hand, an investor who desires that 'extra' return and is willing to take on a little bit extra risk can look at portfolios which are made up of companies with business models which are expected to grow at exponential levels.
Unique and customised product offerings:
For a HNI, equity PMS also offers the scope to participate in some unique product offerings which are not available otherwise. For example, we recently launched a product looking at listed equities which are driven by Indian entrepreneurs. By applying rigorous filters, we were able to construct a portfolio of 18-20 carefully chosen stocks which offer ample scope for appreciation over 3-4 years. These were stock ideas that required gestation and hence we marketed it to a set of chosen investors who were willing to put away their money for the specified period of time. To show our conviction in the idea, we marketed the product with a very low fixed fee for the first three years with a performance fee at the end of three years which would get triggered only on the portfolio delivering a compounded annual rate of 10 percent. This instantly appealed to investors and this offering was a huge hit. These kind of structures are not readily available in the mass space.
Comparison of PMS with mutual funds:
Though many investors like to compare PMS products with mutual funds, these are not strictly comparable. Unlike mutual funds, industry wide data on PMS structures is not easily available. PMS structures offered thus far have been varied across various providers and hence an apple to apple comparison is often difficult. Both mutual funds and PMS benchmark themselves to some indices and performance should be examined relative to such benchmarks. Recently, the capital market regulator has started putting out PMS industry numbers and one hopes that more transparency would become the norm.
The alpha and delta return strategies come with their own risk profiles which are sometimes accompanied with heightened volatility and risk to capital in times of cataclysmic market movements. It is therefore important to invest monies with PMS providers where there are risk management systems in place to contain such fallouts. MFs run diversified portfolios as their objective is to provide investors with a pooled investment vehicle to spread risk across various stocks in its portfolio. This diversified portfolio at times enables to cushion the capital invested during heightened volatility.
PMS structures, in comparison, take relatively more concentrated bets to generate higher alpha (higher return over chosen benchmark) for different investors as per their needs and requirements. In equity PMS, for example, most portfolios are custom built on 10-20 stock strategies compared to at least 35-70 stocks that MFs build in their portfolios.
There are, however, factors that need to be taken into consideration while making investments into equity PMS offerings. First, you should match the offerings to your asset allocation and risk appetite. On the other hand, an investor who desires that extra return and is willing to take on a little bit extra risk, can look at portfolios which are made up of companies with business models that are expected to grow at exponential levels going ahead.
You should also look at the track record pedigree of the PMS provider and understand what risk control mechanisms does the PMS provider have in place. You also need to understand the expense structure of the offering.
From an investor's perspective, equity PMS is a well-established investment avenue which may have a place in one's overall asset allocation. Investors should consider PMS as a long-term investment option and focus more on the exclusivity and customisation benefits that they offer rather than just focusing on returns.
