Jugglers for Hire

Earlier this year, an investor complained about his PMS, or portfolio management service, provider: “I don’t think my managers were all that smart. Also, I didn’t like the fact that they never met me personally. What is the use of PMS if they don’t give privileged services… like special movies, clubs and lunches?” And the returns he got from his PMS? 180 per cent! A case of a spoiled, greedy customer?
In the bull run till early 2008, it was common to see clients being little concerned about the expertise and accountability of their PMS providers, as long as the returns and gifts kept coming in.

On the other hand, portfolio managers were acting like their mutual fund cousins — looking to expand their portfolio as much as possible. “They were not trying to understand the need of the customer, but were just peddling their products,” says Akhilesh Singh, business head for wealth management and distribution, Emkay Global.

With the regulatory ban on distributor commissions in mutual funds, many PMS providers are now pushing more equity-based products whether or not they match an individual’s risk profile. The industry has what is called a “model portfolio” to which a customer’s investment is aligned. “But many a time product-pushing takes prominence,” admits a portfolio manager, speaking on condition of anonymity.
The worse problem is when the model portfolio itself is out of date and does not reflect the change in market scenario since it was designed.

Illustraation: Malay Karmakar

Carefully chosen, PMS is an option for those with more money than the average investor but not enough to have their own private managers, which means anywhere between Rs. 50 lakh and Rs. 5 crore. Earlier, PMS providers used to accept the Rs. 10-25 lakh customers but no longer. “Now the average ticket size is getting larger. There is no point in having a target of Rs. 1,000 crore or Rs. 5,000 crore. Instead, we have to learn to say no,” says Parag Parikh, founder of Parag Parikh Financial Advisory Services.

Transparency is improving because portfolio managers must now maintain separate bank, demat and brokerage accounts for each client. Earlier, managers would pool together their clients’ money, and no individual customer had any idea about how his money was travelling.

If you do choose PMS, check whether the investment philosphy of the house suits your need. Anybody claiming to be the supermarket of investing with growth, income and value investing under the same roof is suspect.

Firms like Religare Macquarie Private Wealth are also trying to move on to a more evolved fee structure that avoids the earlier strict format of 2-20 — that is 2 percent management fee and 20 percent performance fee. “The fee structure is not rigid but varies according to the asset class and risk profile,” says Vikas Agnihotri, CEO or Religare Macquarie, who manages Rs. 900 crore in PMS. So a customer with a high risk appetite would usually have a more “active” portfolio and thus the fee would be higher, or about 100 basis points of the asset arranged. That fee will cut to half if the customer is “conservative,” which means more debt component and thus, less action.

Despite all this, the risk quotient in PMS remains high and transparency low. An industry veteran, who doesn’t wish to be named, says, “The PMS industry might take another three to five years to mature. Till then, it will be trial and error.”