What to know before going the portfolio management services route

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The portfolio management services (PMS) industry has come a long way since the Securities and Exchange Board of India (Sebi) 2020 regulations and guidelines on portfolio managers. says Munish Randev, Founder & CEO, Matterhorn Family Office & Advisors.

These regulations set out detailed rules on auditing, the appointment of a custodian, the role of portfolio managers, etc. The minimum investment has been increased to 50 lakh per customer and PMS have been mandated to provide periodic reports. In accordance with Sebi’s guidelines, PMS were required to report their performance data net of all fees and expenses. And this had to be done on a consolidated basis after aggregating the performance of all client portfolios (not a select few) for each strategy. While PMS investors can now rest on the regulatory front, here are a few things to note before embarking on the PMS route.

Declaration of returns

PMS must submit monthly performance reports to Sebi. These can be found under “portfolio manager’s monthly report” in the “statistics” section of “reports and statistics” on the Sebi website. Here you can also see the breakdown of AUM (equity, debt and others) and 1 month and 1 year returns. PMS aggregator websites such as PMSBazaar and PMS AIF World that provide data on all plans (from PMS) can help with comparisons.

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PMS also provide performance data by schema on their websites. Here, while the larger PMS explicitly state that the returns displayed are net of all fees and expenses, some smaller ones do not state this clearly. Additionally, each PMS provides performance records for different time periods. Not all disclose their full plan portfolios. This information is, however, shared with investment advisers who have linked to a particular PMS.

While the standardization of performance reporting and greater disclosure to Sebi and PMS clients has brought much-needed transparency, new investors may still not find it easy to navigate the PMS space. “Clients should do research or take advice from an investment advisor before deciding on a PMS,” says Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

The right strategy

“PMS is an area to invest in the midcap or sector independent space (flexi-cap type strategy). Large-cap strategies don’t make much sense,” says Randev. While a few systems Very long-term, large-cap PMSs have done well, most have followed the same path as mutual funds (MFs).According to Randev, high-conviction concentrated bets focused on a few mid-caps or a few all-cap stocks are where PMS can really add value.

What to focus on

So what should investors focus on when shortlisting a PMS program? Most experts point to the track record: how long have a plan and its fund manager been around? The longer, the better. Nitin Shanbhag, Senior Executive Group Vice President, Investment Products – Motilal Oswal Private Wealth, suggests looking at the manager’s track record over multiple market cycles. “Understand the underlying strategy and where the returns are coming from,” says Dhawan.

Nishant Agarwal, Managing Partner and Head of Family Office at ASK Wealth Advisors, says one should also check whether a PMS is a one-man show or follows a team approach. It’s also worth checking whether the portfolio manager relies on third-party research or its own research. According to Randev, investors should not only compare the returns of a particular PMS strategy with those of its benchmark, but also with those of a similar category of money market funds.

Although plan expenses may not be the main deciding factor, it is something worth considering. “When the market is up, you can ignore spending. But the same spending will hurt in a flat market,” says Randev.

Fees and other charges

PMSs typically offer investors a choice of fixed, variable and/or hybrid fee models for portfolio management. Unlike in the case of MFs where total expense ratios are capped, there is no upper limit imposed by Sebi on PMS fees. Operating expenses can be an additional 0.1-0.3%. These include brokerage and custody fees and are subject to a cap of 0.5% per Sebi.

Under the fixed fee model, a client may be charged a fixed fee (anywhere between 1.75 and 2.5%) per year on the value of the portfolio. The variable fee model only includes a performance fee of, say, 20% profit sharing on returns above a certain threshold of, say, 10%. The hybrid model combines fixed fees and performance fees.

Given the high minimum investment and the multitude of plans offered, investors should consult an advisor before choosing one.

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