Performance Matters: Why PMS May Not Be a Good Investment

However, minimum investment is mandatory for growth in PMS industry 50 lakh comes against the backdrop of its poor return performance as compared to MFs, which are considered a mass product for retail investors (see graphic, The analysis is based on data from PMS Bazaar, a portal that provides information about PMS funds in India.

There are around 400 asset management companies (AMCs), each offering multiple PMS strategies in the market today.

Over a period of 5 years, only 30% of small-cap PMS funds could outperform the average returns offered by MFs in the same category. That is, only three out of 10 small-cap PMS funds delivered 5-year returns above 11.5% Compound Annual Growth Rate (CAGR), which is the average category return of small-cap MFs. Similarly, only 36% large-cap PMS funds and 44% multi/flexi-cap PMS funds outperformed the average returns delivered by the respective categories in the MF space during the said period.

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Does this mean that investing in Mutual Funds is more likely to fetch better returns? Lastly, MFs are highly regulated with a tax-efficient structure and lower minimum investment limits as compared to PMS funds.

According to experts, the answer depends on the intent of the people investing in PMS and their ability to choose the right portfolio manager.

The data points to a huge difference in returns between the best and worst performers in the PMS space. For example, in the small-cap category, the PMS funds that were ranked best and worst based on 5-year returns (CAGR) gave 16.7% and -5.6% respectively in January.

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Note that the category average return considered for the analysis is the simple average of the returns of all the funds in the category. For assessing Multi/Flexi-Cap PMS Funds, flexi-cap MFs are considered because of its market-agnostic nature of stock picking for the portfolio.

The PMS return is the time-weighted rate of return (TWRR), which excludes the effect of intermittent cash flows from subscription and redemption on the return for each strategy. The returns of mutual funds are based on the point-by-point returns of the accumulated funds over a given period of time.

Further, “PMS funds are classified into large, medium and small based on the information shared by the PMS managers. There is currently no definition in the PMS industry that separates funds based on market-cap allocation,” said R. Pallavarajan, Founder, PMS Bazaar.

“The data is based on 150 AMCs disclosing details with PMS Bazaar. These 150 AMCs represent around 63% of the AUM of the industry,” he added.

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performance breakdown

Weak performance of the PMS industry over a long period of 5 years (see graphic) may be behind concentrated portfolios as compared to mutual funds, which leads to higher volatility, according to industry veterans, who did not wish to be quoted.

PMS typically hold a portfolio of 25-30 stocks, whereas Mutual Funds typically hold a diversified portfolio of 40 or more stocks.

Debashish Bose, founder and portfolio manager, ABC Portfolio, OKS AMC, said the increase in the number of managers in the small-cap and multi-cap PMS space over the past few years could lead to a wider dispersion of performance.

Talking about the poor performance of large-cap PMS funds, Munish Randev, Founder and CEO, Sarvin Family Office, said, “I am not surprised. When most MF managers fail to beat the benchmark, the PMS fund’s chances of beating the benchmark are even lower as it is not easy to beat the index by having only 15-25 stocks in a concentrated portfolio. Having said that, there are outliers in this space as well, which have given good returns over a long period of time.”

In case of mid-cap PMS funds, around 60% of them outperformed the MF category average.

Randev said, “The midcap strategy works in a concentrated portfolio. Mutual funds also outperform the benchmark index, but their performance is completely washed out due to over-diversification. The outperformance of a PMS fund should be 90% and not just 60%. Most quality mid-cap oriented PMS managers beat the index by just over 60%.”

However, the same principle is not applicable for small-cap PMS funds, as these stocks carry higher risk. “In a small-cap strategy, you need a diversified strategy to average out volatility. If it is a concentrated bet, it is extremely high risk because the portfolio’s returns depend on only a few stocks and this can make the portfolio very volatile. Turns volatile due to low traded volumes,” Randev said.

Most PMS strategies in the industry are segregated under the ‘multi-cap’ category due to limited restrictions on stock selection.

While the PMS multi-cap category is compared to the flexi-cap category under MFs, according to Randev, the portfolio of the former is tilted towards mid-cap stocks, while the latter is focused on large-cap stocks.

take note

HNIs consider investing in PMS funds because of the customized portfolio offered by them and the opportunity to invest in exclusive investment themes or models that are not easily available publicly.

“The way to look at a PMS is how it complements one’s overall portfolio. A diversified portfolio that has a different flavor than MFs serves the investor well, said Rishabh Sheth, co-founder and co-CIO of Karma Capital.

Also, while selecting a PMS manager, returns are an important parameter, but not the only parameter.

“Investors should be aware that a PMS has a very active share, a focused portfolio, and performance is based on the manager’s conviction. I think the most important thing to examine is the manager’s long-term track record.” And that track record should be measured across market cycles,” said Jiten Doshi, co-founder and chief investment officer, Enam AMC.

Industry experts and money managers recommend that investors seek the help of advisors to assess a manager’s style and how a strategy fits into the overall portfolio.

Santosh Joseph, founder and managing partner, Germinate Investor Services, said, “The weightage of the fund manager in generating returns in the PMS space is much higher than in the MF industry, where most AMCs are institutional. It is important to understand the manager’s convictions, investment style and how his product fits into the investor’s portfolio before investing.”

Investors should seek advice from an advisor who is not biased. “I want to highlight this because there are many advisors who are paid heavy brokerage, commission. Etcetera. So, one has to be a little careful,” Randev said.