PMS Funds - India


(8sarveshg) #63

Hi Guys,

I have been a keen follower and student of the equity asset management industry and the way it has evolved and how investors have behaved and should behave in the future. I am laying down some points that I have learned and what I consider are universal truth for everyone and I hope all of you will benefit from this experience which I have learned on account of my own experience in the industry and comprehensive study.

  1. Equity asset managers who charge just the fixed fee or a fullsome fixed fee including all mutual funds and almost all PMS firms, hedge funds are playing a game called ‘Heads I win a lot, you win but less but Tails I still win a lot and you loose a lot’. This is the reason one should stay away from all such managers who are majorly relying on fixed fee for thier revenues. One should read about what Warren Buffett has to say about so called Hedge fund-managers or Private equity guys who are all smart but most of them struggle to beat the benchmark.

Bottomline is - know how the incentives are aligned. Some PMS or MF guy who is charging mostly fixed fee is going to care very less about your long term returns but will care the most about his short term income and fees. So you will loose with such managers in the long term, even if the past track record has been great.

1a. Most PMS managers have shown great perfromance in the past few years but that is not because of any great skill but luck. BSE Small cap index with almost 700 stocks is up 3 times in the past 4 years. So a PMS or a small cap fund like DSP ML saying that they have done 25-45% in the past 3 years means nothing - we will alll know who was swimming naked when there is sustained crash in the market and there is a high chance that a large % of performance will be wiped out in many cases. Basically you will come to know whether your portfolio manager was running a high beta or a alpha portfolio only in bad times and we havent seen it yet.

1b. Most of the PMS strategies are not scalable in India due to lack of liquidity and lack of enough small and mid cap great ideas particularly in these times when valuations have gone up so much. It is a pity that most gullible investors are going to put money now in equity markets when they are already at a all time high and no valuation arbitrage is left on almost most stocks, but particularly in small and mid cap space. So the known PMS funds and small cap mututal funds would struggle to replicate their performance if they have already done so well.

For example, Can fin homes is a favourite for many now when it is trading at a never heard before 7-8 times price to book.

1c. Most importantly, I saw that most of the people are talking about returns here which is not the only important metric in investment management. You should invest with a manager whose style you are comfortable with. And whose funds objectives resonate with yours.

Corollary to this is any asset management company which says that we have multiple strategies each suiting for a different investor is making a fool of investor. No matter how big a team is, equity investing comes down to just one portfolio manager view and he has limited time and bandwidth to know so well so many stocks. And such great managers dont come dime a dozen and certainly they would not stick for long with a broker or a NBFC - most if not all great managers will set up their own firms.

2a. No matter how great a manager is, the size of the investment fund and its performance are inversely correlated. So all the known names that you are talking about are going to struggle a lot in replicating their performance going forward. Some funds I know have produced great returns buying Bajaj Finance at 1-2 times book - how will they perform the same since they are buying the same stock for you at 7-10 times book now.

2b. So what should one do - look for a porfolio manager who is charging most of his fees through performance fee only (Buffett has never charged fixed fee to his investors), one whose own most of the networth is invested alongside you, one who is belongs to value investing style, one who is not already so rich (because if he has already made good money then his incentives may not be aligned with you) and one who has the right pedigree/education/experience in the markets to actually take the right calls (for instance someone coming from a sales or sell side equity research background is already spoiled to make a good manager - someone who has always been on the buy side is much better).

Please understand that all of the above are my own biased views.

If you are wondering if there are any managers who have such qualities, I know atleast one, please ping me and we can have a separate discussion.


(Yatharth) #64

From the data published here, Kotak, IIFL, SBI, LIC seem to be very high. Has anybody taken these services please? There seems to be quite a few errors in data published by SEBI.

Basant Maheshwari’s data here, as published, seems to come to finally reward the investor to the tune 18-20% per annum till April 2017, after all expenses, charges and taxes, as also clearly articulated in the methodology of Yogesh above. BM looks to have done better in the last two-three months ( May & Jun ) but that is a very short period.

Nine rivers data does not indicate high returns in the last financial year. Vallum, I have heard good things but SEBI data is not available and I have no direct experience.

Any one who has received final CAGR, after fee and charges, in excess of 40% last year? from which PMS? Mind it, good Private Bank like Indusind/HDFC has given more than 40% in the last year / financial year.


(chetanb) #65

@yogesh_s very useful spreadsheet. Thanks.


(sunnysachdeva) #66

I want to highlight one point here wrt MF. If you go with direct option, then some good funds charge is less than 1%


(8sarveshg) #67

Thanks you are right.

The points I raised were more for the non-retail investors. Ordinary retail investors would do great in my opinion to put money in an index fund rather than a direct or regular MF. Now one would argue that MF charging 2-2.5% have ordinarily beaten the benchmarks in India. To which my response is that a) retail investors should consider equity investing for extremely long term - ideally as their retirement plan and b) over such a long term (10-15 years plus from now) index funds in India are going to give you a better return than most MFs as seen globally. Infact the aggregate alpha of large cap schemes have already fallen a lot in the past decade from almost 2-2.5%+ to around 1% now.

The reason behind the above argument which most of the investors dont seem to appreciate is very simple, a) as the size of MF industry in relation to overall marketcap increases, it becomes difficult to beat something of which you are a larger share. The size of MF industry in the US is almost 31% if I am not wrong while in India is in single digits. My prophecy is that in the next decade MF industry would become sizable in India and generating alpha would become much more difficult.

and b) there were far too many bad stocks especially PSU stocks in the bechmark traditionally in India. Now if you are seeing what is happening in India on a consistent basis, the benchmark is becoming stronger and stronger because of non-govt companies share of benchmark becoming stronger and investors giving importance to high Roe, high consistent growth situations. This will mean that benchmark in India in few years will become much more comparable to something like S&P 500 which primarily consists of great stocks. That would further make it extremely difficult for the MFs to generate alpha.

Because of the above reasons, Warren Buffett has been consistenly recommending only index funds for retail investors in the US. My thesis is that for the long term, similar to the US presently, 3/4th of all MFs in India will struggle to beat the benchmark. The other curse of good performance is size, because HDFC or a DSP fund manager is good, they will get so much money that they will find it extremely difficult to beat even benchmarks in long term. Please note that most of the great fund managers refuse further money for many years contrary to our MF industry which is playing the most amount of ads these days - at a time when they should have already said NO to new assets.

Also, retail guys can get some smart SEBI registered investment advisors to help them with the same qualities as I described above. Else should just do SIP in index fund for the extremely long term (post buying a house of own ofcourse). However non-retail guys should do what I recommended in my earlier post.


(sunnysachdeva) #68

I agree 100% of you POV. I been investing in MF from last 8 years and now have stopped SIP. From last 2 years i am searching food advisor. I have found 2-3 who are genuine and want to stick to them for another couple of years.

Anyways, how do you invest? pls feel free to say NO since its personal finance. Also do you know any trustable advisory or PMS.

Thanks for sharing your opinion.

Cheers


(chetanb) #69

@Yogesh_s @Yatharth SEBI’s PMS data is incorrect. Anvil Wealth management has the highest return among all. However, AUM is changing only marginally from month to month despite over 100% monthly return. Looks implausible that AUM of a PMS doubling money every month will not change!! Similar is the case with others too.

Not expected of market regulator. The main use of this data is for prospective investors to choose pms manager. Who is responsible for wrong selection based on this wrong data?


(Suneel) #70

pls share the genuine advisors you found.


(Rudra Chowdhury) #71

So aptly put. Great.


(SAMIR SHAH) #72

Nothing against Mr. Maheshwari, but I think this contention about AUM weighted returns is not really correct. If you look at the SEBI reported returns, the PMS has underperformed the other funds both in months when the markets (and other PMS’s) have done poorly, as well as in those months when the markets(and other PMS’s) have done well.

Yes, since the PMS originated only in March 2016 or so, there has been a sharp increase in the AUM over the year. I agree that it is not worth measuring returns over a short time. But it is not appropriate to ask the PMS manager to self report on some self designed metric. It is best if we go by statutory reports, which pit all schemes and managers at par.


(us121) #73

For me PMS evaluation criteria remains same and nothing less than that of Mutual Funds, i.e. 3 Years bare minimum, but only if supported by 5 years performance. Discussing any thing on monthly return has got no meaning. why SEBI could not find some means like MF to report long term return, i am surprised.

Apart from that Teji (Bull) time, is like 16 year old young who always looks handsome and/or beautiful. One need to assess these parameters over little longer life cycle to find something meaningful.


(8sarveshg) #74

Few more of my learnings by being a part of this industry, given that some of you are searching for fund managers. Hope that my own extensive industry experience and reading/reseach in this regard helps you all in proper manager selection.

1.In general, as I have indicated in my earlier post, standalone focused portfolio managers or SEBI registered investment advisors are far more preferable over corporate houses or those whose main business is not equity asset management. This is especially true for those where this is a marginal business. Globally, the best of the investors do only thing - invest. Be it private equity (Blackstone, Warburg Pincus) or public equities (Berkshire Hathway, Baupost) - all the best investors generally do not belong to the corporate houses. The reason is very simple - the best of the fund managers know that they are the best and even a Prashant Jain (HDFC CIO, India’s best-known MF Manager) salary is no match to what a much smaller guy like Ashish Kacholia (Lucky securities, net worth of over 750 cr) can make. So the best of fund managers always start on their own leaving behind the corporate house. However, you have to be able to have trust on the standalone managers you invest with.

Secondly, for the corporate, this is just one of the many businesses, they never have the focus on this. And focus is everything in business. Please read a gem on marketing called Focus by Al Ries to know more of what I am trying to say here.

Thirdly, equity asset management if done rightly produces very lumpy results - something which most publicly listed and large groups hate. A Motilal would never like to charge a ‘profit share only’ because then the earnings line would be very volatile. But then, that’s precisely the problem - creation of wrong incentives in the system to accumulate assets rather than show performance. Don’t we all hate businesses which are just focused on revenues and scale rather than RoE and RoIC?

2.With regards to fee, I would advise not to be overly focused on fees (please read the example in this point which I am giving). The Bottomline is - unless the fees is totally out of whack it does make a lot of sense to go for the best manager (trust, integrity, pedigree, right incentives) rather than haggle about few % points of fees here and there. Managers who have high degree of integrity, a long-term outlook (they are not there to make a quick buck but to create a lasting organization for 20-50 years plus) and work always towards enhancing their skill sets will always create greater long-term returns (even though somebody else’s performance might look sexier in the recent past) because they will never expose you to risk so much that the portfolio value or investor’s interest itself goes away. This analogy is similar to buying a TBZ stock or a Titan stock. While TBZ may trade at 15 times and Titan at 30 times, if you are looking to compound your wealth over 20-25 years, I would pick Titan over TBZ anyday (although as a value investor with an option to buy nothing, I would buy none of the stock currently). So don’t overly worry about fees, the game of money management is such that best of money managers are destined to be filthy rich, as layman investors who have other work to do and we are not full time investors, we need to focus on whether the a) manager is highly skilled, b) manager is generally risk averse and conservative, c) manager is man of words, integrity and d) most importanltly, whether he is making money when I make money - meaning whether rewards of investor and manager are properly aligned.

In this regards, the world’s best performing hedge fund (medallion, has probably made returns double/triple of warren buffett in the last two decades) charges 5% fixed fee and 44% profit share (https://www.bloomberg.com/news/articles/2016-11-21/how-renaissance-s-medallion-fund-became-finance-s-blackest-box). While I am not recommending paying this much :slight_smile, do focus on manager’s skills & incentives much much more than fees for your long term benefit.


(Tarun_1984) #75

Very Aptly put - Corporates Fund Houses have to generate stable income and this cnnot be done with PMS/AM businesses…Quality will come at a price be it stock OR fund manager. Few % here and there shouldnt be a matter of concern as thats the price someone should be willing to pay for a good guy rather than being penny wise


(Yogesh Sane) #76

High PMS fees may be the reason why investors create shadow portfolios that mirror PMS portfolio. SEBI rule require that a separate account is maintained for each PMS client so client will know in near real time what stocks the manager is buying and selling and can mirror those transactions in real time. In fact a savvy investor can hire a broker to just do that for a small brokerage instead of paying hefty fees to PMS manager. No wonder most PMS accounts are between 25 lakhs to 50 lakhs even after years or producing stellar returns.

Skilled PMS managers will move to AIF structure as it allows pooling of funds and does not require manager to report transactions to investors in real time. Some are already planning a move.

Equity Intelligence launches new product – AIF

Some PMS have realized that a PMS portfolio is just a concentrated mutual fund portfolio so they are using a MF structure especially if the PMS service is already a part of an AMC. In fact in the past I built a concentrated portfolio using the top 10 positions of a top rated mutual fund and found that a concentrated portfolio beats the diversified portfolio from which it is derived.


(maheshkumar) #77

For investment advisors, Sebi seeks to relax registration rules. Few such proposed amendments are lowering the application fees for corporate applicants, for initial 5 years, to Rs.10,000 from Rs.25,000. Registration fees to be halved to Rs.1 lac. Net worth requirements should be reduced to Rs.10 lacs from the current requirement of Rs.25 lacs.


(Mpant) #78

But I dont think PMS managers will reduce their net requirement. they would
rather have few clients with high corpus… Makes it less work for them.

Regards,
Mayank


(maheshkumar) #79

can any one share their views regarding ashish chugh’s investment advisory
i couldn’t find the cagr for his advisory
thanks


(Dr. TarunDS) #80

Is anyone invested in Mr. manish Bhandari’s pms or has a feedback, kindly Share!


(RAHUL SINGLA) #81

yes please share his style and personal experience if anyone have


(Ameya Dharmadhikari) #82

You can also check dhfl pramerica deep value PMS… E A Sundaram is the fund manager… Conservative but has great companies in the portfolio. Not a typical midcap portfolio…