PMS Funds - India


(Saurabh Maheshwari) #83

@Yatharth ... Was away for a few days hence a late reply.

Checkout the returns over a 3 or 5 year period. Data doesn't lie. Quest, Nine Rivers, Vallum have CAGR above 45% as on Dec 2016 for a 3+ year period.


(us121) #84

Where do we get this authentic long term performance data. Link if any please post.


(Yatharth) #85

Yes, how do we get this data? Nine Rivers and Quest in the last 2 years seems to have done <25% CAGR only as per SEBI data. Name of Vallum PMS scheme on Sebi is not known to me. Can some one help?


(Dr. Tarun Deep Singh) #86

Master portfolio services ltd - vallum india discovery fund


(8sarveshg) #87

Guys,

Since a lot of you are looking at various PMS funds/advisory firms performance data, let me explain to you all what does the performance data signifies (and hence why in many ways it is completely irrelevant) and hence what should an investor look for. I will also explain to you what is the difference between a fund - PE fund, AIF CAT3 fund, Mutual fund (MF) performance data and why it is much superior to PMS/advisory firm data. For any additional queries, you can always ping me. Whenever I use PMS here - I mean all kinds of non-pooled vehicle including advisory and whenever I mean MF - I mean all kinds of pooled vehicle including private equity, hedge funds and AIF Category 3 funds.

  1. The fundamental difference between a PMS performance data (which is there in public at times through SEBI website or through PMS website) and MF performance data is that MF performance data is much more credible because MF is a pooled investment vehicle and PMS is a non-pooled investment vehicle. Hence MF data is an IRR data which also gives an accurate picture of decision quality of MF in areas like - when did the MF take the money initially and intermittently, at what levels it bought various securities post-launch, when did MF redeem the money, at what levels it sold various securities post launch.

On the other hand, a PMS firm shows the performance data as the performance of the first client in its website/marketing material etc (since it is a non-pooled vehicle). So let's say the first client was added to PMS when the NIFTY was 6000. Soon enough market rises to 9000 and 10 more clients were added to that levels. In this case assuming the PMS bought the entire NIFTY, it will show its performance as 50% since inception, even though 10 out of 11 clients will be at 0% returns. Now let's say market falls to 8000. In this case, PMS will show its performance as 33% even though 10 out of 11 clients will be sitting at a loss of 11%. This is the single biggest anomaly of PMS firms and the same applies to investment advisory firms. Most investors don't realise that proper investment management performance assessment can only be done if its a pooled vehicle and not a non-pooled vehicle.

For an investment management firm, equally important is when to take in money from the investors, what levels various investors are entering and what levels investors are redeeming - all these important factors are accounted in a mutual fund performance because of its NAV based but not in a PMS/advisory firm's reported performance. Also, AIF Category 3 and private equity funds are also NAV based and hence their performance track record is also credible.

The problem is that PMS firms/advisory firms etc. - performance varies significantly from client to client. I know of PMS firms which started in Feb of 2016 and are showing great performance even though the bulk of the money has come now and is sitting on almost zero profits. This is also the reason why most of them love to charge fixed fees these days and rely very little on profit share. So just by looking at a PMS firm performance, you can't assume that your returns will be a similar levels - crucially if you are investing at the top end of the market cycle, you are most likely to loose money irrespective of past performance of any vehicle - only an extremely good manager can save you from this potential loss (even when you invest at the top) - these managers are rare and most wouldn't waste their time coming on CNBC TV18 and other such entertainment channels.

  1. The second fundamental and equally important fact (and I am telling you from my own personal experience of reading and managing money) are that PMS firms/advisory firms, in general, because of their structural flaw, will reduce the investor performance (everything else remaining the same, ceteris paribus some say).

Let's say I am an MF/AIF CAT3/PE fund and I am managing 100 cr and I have a portfolio of just 4 stocks - Bajaj Fin (25%), Eicher Motors (25%), RBL (25%), Infosys(25%). Now currently Bajaj Fin, Eicher Motors and RBL are trading very expensively and Infosys is trading very cheaply. Let's say Mr A becomes a new investor and invests 1 cr in the fund. Now a smart and well-incentivised MF manager (and sadly there aren't many in the industry) will just use that 1 cr to buy Infosys so that portfolio changes to Eichers Motors, RBL, Bajaj fin (24.5% each - a reduction in expensive stocks) and 26% in Infosys (a increase in cheap stock) - which is what is ideal.

However because PMS/advisory is a non-pooled vehicle and they have typically only one model portfolio and because of millions other wrong incentives - the PMS manager will not want to alter the portfolio just because a new client has come in - else he will have to do buy and sell for all the clients and all the stocks - which will also create a lot of unnecessary brokerage cost and short term gains tax. So for the new investor, he will buy stocks in the same proportion - hence he will end up buying 3/4th of the portfolio at very expensive valuation for the new investors while also not reducing the weightage of expensive stocks for everybody else. This is the single biggest structural problem in PMS/advisory. This can be solved if he starts a new model portfolio for each client based on then market conditions - but that is just not scalable solution for any of the large PMS/advisory firm. This is the reason a lot of such firms are buying Canfin homes, Bajaj Fin and other expensive stocks for the new investors - I am not saying that these will necessarily lead to loss but buying a stock without a margin of safety is a bad deal irrespective of a whether or not it makes money.

Most importantly, a PMS firm hardly cares so much about all the follow on clients money and at levels shares are being bought because a) it reports only the first client performance and doesn't have to worry about the performance of subsequent clients and b) in most cases fees is anyways being charged at fixed and not variable.

I know all of this might have sounded technically difficuly to grasp, happy to help with the queries on the same.


(sanketkulkarni1987) #88

I have a very basic question and please ignore my ignorance .. when I hear the word PMS, I always assumed that the firm managing my portfolio will identify the right stocks based on let's say my age, income, future needs , etc and create a portfolio based on what is suitable for me.. so I always thought that most (if not all) portfolios will be different .. but based on what is shared here (and very thankful for that), this does not seem to be the case ..


(Dr. Tarun Deep Singh) #89

VIDF - Monthly Returns Apr 2017.pdf (251.5 KB)

Returns for Vallum India Fund. Kindly share your inference!


(Yatharth) #90

This is an eye-opener. Thanks a lot for detailed information.


(Tarun_1984) #91

Eye Opener and incisive analysis in terms of how statistics can be upended to show great returns...No funds have clients joining at Day 1...There is a survivorshiop bias here as you continue to show great returns...a better measue would be to show as done by Vallum on a monthly basis here so that investor can calculate CAGR from the time he joins the fund...Fancy normalized metrics like Return since inception and alike are meaningless to most investors.


(Yogesh Sane) #92

@8sarveshg I think you are mixing money weighted returns with time weighted returns. What you have described is money weighted returns which are highly sensitive to timing and amount of cashflows. time-weighted returns are not impacted by timing and size of cashflows. All fund managers generally use time weighted returns to report their performance as they do not control cashflows.

I am posting my earlier post from different thread on the same topic.

Also look for a presentation I made to ValuePickr Mumbai meeting on this topic. It has a PPT and an Excel template for calculating returns.


(8sarveshg) #93

Hi Sanket,

Please understand that while what you have said is desirable, it is practically impossible. In all such cases, typically decisions are made by one person (Portfolio Manager) and for him to have a separate portfolio for each client is impossible. For instance, a motilal PMS may be managing 6000 cr in AUM and assuming an average ticket size of 1 cr, they would need to have 6000 different portfolios which is impossible. So what they do is that they have one portfolios or in certain cases, 2-3 various strategies and then there is a standard portfolio for that scheme for each client.

The only case where it can be different is with very small PMS/advisory firms because they haven't yet scaled up and the number of clients is less and hence customization is possible.

In any case, in my opinion, an investor shouldn't expect the manager to align his strategy with investor's goal (because each portfolio manager is good in a certain type of stocks, a certain type of investment philosophy). Instead, the investor should (as an investor) check whether his goals, risk taking ability etc., objective etc. are being served with a particular manager. That's why I dont understand why people look at only returns and nothing else. It is like judging a restaurant by only its food taste while not giving importance to other equally important aspects like ambience, service and hygiene.

Hope this helps in understanding. You can always ping me in case you have further doubts.


(8sarveshg) #94

Thanks for the attachments and your view.

While I understand these concepts pretty well, without getting into the jargons I think the NAV or IRR method is much superior to point to point return method that PMS/advisory firms follow. My reasons are adequately detailed above. However, I would want to explain it again in simple terms.

Let's say I have 100 Rs. for investing, and I decide to invest 10 Rs. when NIFTY is 6000 and 50 Rs when NIFTY is 8000 and 40 Rs when NIFTY is 9000, I would say a much better representation of my overall performance is 10*50%+50*12.5%+40*0% = 11.25%. This is approximately how a pooled vehicle like MF/PE/Hedge fund would report. And that is why NAV is the globally followed practice for reporting investment management performance.

However, a PMS/advisory firm would say we have 50% returns since inception. Even in a case where let's say NIFTY was 6000 at 9 months back and has moved to 7000 6 months back and subsequently to 8000 and 9000 as per the example above, the PMS/advisory firm would also say that we have done 28% (7000 to 9000) in the past 6 months and 50% since inception. Both of these marketing data is gross misrepresentation. And this is why I think integrity and trust aspects are very important when investors decide to invest in such non-pooled vehicles.

Now let me explain why 28% and 50% fail to capture the appraisal of this investment management firm.

Basically, an important aspect of investment management also lies in when they are accepting the money and when they are redeeming the money. That is why I find it ridiculous that AMFI recently is doing so much of ads when the markets are looking topish. Where was AMFI asking for money in 2013 when the market was at much lower levels and which was perhaps much better time to accept money. Now I think, this decision of when to accelerate money intake is as important as the performance of the firm for the first client since inception - this is underappreciated by most investors My 15 years of deep study in this field shows that best of the investors do not even want money when they feel they cant produce great returns from current levels for fresh investors (very unlike AMFI and most other funds and PMS firms).


(sanketkulkarni1987) #95

Thanks !! .. In that case, it is very as difficult to identify a PMS fund manager as to identify a good mutual fund which will give you market beating returns over several years in my opinion.. Even if a person has a huge corpus and he goes and meets different PMS fund managers and also studies several MF's, how will he determine which one to chose ? I am trying to understand what is the "advantage" of a PMS over a "MF" .. Based on your explanation on the returns reported, and the portfolio allocations made for an investor, i see no advantage of going to a PMS fund ..


(8sarveshg) #96

PMS vs MF - Some points (Please note that by PMS I mean PMS as well as AIF and SEBI registered investment advisors here)

  1. Since PMS is lightly regulated, it is possible to create a portfolio highly different from benchmark and hence deliver an alpha far superior to a MF. However this is a theory, it cuts both ways. A great/very good equity fund manager can hence deliver a much higher return in a PMS set up compared to when the same fund manager operates in an MF setup because his hands are tied up much less. For instance, an MF will normally have 30-40 stocks in a portfolio while it is not uncommon for PMS to just have 15-20 stocks in the portfolio. However, at the same time, an average/poor quality equity fund manager will produce returns much lesser than an MF guy as he will concentrate and towards small caps in general - where mistakes can be far more costly.

  2. At the same time, the performance data for a MF is much more reliable than a PMS (as explained in my post above)

  3. In general, PMS are oriented much more towards small caps, because most investors have exposure to large caps through MF already. This means in rising markets, like what we witnessed in the last 3-4 years you will see PMS firms outperforming MF and vice-versa. This is because small caps tend to outperform general market in a rising market situation and vice-versa. However, please note that a small minority of PMS fund managers will outperform in all conditions just like Warren Buffett - these are the really talented and risk-averse managers with the right incentives.

  4. So what should investors look for in a PMS manager. Well I would look at few things - a) risk averse mindset - this can be checked by calculating the weighted average portfolio price to book and price to earnings and comparing it to the normal market. This can be especially helpful since it is difficult for an investor to figure our individual stock proxy but the overall valuation of the portfolio will give some sense of how it will perform in falling markets. Lower the better. b) alignment of interest - where has the manager invested his own money, how much money he makes as a fixed salary, how much is the fixed part of the fees and how much is profit share. Higher the profit share and lower the fixed fees and salary, the better. c) how much of the PMS manager own money is invested in the funds being manager. What is his % of networth d) Pedigree - does he come from the high pedigree and can he do his own independent valuation rather than relying on already compromised sell side research. Can he do some primary research and figure out the truth hidden behind the numbers. and e) Size - what is the size of money he is managing - higher the size lower the returns, most PMS firms become or will become victim of their own size as their performance will not be replicable once they are well known in the market and have a lot of funds to invest - particularly at the top of cycle.

  5. When Warren Buffett started his partnership days, he really complied with each of these requirements. a) he was a value investor and very frequently he sold positions when they reached 50-80% over his purchase price because then technically they became fairly valued. So his overall portfolio valuation metrics were low at all times compared to markets and other managers portfolios. b) & c) 99% of his networth was invested in the stocks he recommended for his investors, he took no fixed salary and only relied on profit share and d) he already had the right pedigree of managing his own money, reading extensively into sectors like insurance and retail where he made a lot of investments and he had already attended classes as well as worked for Graham - the father of value investing and e) he dissolved all the partnerships after a decade of track-record and once he reached a stage where he can no longer expect similar performance as past.

  6. Unfortunately, while these days, hardly very few people are following Buffett's path - but if you are able to find a match in few respects, one can think about investing money with that manager seriously.

  7. I know all this takes time and effort and if one is not willing to spend it, best way to earn decent returns for the really long term is to take exposure to ETFs (which is what Buffett has also recommended for many).

Hope you guys find it useful. You can always ping me for further discussion or queries.


(Storyteller) #97

A big learning on this thread. Thanks. @8sarveshg, Would appreciate your inputs on ETF's ..
There don't seem too many choices in India.


(Yogesh Sane) #98

Can you please provide source of this information?


(8sarveshg) #99

Hi,

The source of information is my reading on Buffett and his work over the past two decades. I can write an extremely long discourse on this because of my extensive research in this field but that will call for a separate thread. In any case, Buffett used to be extremely secretive about his market operations for most of his initial career. However, there are many case studies which illustrate how he used to operate in his early days. This is what the author Roger Lowenstein has written in his book 'Buffett - the making of an American capitalist' regarding his purchase of Sanborn Map which at one time used to be more than 25% of his partnership assets:

"Sanborn Map illustrated Buffett’s debt to Ben Graham. Sanborn’s once-lucrative map business had declined; however, the company had an investment portfolio, built up over its flush years, worth some $65 per share. And it stock, reflecting its sagging map business was trading at only $45. This was a carbon copy of Northern Pipe Line—prized by Graham for its railroad bonds.Echoing his mentor, Buffett bought Sanborn stock through 1958 and 1959. He was trusting in Graham’s testimony: sooner or later a stock would rise to value.But it didn’t. The company’s directors owned merely 46 shares and were content to let the share price languish. In fact, while sitting on that huge portfolio they had cut dividends five times in eight years, though, as Buffett noted, it had not as yet occurred to the board to reduce the fees to themselves.Following Graham page-for-page, Buffett became a director and lobbied the management to unearth the sub rosa value in its investment portfolio.The management resisted.In the meantime, Buffett did not mention Sanborn to his investors, though he did disclose that he had put 35% of their assets into a single stock. But he and other dissident shareholders continued to put the heat on. In 1960, Sanborn capitulated and agreed to use its portfolio to buy out stockholders. Buffett made roughly a 50% profit. With the cat out of the bag, he wrote to partners that Sanborn does point up the necessity for secrecy regarding our portfolio operations as well as the futility of measuring our results over a short span of time."


(anand21) #100

Hi sarvesh, Have you checked minance capital?


(Ameya Dharmadhikari) #101

BOTH REPORT THE PERFORMANCE BASED ON STARTING POINT AND NOT ON WEIGHTED AVERAGE BASIS.


(maheshkumar) #102

can anyone please suggest good equity advisors
As my portfolio is small ,I am not eligible for pms
And as my knowledge is also small ,I can't buy by myself