PMS Funds - India

(Sarvesh Gupta) #129

Hi @100cagr,

Good points.

Yes, Rightly said that the consistency of performance is dependent on retention of great managers which is presumably higher in PMS/RIA/AIFs. Especially since in most cases PMS/RIA/AIFs are entrepreneurial which MFs in general are not and suffer from higher degree of principle-agent problem.

I must add, however, that returns going forward are even more importantly dependent on the overall assets under management. The law of gravity in the world of investment management is that the everything else remaining the same (ceteris paribus as economists will say :smile:), expected returns are inversely proportional to size of the assets. An elephant, however good, can never run faster than even a limping fox. Infact Buffett has been famously quoted as saying that ā€œGive me USD 1 Million to invest and I guarantee you that I will generate 50% on thatā€. What he really meant is that higher size of assets has greatly put a celing on his performance. Infact Berkshireā€™s performance, while remaining the best on an overall basis has come down drastically in recent decades as the size of assets increase.

So people planning to invest in Advisory services/PMS/AIF should carefully think about the size of assets under management and its recent growth. This is the reason some of the worldā€™s best investment houses have been closed for new money for several years now. Seth Klarmanā€™s Baupost, Janchor Partners based out of HK as well as Medallion fund - all performing at top levels are closed for new investors. I think even DSP did stop taking money in one of their funds from new investors - a good step (although they still allowed existing investors to put more money - a bad step).

So watchout for asset accumalation in bull markets, the problem is that when bear markets come and everyone is interested in only one task which is selling, funds which have too much money in terms of their size (have great caution wherever firmā€™s size of assets is over 1000 cr) but are invested primarily in small and mid caps are going to be massively hit. Keeping aside the point of almost ridiculous valuations in the small & mid cap stories which most of them own - trading frequently at 50 times or more of their one year forward earnings, their own actions of selling will cause prices to depress rapidly and even hit consistent lower circuits. When it comes to selling in bear markets, liquidity is like oxygen, when you have it (like today when markets are bullish) nobody feels the importance of it, but when you donā€™t have it (which is what is going to happen in many of these expensive small & mid caps in bear markets)- the only thing which matters is oxygen i.e. liquidity. So funds which have quickly scaled up asset bases (anything more than 1000 crore is big) while still focusing on small & mid caps focused strategy will find liquidity a major challenge in bear markets and can see severe drawdowns (fall from peak as % of peak value). Even 40% or more can be routine for many is my guess given the extent of over-valuations in most of the expensive small and mid caps.

So please be aware of this fact as well, success in investment management, if not managed well during bull markets (by considerably slowing down incoming investors or evolving investment strategy to take into account liquidity in bear markets), can become the biggest curse for a successful investment manager. Hope I was able to clear this point to many of the existing and potential PMS/AIF/Small cap-midcap focused MFs clients.

Sarvesh Gupta

PS - A corollary to above observation is funds which have invested in some of marketā€™s well known or well discovered stories. These investments will have wide institutional-HNI ownership and will be under a bigger trouble in a bear market than those portfolios which are distinctly different from many others. This is also the reason contrarian low valuations focused strategies outperform growth strategies overall in the long term as in a bear market, value outperforms growth by a huge margin much more than what growth outperforms value in bull market.

(100cagr) #130

Hi @8sarveshg,

Interesting points.

Totally agree with larger asset point. But its a vicious cycle. Higher AUM is usually an indicator of better performance, processes, audits, checks as well balances. These PMS are better marketed and easily available compared to unknown niches PMS where one would not invest unless you know the fund manager personally.

What you are largely speaking of is limiting the risk in case of a market fall. Well in case of 2008 like a situation all PMS big or small, MF, and direct equity will fall the only is the difference is by what amount. A good moat here is stringent asset allocation. In a bull market, it is more important to maintain equity/debt allocation in portfolio rather than being too focused on the size of PMS. Secondly, one must have faith in his/her portfolio. Case in point, Motilal PMS NTOP strategy was launched in 2007 right before the market crash in 2008. From there it recovered to give ~19% Cagr. This is what made me invest in them as they have proper processes to select quality stocks that have internal merits and not driven just by market sentiments. As in Buffets own awards, One should not invest in a stock if the markets close for 5 years and you are still okay holding them.

(maheshkumar) #131

High aum pms nowadays work with different strategy
They usually make 4-5 portfolios
So AUM becomes 0.2 AUM
So they can invest in small caps also
Also can generate higher returns

(sunnysachdeva) #132

Not true everytime. Check performance of HDFC Top 200 or HDFC Equity or HDFC midcap. Assuming you would not compare apple with oranges ( compare large cap vs large cap only] you wont be disappointed with their returns.

(100cagr) #133

@maheshkumar Correct its a more concentrated portfolio of 15-20 stocks compared to upto 50 in Mutual Funds

@sunnysachdeva Hindsight is 20/20. My goal is to get 25% cagr over a course of 10 to 15 years. Looking into the future a vehicle that gives me credence to be invested for long is PMS. For some, even MF does the trick. As I said it boils down to individual choices

(maheshkumar) #135

What I mean was that one pms fund will have eg 25 stocks
Then they make 5 subgroups
Each group will have 5 stocks
Eg if person A joins the pms then he will have 5 stocks and person b in same pms will have different 5 stocks

So the value of 1000 cr pms becomes 200cr

(Rits) #136

Thanks Sarvesh for extremely useful insightā€¦ May I request you to share your opinion about PPFAS long term equity fund, which seems like following the criteria mentioned by you in your postsā€¦

(Sarvesh Gupta) #137

Even though PPFAS is a sort of competitor, I think there are several merits (more merits than demerits which I have also mentioned in the last point below) which I feel are worthy of consideration for a long term oriented non-gogo (aka non-momemtum chasing) type of investor.

  1. They have only one scheme - the best of the investors always run with just one scheme/one product. This is because any investment management organization is ultimately a one person job (Warren Buffett has famously said that his, perhaps jaundiced view of the investment management business is that it doesnā€™t work well with any team with a size of greater than one). And there is limited bandwidth of time and focus for one person to pick maybe 10-15 best ideas at max. If one is running multiple schemes/products - one is perhaps too focused on asset accumalation than client returns because there canā€™t be 50 equally best ideas at one point of time. Also people paint it as giving a choice to investors who can decide on the product/scheme given their own risk/return requirement and asset allocation - but in reality, 90% of the investors in various schemes are themselves clueless about which scheme or strategy is best for them to partipicate. So thatā€™s just an marketing eyewash.

  2. Most importantly, the presence of multiple schemes helps most MFs and PMS to market their product deceptively. If one has multiple schemes, atleast one type of scheme will do very well at any point of time (for example pharma/healthcare fund would have sucked this year but mid-cap/small cap would have done very well) and then all the marketing efforts are focused in taking more and more money from investors in the currently well working schemes while putting in a ice bag and not marketing the schemes which are not working well or is relatively worse (essentially hiding your poor investments to the investors). Its like a child showing her English marks to the parents (where she scored very well) but not showing Mathematics marks to the parents (where she failed). In due time, all the bad schemes are merged with the good ones and the result is tremendous survivorship bias in the results shown. Only good results are carried forward and bad results are shunned and investors get to see only the good results. I can go on and on this point but enough discourse on this point.

  3. Fairly concentrated portfolio - Wonā€™t further elaborate the importance of this. If one just wants market returns in the long term better to take ETF type extremely low fee exposure. There is no point of choosing a fund which is anywhere over 15-20 positions if one is paying the high fees for an active manager. This is because one of the mandatory points towards beating the market returns in the long term (or get beaten comprehensively by the market in the long term) is to take concentrated bets. Most managers are too focused on their high salaries and donā€™t want to loose their extremely high paying jobs - so their performance is closely aligned with benchmarks which is frequently due to multiple small positions. It also relieves them from the pressure of really doing your research well.

  4. Contrarians and value focused - I canā€™t overemphasize the point again. Nassim Taleb in his book, the Black Swan talks about the concept of ā€˜alternative historiesā€™. Fortunately for India, we have seen a tremedous period of political stability, legal stability, we had no real war since 1971 which we also won very easily, there have been no world wars, no major climate related disaster etc. So a lot of investors buying high priced stocks feel that their strategy is vindicated and they are right in buying quality irrespective of price. All such investors should take wisdom from the fact that although Warren Buffett in his AGM talked a lot of merits of Amazon but he still didnt buy the stock. Because quality canā€™t be bought at any price. Coming back to Talebā€™s point - just because we have seen a period of stability of all kinds in India doesnt mean that the strategy of being value focused and shunning expensive stocks is wrong. Many of these expensive stocks are ripe for massive correction should a big negative event materialize which may look impropable but can happen nevertheless. So it pays to be risk-averse always. And I think PPFAS is.

  5. Eating your own cookies - Again most managers have a very small % of their own wealth invested in schemes that they manage, if they did they would have proudly mentioned that in their marketing literature. PPFAS does.

  6. Small size - In the world of investment management, everything else remaining the same, the expected returns are inversely propotional to the size of assets under management. This means that the expected returns from a similarly skilled manager of a 50 cr fund is higher than the case if the same manager was working in a 500 cr fund which will in turn be higher than the case if the same manager was working in a 5000 cr fund. Fortuantely, PPFAS size is still small and hence there addressable universe of opportunities is very large and so are the expected returns potential. Always remember that elephants canā€™t run fast enough - and as the size and popularity of funds/PMS increases exponentially - their expected returns fall exponentially in tandem. Now one may ask, why is PPFAS still sub 1000 cr while one of the more media friendly manager discussed above is now managing 1500 cr - this is because value investors tend to underpeform in strong bull markets (most of them even wait out in cash). Most investors on the other hand, suffer from human short sigtedness and focus excessively in recent bull market returns and give all their money to go-go manager (most of which comes just at the market hits top end of the market) and loose significantly when the bear market returns.

  7. Things which I dont like about PPFAS - a) I dont know why they converted into MF (they were earlier a PMS firm) in the first place thereby loosing their ability to establish perfect alignment with their clients by focusing on profit share as fees instead on flat % of AUM and b) I saw in their website that they have started working with distributors - distributors are most investor unfriendly animals in general and distributors only skill and intention is to milk more and more money out of investors. Talking to a distributor is like asking a SONY TV salesperson whether SONY TV is good - the inherent conflict of interest and complete lack of any responsibility towards investors is of the greatest order whenever distributors are involved.

PS - These are just my personal views and one should do his/her own research if one has to select mutual funds. Although I am a SEBI registered investment advisor as well but I have no business with PPFAS or any other mutual funds.

All the best,
Sarvesh Gupta

(rishabh) #138

Absolutely true
Compare any MF vs PMS with a similar AUM and check returns generally PMS will outperform a MF

PMS can make a concentrated portfolio with timing of entry and exit dependent on investor and still make good returns while MF returns get averaged out

See Kotak, Aditya Birla PMS they have all come with now NEW PMS schemes to show their outperformance while old schemes maybe in laggard.

PMS Advisory
[email protected]

(rishabh) #139

Bigger names can do well can do badā€¦generalizing may not be a good idea

Having good system of checks and balances is almost done by all PMS these days since no great technology required to keep track of this. Infact smaller PMS can enter exit easily due to smaller AUM with decent track

Fund Manager knowing personally is not required, understanding their ideology and their past track is very crucial for decision making in my opinion.

PMS Advisory
[email protected]

(rishabh) #140

Going with a PMS like direct investing only , managed by somebody specifically for you while Mutual funds are managing funds on overall basis and not for an individual.

(Rits) #141

Thanks for your valuable opinionā€¦ I am invested in this mutual fundā€¦ The reason they gave for starting a mutual fund is increase in minimum investment sum of PMS from 5 lakhs to 25 lakhs by sebiā€¦ Apparently due to this reason, PMS became out of reach for many small investorsā€¦ Hence the mutual fundā€¦ Anyway I think itā€™s a good idea for small investorsā€¦ Regarding distributors, when they started this fund in year 2013, direct plan was not made mandatory by sebiā€¦ So, going through distribution channels was sort of a normal way of investmentā€¦ Regards

(Bhaskar Jain) #142

Nice discussion. This website also has deep probing articles on the MF industry -

(Growth_without Debt) #143

Good info at SEBI link

Is SEBI mandate to disclose top 5 or 10 holdings in PMS like MF?
How SEBI keep control/watch over PMS play in market ensuring every thing is fare and transparent.

(Tarun_1984) #144

Loved the surgical strike done on these damned stats which are paraded on Social Media

(100cagr) #145

Smaller PMS are usually launched in post 2010-11 They have not completed a complete bull-bear cycle which is the best gauge of performance. You are welcome to name any outliers.

Checks and balances do not just relate to financial discipline but also to the equity research process. Transparency of the PMS also matters. Case in point, Equity Intelligence. The are reluctant to tell you what market cap do they purchase, their sample portfolio, ideology via email as well as call. There presentation is 5 to 6 odd pager with very thin information to make an invetment call

(Divyanshu Taneja) #146

I read some view points ,.I think after the ddt on mutual funds and also ltcg tax @10% now pms have become at par with mutual funds t, mutual funds returns if we look at long term chart say of 10 years especially multicap funds returns are around 11 % after such a great bull run as per table on valueresearch , now if really want to enjoy the taste of stock market there should be great returns then only we can sustain bcos as per Dhirendra kumar of valueresearch he in his article stated that this new taxes can eat a lot of compounding returns which at present are not aƧcessible
What i want to understand that now the time has come to give money to porinju or no still mutual funds are good

(Divyanshu Taneja) #147

Hi i need some help , can someone please explain what are the net net difference we can expect mutual funds returns and pms returns i have read this thread but many things are bouncer balls so some one in easy language please explain what are the positive side of pms and negative side of pms and net net by what margin pms returns actually in reality exceed the mutual funds returns especially of porinju should i consider his pms or not

(Growth_without Debt) #148

After LTCG Tax, It is difficult to beat Index Fund / low cost FM return by PMS .

Want to know view on PMS service return after LTCG.

PMS charges huge fees and upfront commission from the profit we earned + now there will be LTCG tax on capital gains. Hence, if you take net return from PMS, it will be not better than Index Fund / Low cost good MF.
Also, due to increasing educated participates in market, market more likely efficient and difficult to beat in long-term. To get higher return from PMS, PMS shall beat Index fund more than (upfront commission on profit + base charges + LTCG tax) which is I think not much likely in many cases. This could reduce flow to PMS!

(1.5cr) #149

Hi do members have any info on the motilal oswal value pms? It has delivered 24% CAGR from last 15 years. That is across a business cycle that included the financial crisis.
What is fee structure?
They have generated this return as they had bought hdfc, bosch etc at very very low levels.
Am I right in assuming that the dividends alone from these cos should generate the pms a solid return.
They also have other funds like the next trillion dollar opportunity fund and the India opportunities fund.
If a solid large cap fund with solid companies can pull you 20-25% CAGR (Im not sure if this is net of fees or not) wouldnt it make sense to put money with them and to a small extent clone that portfolio while taking our well informed small and mid cap bets on the side.
Any views? Any info on the motilal pms?