ValuePickr Forum

PMS Funds - India

@karanmaroo Which PMS you finally opted for or have you opted at all?

​there are good no of PMS available in market to invest from , it is imp to choose wisely where your thought process matches the fund thoughts. can help you if any advise is sorted , mail query on mail query on djrish@gmail.com

I had a question on regulatory requirements PMS have. I am aware that they need to report performance and that it’s available for us to see on SEBI website. Do they publish their holdings somewhere ? MF’s do that but not sure about PMS.

Is anyone aware?

Porinju’s PMS has given 79% returns this year. Unheard of so far to me in India.

Any idea about other PMS returns?

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Maruti gave 83% returns for CY17 and HDFC Bank 55%. Is it worth going for these PMS funds esp those that take exposure in unknown companies. The risk reward ratio in these companies does not seem to be favourable. Moreover, this PMS return is gross return and the performance fees is yet to be deducted…that will reduce the CY17 return of the PMS to be less than reported. The MARUTI’s of the world are the best!

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Hi Yatharth,

Thanks for this data. When I look at this data, I can’t help but comment because I somehow find too many gullible investors fall for statistics at exactly the wrong time. So, for the benefit of all, I want to lay down few points.

  1. Compounded Annual Returns is something not intutive to human mind.

For instance if I ask you what will be your net retuns per year in 5 years if your performance is like this : +40%, +40%, +40%, +40%, -50%. Most likely it wouldn’t seem to us that performance CAGR drops to a mere 14%. However someone who does +20%, +20%, +20%, +20%, 0% achieves 16% - a seemingly small but important 2% point difference. And much better even after achieving just half of the returns shown by the first guy in 4 out of 5 years as he manages to save the investors by not becoming all go-go investor in the bull market. Still if this 2% difference per year doesnt excite you, assuming you are a PMS investor at the age of 40 and you are working somewhere else and want a comfortable retirement - this difference of 2% per year will create a differnce of 50% difference in wealth when you retire at the age of 60 - this will give you a different standard of living all together as 50% difference will all fall in your discretionary expenditure - very important for the standard of life in retirement.

So bottomline of first point is - Compounding of wealth is magical but making money isn’t as important as retaining it is. It is very important to not have massively down years and the thoughtful portfolio manager’s portfolio is tilted towards this consideration. So avoid risk but more so when markets are appearing expensive.

  1. There are three kinds of lies - Lies, Damned Lies and Statistics

Now this is interesting. Why would a manager who famously invests mostly in micro-caps and at best small caps compare his performance to NIFTY and BSE500 rather than a index like BSE Small Cap (which by the way is also not representative for many of the micro and small caps bets). Less than 15% of BSE 500 companies have market cap less than 3000 cr and again is not representative to bets. A 79% looks massive compared to 28% of NIFTY but not so great when BSE Small cap index which is an index of more than 700 companies is itself up by 60% in CY17. The answer is simple : because the Alpha of returns comparing it to BSE500 or NIFTY looks much more great. I bet many such managers start comparing themselves to BSE Small cap index in a bad years - as BSE Small cap will get massacred in a down market and it will again make the underperformance look better relatively speaking.

  1. The concept of Risk Adjusted Returns

Unfortunately, most of us are inclined to look at returns only as they are far more objective but not look at risk adjusted returns. Classic Corporate Finance theory tells us that returns can always be expected to go higher if risks are. While I believe that there are a set of distinctive portfolio managers who will beat this equation and show that market anomalies exist so that returns can be increased without taking excessive risk but then not everybody belongs to this elite set (and I bet any manager who is regular on twitter and CNBC don’t belong to this elite group either). Now this was a year when taking massive risk led to massive performance. Forget BSE Small Cap Index which is up 60% or this Portfolio which is up 79%, BSE Realty which maybe consists of most volatile and low quality company is almost up 100%. Taking higher risk is like driving fast - you may reach early sometimes (like managers who took higher risk this year) but sometimes you will just crash. Unfortuanately we feel pity for the guy who died and we hail the guy who came first - while we should pity both. Shouldn’t we?

This is what two of the world’s best investors - Buffett & Seth Klarman say about performance to their investors:

“I have pointed out that any superior record which we might accomplish should not be expected to be evident by a relatively constant advantage in performance compared to average. Rather it is likely that if such an advantage is achieved, it will be through better-than-average performance in stable or declining markets and average, or perhaps even poorer-than-average performance in rising markets” Warren Buffett, Partnership letter 1960

“The true investment challenge is to perform well in difficult times. It is unfortunately not possible to reliably predict when those times might be. The cost of performing well in bad times can be relative underperformace in good times. We have always judged that a worthwhile price to pay” Seth Klarman

Bottomline is the go-go managers who outperform the index in a year like this should be evaluated cautiously. Best of the managers will probably underperform as the bullish market stays strong as they get more and more risk averse before the market actually tops out. Hence they are psychologically prepared to take full advantage of bearish markets since they dont loose much and actually have cash to invest as well. As opposed to that, go-go managers get wiped out massively both psychologically and performance wise.

“A market downturn is the true test of an investment philosophy” Seth Klarman

  1. So if performance data is not useful, then what is useful. While performance data in ultra bullish years like this one is not useful (even a chimpanzee throwing darts can get great returns in a bull year like the one we had, BSE Small Cap index itself is up 60% in CY17), performance data in down years is very useful. Very important is the fee structure - now tell me wouldn’t a portfolio manager like the one above better off is he just charged profit share - if the manager is confident about performance across cycles which one can be only if one is a bit risk averse - they will mostly charge through profit share rather than the other way around. What should we learn about some of such managers propensity to still charge a hefty fixed fee while knowing very well that they could have earned much more if they charged only profit share - are they smart or are we dumb? Very important is why the manager is investing on the stocks he is investing - is it hopeful investing, does that carry margin of safety in terms of valuations, how does portfolio valuation metrics compare to market benchmarks etc.

Unfortunately, too many investors remain focused on just the return metrics that too in the bull market. They get swayed into investing with the go-go managers at precisely the top of the cycle and then when burnt badly exit at the bottom with heavy losses, promising to never return again. Soon after a new bull cycle begins which brings in a new wave of fresh gung-ho investors as well as a new crop of managers who take highest amount of risk and show mouth watering returns and the cycle continues.

One data point I read recently was particularly sobering, as well all know 75% of the fund managers in the USA (including private equity, hedge fund and mutual funds) over the long term fail to beat the benchmark. Many people did the research recently and found that a majority of investors actually underperform these fund performance itself which are anyways underperforming the benchmark - due to a dangerous cocktail of bad skill of managers and bad timing of investors.

So when we read such startling returns we should all remember Buffett who said - be greedy when others are fearful and be fearful when others are greedy. What goes up very quickly comes down equally fast as well. Always remember that risk and returns almost always (not always though - this is the space where best of the managers play) are correlated. And remember that driving fast will make you reach your destination earlier 9 out of 10 times but would you rather do that and die in that one scenario. Or would you prefer to reach destination maybe slightly slowly but surely.

With these thoughts, I wish you all a very happy and also safe (given where we are in terms of valuations) new year.

Cheers,
Sarvesh Gupta

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A great perspective. We usually get carried away with Statistics without understanding meat of the matter. As rightly said in post, time is ripe for many to fall in trap with such numbers. What is achieved by Porinju is commandable, but need to read it with both eyes open to understand the context beyond plain conveniently tabulated numbers.

Excellent post. Sincerely appreciate your going to great lengths to differentiate between returns and sound investing philosophy based on risk adjusted returns.

I wanted to explore the thoughts of other investors here and hence quoted Porinju.

Porinju and a couple of others have shared their returns on twitter. Personally, I find difficult to invest in small caps, having seen earlier performance and management quality in many of these.

This year, after 2014, has been exceptional. Any good portfolio, with discipline could have given similar or better results. I am sure that several, if not most on VP, may have got that.

A stable PF of 6-7 quality large caps consisting of good Private Banks, NBFCs, Auto, Auto Ancillaries, Consumer companies; have even performed better this year.

Once again, thanks.

Very Nice post Sarvesh.Write more often.

Very well explained Sarvesh…

no data available on stocks they are holding

monthly reports available on sebi website depicting aum and no of client etc but nothing material to return.

can ask for disclosure documents to PMS for checking any gray areas of management and get proper data as this is the same as submitted to SEBI

some pms give model portfolio returns and not weighted avg returns of all clients so be careful. also some give returns net of fees and exps while some do not so while comparing be careful.

if any questions unanswered pl email on djrish@gmail.com

I have invested in Motilal IOP, Motialal NTOP and ASK-India Select
I have also invested in mutual funds.
With all due respect to @8sarveshg and other veterans, the biggest plus point of PMS over Mutual Fund is the consistency of returns. A 5 star rated mutual fund you invest in today could become 3 stars down the line in 2 years (case in point DSP Black Rock Micro Cap)
With PMS there is more “faith” as the portfolio is managed by seasoned professionals and unlike mutual funds, the managers do not change that often. Gives you more credence to hold your portfolio during turbulence times.
Again, nothing could beat direct equity investing provided you have the time. Also, the choice between Mutual Fund, PMS, and Direct Equity also boils down to individual investment styles and risk appetites.

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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 “Give me USD 1 Million to invest and I guarantee you that I will generate 50% on that”. What he really meant is that higher size of assets has greatly put a celing on his performance. Infact Berkshire’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 world’s best investment houses have been closed for new money for several years now. Seth Klarman’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 firm’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 don’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 market’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.

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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.

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

@100cagr
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.

@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

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

Thanks Sarvesh for extremely useful insight… 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 posts…
Regards

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 doesn’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 can’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 that’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 - Won’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 don’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 can’t overemphasize the point again. Nassim Taleb in his book, the Black Swan talks about the concept of ‘alternative histories’. 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 can’t be bought at any price. Coming back to Taleb’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 can’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

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