The assets under management (AUM) of portfolio management services (PMS) that cater primarily to wealthy investors have seen an uptick as markets move north. Overall assets, excluding the Employees’ Provident Fund Organisation or EPFO, stood at Rs 4.65 trillion as of December 2017, a 31 per cent rise over the year-ago period, data from the Securities and Exchange Board of India shows. Accounting for the contribution of EPFO, PMS assets rose 21 per cent to Rs 14.2 trillion as of December 2017 from Rs 11.75 trillion a year ago. Non-discretionary assets grew 25 per cent to Rs 0.87 trillion in December 2017, while discretionary assets rose 21 per cent to Rs 11.15 trillion, thanks to inflows from EPFO and PFs. In discretionary management, investment decisions are made for clients at the portfolio manager’s discretion. Under non-discretionary investment, trades must be discussed and approved by clients. Advisory services involve managers advising their clients about investing. PMS allows investors to customise portfolios, depending on risk appetite and returns expectation and is the next step for those who have already dabbled in direct investment and mutual funds or MFs. “With the market on an uptick, HNIs (high net worth individuals) wanting a more customised portfolio are turning to PMS, which offers a much freer hand in portfolio construction in terms of stock limits and sector exposure,” said Kaustubh Belapurkar, director, fund research, at Morningstar. For instance, no MF scheme may invest more than 10 per cent of its net asset value in equity shares or equity-related instruments of any one company. There is no such restriction in PMS. A PMS also runs a more concentrated portfolio of 15-20 stocks, compared with equity schemes of MFs, which generally invest in 40-60 scrips.
A concentrated portfolio increases the potential of higher return but adds to the risk.The inflows into PMS, however, have created a problem of plenty for some. With the markets hovering near all-time highs, it has been difficult for fund managers to find stocks with reasonable valuations to generate the right alpha. ICICI Prudential Asset Management, for instance, is reportedly shutting down two schemes run by its PMS division. The fund is reportedly in the process of returning the Rs 7 billion collected under the two schemes — PIPE and Small Cap Portfolio Series I — to investors. The other thing investors ought to keep an eye on is the fund management fees. While equity MFs charge between two per cent and 3.25 per cent in expense ratios, fixed management fees in PMS might vary between one per cent and 2.5 per cent. A PMS might have a separate profit-sharing arrangement, wherein the fund management fee could also be zero in some cases. For instance, there could be an annual profit-sharing arrangement of 20 per cent above a certain threshold return of, say, 10 per cent. So, if the portfolio earns a profit of 20 per cent at the end of the year, the incremental 10 per cent return will have to be shared with the fund manager. “Since PMS works on profit-sharing, the share can be significant when the markets are doing well,” said Belapurkar.