Investing: Paras Adenwala

I had invested in a portfolio management service (PMS) offered by a brokerage company. Recently, I got a letter from the company informing about changes in the fee structure, based on the ‘high watermarking’ principle. How will it work? Will it affect my investments?
A high watermarking principle is often applied to the performance fees’ calculation. It means the manager receives performance fees at the end of the year, only on increases in the net asset value (NAV) of the fund, in excess of the highest NAV it has previously achieved. For example, if a fund was launched at an NAV of Rs 100 a unit, which rose to Rs 130 in its first year, a performance fee would be payable on the Rs 30 return for each unit. Next year, if NAV drops to Rs 110, no fee would be payable. And, if in the third year, NAV again rose to Rs 140, a performance fee would be payable only on the Rs 10 profit from Rs 130 (the high watermark) to Rs 140, rather than on the full return during that year from Rs 110 to Rs 140.

High watermarks are intended to link the manager’s interests more closely to those of investors, and to reduce the incentive for managers to seek volatile trades.

Real estate stocks were hit considerably after the housing loan scam. But a few sessions later, most bounced back. Does it indicate a good financial health of the sector? Should one invest in scam-tainted sectors such as realty, banking and telecommunication?
It would be unwise to paint all companies, in these sectors, with the same brush. There are several companies within these that are well managed. Real estate companies with low leveraging and better pricing power, should be considered for investment. Investment in the banking sector, too, should give good returns over the longer term.

I am 45 years. My portfolio has three equity-diversified funds, two thematic funds (infrastructure and banking) and two balanced funds. I have a lump sum of Rs 4 lakh to invest, and I want to explore products such as fund of funds (FoFs) or feeder funds. What would you advise?
FoFs or feeder funds could be used to invest in markets or asset classes or instruments which cannot be invested in directly. There are several FoFs available for investors that invest in international realty funds, gold funds, country funds, etc. These could certainly be considered for optimal diversification of the portfolio.

The writer is the managing director & principal portfolio manager, Capital Portfolio Advisors. Send your queries to yourmoney@bsmail.in