The bloodbath in the markets
has come as a body blow for PMS (portfolio management services) players, which were already reeling from the impact of recent regulatory changes.
A sizeable number of PMS schemes lean towards mid- and small-caps in their portfolio and run concentrated portfolios of 15-20 stocks. A concentrated portfolio increases the potential of higher returns but can exacerbate the fall, making exit difficult for investors.
“Unless strategies are well-diversified and comprise quality stocks, the schemes are likely to take a greater hit. If the index has fallen 25 per cent in the past few sessions, PMS schemes would have fallen 20-30 per cent more,” said Daniel GM, founder, PMS Bazaar.
The NSE Midcap 100 and the NSE Smallcap 100 indices have fallen 25 per cent and 30 per cent, respectively, this month to their lowest levels. The midcap index is currently at a four-year low, while the smallcap index has hit a six-year low.
This is the second time in two years that PMS players have had to take a hard knock to their portfolios — mid- and small-cap names had seen a significant correction in early 2018 as well. According to experts, volatility in PMS schemes can be higher than that in mutual fund schemes in times like these. “While large caps have seen a significant correction, PMS schemes not holding quality names could take a greater hit. The fall could also rattle new investors in PMS schemes who started putting in money in the last year or two,” said Ashish Shanker, head (investments), Motilal Oswal Private Wealth.
PMS assets have doubled in the past five years to Rs 18 trillion as of January 31, 2020. A large portion of this money is in discretionary schemes, wherein the portfolio manager manages the fund of each client based on his/her needs.
“These are extraordinary times and requires extraordinary caution. The aftereffects of the coronavirus pandemic may throw the earnings potential of companies for the next three quarters out of whack. So, investors should stick with portfolio managers who have robust processes and risk framework in place,” said Siddhartha Rastogi, managing director, Ambit Asset Management.
He said investors ought to gravitate towards unleveraged businesses which have dominant market share.
The regulator recently increased the minimum ticket size to Rs 50 lakh, from Rs 25 lakh earlier. It had capped fees and loads that can be charged to clients, as well as commission paid to distributors.
The number of new accounts being created has already fallen by more than 50 per cent after these changes came into effect, said industry players. “The reduction in commissions and adverse market conditions will make it difficult to sell PMS among high net-worth individuals, which is why we may see consolidation among PMS players in the coming months,” said Shanker.
“A lot of portfolio managers who grew in the last decade may become history and new ones who bring technology and institutional intelligence will thrive,” said Rastogi.
In 2007, several PMS schemes compromised on quality to generate alpha by investing in mid- and small-cap stocks. This caused the PMS portfolios to go into a tailspin after the market crashed in 2008 and it became difficult for portfolio managers to exit some of these stocks because of poor liquidity and the quantum of holding. A lot of PMS outfits went bust between 2008 and 2013 after seeing years of continuous net outflows.
This upheaval had forced Sebi to tighten PMS regulations. In 2008, it banned the pooling of PMS assets, wherein fund managers pooled investments from clients and invest on behalf of the whole group. In 2010, the regulator mandated that profit-sharing or performance-related fees should be charged based on a ‘high watermark principle’ over the life of the investment. This meant if the portfolio value declined and then recovered, the manager did not earn fees until all the losses had been made up. Ticket sizes were increased from Rs 5 lakh to Rs 25 lakh.