Most PMS funds have concentrated portfolios. Such portfolios tend to fall harder than more diversified ones during a market downturn.
The number of PMS players has increased in recent years. But many of these fund managers have not witnessed such a brutal downturn before. That lack of experience is also telling now.
Some have fared better: The news is not all negative, though. Many good fund managers in this space have also managed to offer sound risk protection to their investors. Their portfolios have declined less than their respective benchmarks. The best-performing scheme, for instance, fell only 3 per cent in March (according to Pmsbazaar.com data).
Shift to quality: Fund managers who have built robust portfolios are confident about sailing through this downturn. “We pick up high-quality businesses that have the ability to generate cash flows, can compound their earnings over the years, and do not have corporate governance issues,” says Prateek Agrawal, business head & chief investment officer, ASK Investment Managers, which runs the Rs 8,696-crore India Entrepreneur Portfolio.
Investors in large-cap PMS schemes, especially those where the fund manager has also been value-conscious and has been unwilling to overpay for his purchases, also have less to worry about. “Large-caps have scale and balance-sheet advantage. They have weathered such economic downturns before and hence are better placed to handle these than their smaller peers. In fact, they tend to gain market share during such downturns,” says Shrey Loonker, fund manager, equity PMS, Motilal Oswal AMC. Loonker manages the large-cap oriented Motilal Oswal Value Strategy. Besides, a major reason for the fall in large-caps has been the massive pull-out of funds by foreign institutional investors (FIIs). “As and when the economy recovers and FIIs return, this category will be at the forefront of the recovery,” he says.
The pain, as stated earlier, is greatest within the mid- and small-cap space. Over a three-year period, the Nifty has been flat (-0.3 per cent), the Nifty Midcap 100 has fallen 10.4 per cent, and the Nifty Smallcap has declined 18.7 per cent.
In this space, too, fund managers with stronger portfolios will fare better. “In the mid- and small-cap space, more than 100 companies have delivered a compound annual return of 20 per cent or more in the past 10 years. You will not find many companies in the large-cap space that have delivered this kind of return. Your scheme should be invested in such outperformers,” says Madanagopal Ramu, fund manager, Sundaram Alternates. He manages the midcap-oriented Sundaram Emerging Leaders Fund. He applies filters such as sound return ratios, strong balance sheets, regular cash flows, and quality management. “If you are in a fund with this kind of a disciplined approach, you don’t have much to worry about,” he adds.
Time to return to basics: The latest market downturn is once again an opportunity for investors to check the portfolio they have built. First, of course, it needs to be diversified. “Look at your entire portfolio, including mutual funds. Make sure you have diversified across asset classes, market caps, and fund managers,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. If you have a predominantly mid- and small-cap-oriented portfolio, switch to large- and multi-cap-oriented schemes.
Investors should also check their scheme’s performance during this downturn. “Schemes with quality portfolios would have fallen less than their benchmarks and they would recover faster, too,” says Ankur Kapur, managing partner, Plutus Capital. If your scheme’s portfolio has fallen much more than the benchmark, you have a greater reason to worry and should consult your advisor. Kapur says that fund managers with a fundamentals-based, research-oriented approach will fare better than those who have a trading mentality and invest on the basis of news flow. While checking the scheme’s portfolio, watch out for smaller companies with high debt burden. Many such companies may not survive the downturn and will in turn damage the portfolio.
Higher churn in the portfolio in recent times is another worrying sign. “It reveals a lack of long-term orientation in the fund manager,” says Loonker.
Investors also need to reassess their risk appetite. “Many PMS schemes have the ability to generate a 25 per cent compound annual return over a five-seven-year horizon. But they could also see a 40 per cent drawdown in a given year. In this kind of environment, investors need to ask whether they want to be in this kind of a high-beta portfolio,” says Jay Shah, founder, OneTreeHill Wealth Partners. He also runs PMSkart.com.
Investors with a long-term horizon of 7-10 years can also use this opportunity to increase their equity allocation and benefit from attractive valuations. Old investors in PMS may, however, find it difficult to do so. “The regulator has hiked the minimum investment limit in PMS from Rs 25 lakh to Rs 50 lakh. Older investors who entered with Rs 25 lakh cap can continue. But if they wish to top-up, they need to find another Rs 25 lakh. This is proving difficult as most investors like to top-up with smaller amounts,” says Pallavarajan R, founder-director, Pmsbazaar.com. Investors who don’t have large surpluses may have no option but to top up through mutual funds.
The recent closure of IndiaNivesh PMS also holds lessons for retail investors. “Select PMS houses that have an asset under management of at least Rs 1,000 crore, as they are better positioned to meet their fixed costs and survive a downturn,” says Dhawan.