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Thursday, 9 May 2024

Rapid Rise of India's PMS Industry - vrk100 - 09May2024

Rapid Rise of India's PMS Industry

(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

India has witnessed rapid rise in the PMS industry in the past 10 years -- the industry's asset growth is almost five times during the period.

Firms offering Portfolio Management Services (PMS) provide tailored investment management services suitable to their clients. PMS caters to wealthy individuals and institutional investors (including foreign portfolio investors or FPIs).

1. PMS Money Managers

Some examples of entities offering PMS are:

360 One Asset Management, Marcellus Investment Managers, White Oak Capital Management, Ask Investment Managers, Enam Asset Management, Unifi Capital, Kama Capital Advisors, 3P Investment Managers, Quantum Advisors Pvt Ltd and others.

Take for instance, 3P Investment Managers which was founded in 2022. It's a boutique investment management firm. Its founder is Prashant Jain.

Prior to starting 3P IM he worked as a fund manager at HDFC Mutual Fund for about 18 years and he has a good track record as money manager at HDFC MF.

His firm 3P IM manages about Rs 9,300 crore of assets on behalf of nearly 470 families. The firm primarily focuses on investing clients' money in listed equities.

At the other hand, we have Ask Asset & Wealth Management which was founded more than 40 years ago and manages about Rs 83,000 crore of client assets. One could say this is India’s biggest money manager other than mutual funds and insurance firms.

It caters to various segments, like, listed equities, alternative investments, real estate, private equity and hedge funds.

One of their biggest segments is PMS in which Ask Investment Managers have assets of more than Rs 25,000 crore under management, with a client size of 15,700.

Mutual funds in India too have their own divisions for catering to PMS clients separate from their main mutual fund business. They too are hefty players in PMS.

2. Basics of PMS

A portfolio manager (PM) is a professional money manager who manages a portfolio of securities on behalf of clients for a fee as per a written contract.

Portfolio managers provide tailored investment services suitable to individual investors.

A portfolio manager basically manages money in two routes, namely, discretionary and non-discretionary basis.

In a discretionary portfolio, a portfolio manager enjoys full discretion with regard to management of funds as per client needs.

However, in case of a non-discretionary portfolio, a portfolio manager does not have any discretion to invest a client’s money – but the PM manages the funds as per the investment decisions of the client.

Most of the money under PMS industry in India is managed via discretionary route.

A portfolio manager has to obtain a registration from capital market regulator Securities and Exchange Board of India (SEBI) before offering PMS services.

But SEBI does not endorse the various investment strategies or investment approaches followed by portfolio managers. The PMS industry is regulated by SEBI.

A PMS cannot offer guaranteed or indicative returns to investors.

Minimum net worth of a portfolio manager is Rs 5 crore, as per SEBI.

Association of Portfolio Managers in India (APMI) is a PMS industry body, a kind of self-regulatory body for the PMS industry (like what AMFI India is to mutual funds). As per SEBI, all PMS entities have to send monthly performance reports to APMI.

3. Mutual Funds versus PMS

a) Fee structure:

PMS firms charge a fee from their clients. They have basically three options – fixed, profit-sharing (performance-based) and a combination of fixed and profit-sharing.

PMS firms typically charge a maximum fixed fee of up to 2.5 per cent of assets. PMS entities have different investment approaches and they follow a different fee structure for these strategies.

Some investment strategies attract profit-sharing based on the performance of the strategy. The profit-sharing fee may be up to 20 per cent of the return.

Another fee structure is a combination of fixed fee and profit-sharing. For instance, a PMS may typically charge 'two and twenty' fee structure as per the terms of the contract signed between the portfolio manager and the client.

Two and twenty means two per cent of the assets and 20 per cent of the profits, if any.

Expense ratios of mutual funds are much lower compared to PMS. Direct plans of mutual funds charge much lower expenses compared to their regular plans. Regular plans have the benefit of financial advice.

Investors who have financial knowledge invest in direct plans of mutual funds, avoiding the advisors and higher fees of regular plans.

b) Intense competition

Mutual funds, PMS and AIF compete among themselves for attracting investors' money. While mutual funds cater to all kinds of investors irrespective of their wealth status, PMS and AIF focus on a niche group of wealthy individuals, family offices and institutional investors.

For the PMS industry, the minimum investment limit is Rs 50 lakh, against Rs 1 crore for Alternative Investment Firms (AIFs). Suppose a client wants to invest with a PMS, the client has to bring in a minimum of Rs 50 lakh to be eligible for investing with the PMS.

Why do banks, mutual funds and other portfolio managers offer these services? Because PMS and AIF industry charge higher expense ratios from clients.

In case of mutual funds in India, an investor can invest with a minimum as low as Rs 500 and the expense ratio can be less than 1 per cent (in case of direct plans).

There is no lock-in period for the PMS money invested by clients. However, after the partial withdrawal of money, the value of a client's investment shall not fall below the minimum threshold for PMS (currently Rs 50 lakh).

Portfolio managers typically impose an exit load if an investor wants to withdraw money in a PMS strategy.

c) Capital gains tax

PMS firms incur capital gains taxes while trading securities on behalf of clients; unlike mutual funds which do not need to pay any capital gains taxes for securities sold by them while managing assets.

For instance, a PMS entity buys a listed stock for Rs 20 lakh and sells the stock for Rs 30 lakh in less than a year of investment. As the listed stock is sold within one year of investment, the PMS has to pay short-term capital gains tax of 15 per cent.

The short-term capital gain here is Rs 10 lakh (= 30 - 20) and the tax thereon is Rs 1.5 lakh (= 0.15 x Rs 10 lakh).

The capital gain after tax is Rs 8.5 lakh (= 10 - 1.5). The after-tax gain / profit is 42.5 per cent of investment.

Whereas, a mutual fund need not pay any capital gains tax, whether, short- or long-term. So, in the same example as above, the net gain in a mutual fund would be Rs 10 lakh or 50 per cent of investment (versus 42.5 per cent in a PMS).

One clarification here is: If an investor sells units of a mutual fund, the investor incurs capital gains taxes, either short- or long-term depending on the holding period of the investment.

d) Fund manager exits

Some mutual fund managers are leaving mutual funds and starting their own PMS firms. For example, Prashant Jain left HDFC MF and started his own PMS in 2022. Others include Pankaj Tibrewal (earlier with Kotak MF), Jinesh Gopani (formerly with Axis MF) and Sunil Singhania (left Nippon India MF).

Star mutual fund managers starting their own PMS firms is good for the growth of PMS, but this could act as a negative for mutual fund industry in the short and medium term before mutual funds could recoup their mojo.

e) Transparency

As far as fee structure and investment strategy are concerned, there is more transparency in mutual funds compared to PMS. The mutual fund industry has evolved over the past three decades since the establishment of SEBI. Its practices are well honed and fully appreciated by the investors.

Compared to mutual fund industry, PMS industry is in its infancy. It has a lot of catching up to do in terms of transparency.

4. Growth in Assets of PMS Industry

Table delineates the growth in assets of PMS from Mar2015 to now:

The assets under management (AUM) of PMS industry rose from Rs 7 lakh crore (Mar2015) to Rs 32.48 lakh crore (Feb2024), as per SEBI data -- this includes EPFO (Employees Provident Fund Organisation) and pension funds.

Excluding EPFO / PFs also, the growth of PMS industry is huge in the past decade.

In the same period, the number of clients increased from 47,000 to 1,54,000; while number of portfolio managers doubled from 200 to almost 400.

5. Reasons for the growth

A lot of wealth creation has happened in India since the 1991 economic reforms unleashed by Government of India. The wealth creation has contributed to the growth of not only PMS industry, but also mutual funds, insurance companies and related segments of the financial industry.

The personal wealth of promoters of Indian listed companies has grown enormously in the past 10 years, along with the rise of Indian stock market.

Many entrepreneurs have created their own family offices and PMS industry caters to their investment management needs also.

In recent years, start-up ecosystem created wealth for young entrepreneurs. They are trying out new investment avenues for their surplus money. India has seen multi-fold growth in number of Unicorns.

A Unicorn is a privately held startup company with a market value of at least USD 1 billion.

The number of HNIs and UHNIs has been growing in India. The tremendous growth of information technology sector has created wealth for the entrepreneurs and top professionals.

According to Bloomberg, India has the fourth highest number of ultra high net worth individuals (UNHIs) numbering 5,480 in India. UNHIs are individuals with investable assets of at least USD 50 million.

HNIs are high net worth individuals with minimum investable assets of USD 1 million.

PMS money managers have more flexibility in terms of asset classes and investment approaches when compared to mutual fund industry. Investors now are willing to try the new investment strategies of the PMS industry away from the traditional mutual funds.

According to Forbes, India's top cricketer Virat Kohli earns more than USD 20 million (almost Rs 170 crore) annually from endorsements, like, MRF, Puma and Audi.

Where does this money go? Kohli might invest some of his earnings in his own business ventures and invest some part of the money in financial assets, like a fund offered by a PMS.

These are the kinds of opportunities available to PMS firms to pitch their products or funds.

And then there is the marketing effort on the part of the PMS industry. India's stock market capitalisation has swelled by five times from Rs 80 lakh crore in May2014 to Rs 400 lakh crore now (as per data from BSE Limited).

The growth of Indian stock market has provided the opportunity for PMS managers to improve their return performance in recent years leading to better marketing of their products and offerings to wealthy clients.

6. Should one go for PMS?

Are the returns of equity PMS plans better than equity mutual funds?

As mid- and small-cap stocks have done well in the past three years, small boutique PMS firms with smaller asset sizes are delivering superior returns compared to returns of big PMS firms and equity mutual funds.

These small-sized PMS firms with higher flexibility tend to invest in mid- and small-cap stocks and in some cases they will not shy away from investing in micro-cap stocks -- thus generating decent returns in recent years.

If you compare the returns across different timelines and time periods, the performance record will definitely be different, because at different times different investment industries do well.

Some entities, like, PMS Bazaar and PMS AIF World provide data on performance of PMS industry. Prospective investors can check the return data on their websites.

Different products and / or investment approaches suit different investors. There is no one-size-fits-all solution in investing as is the case with most aspects of life.

Investing is all about one's personal situation, return expectations, risk tolerance, investment goals and asset allocation. Investors have plenty of choices for their investment needs.

PMS products might be suitable only to a select few / wealthy investors who know the intricacies of PMS industry and who appreciate the risks involved in investing them.

A majority of investor community is better off with simple products. The more complex a financial product, the higher the chances of losing money.

7. Summary

Despite the growth of mutual fund and PMS industries in recent years, Indians have not shed their affinity toward real estate, land assets and gold.

According to a report from Aditya Birla Sun Life Mutual Fund, two-thirds of household assets in India are with real estate / property (50.8 per cent) and gold (15.5 per cent) combined as of Mar2023. But the share of household assets in equities is a mere 4.7 per cent.

In the US, equities constitute 35 per cent of household assets (2020 figure).

India is still a nation of physical assets despite the increased pace of financialisation in India. Indians relish 'touch and feel' of their physical assets. Occasionally, we come across pictures of politicians and the wealthy enjoying a siesta on their cash pile.

Of course, this is seen as an opportunity by the financial industry and they are trying hard to convince investors to move some of their physical assets to financial assets -- a salivating prospect for the financial services industry in the next decade.

- - -

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References and additional data:

Urban landscape - Hong Kong residential high rises

SEBI (Portfolio Managers) Regulations, 2020

SEBI archive on PMS

SEBI data Feb2024

Individual PMS monthly report with assets

SEBI FAQs 08Oct2020 on PMS (steps for TWRR calculation)

SEBI circular monthly report to APMI

Tweet 16Jan2024 on UHNIs

APMI or Association of Portfolio Managers in India

PMS AIF World compare PMS performance

Twitter AIF & PMS Experts

Twitter PMS Bazaar

Twitter Neil Borate

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Read more:

Blog of Blogs Theme-wise

NSE Indices Calendar Year Returns: 2006 to 2024

How to Buy Nifty Midcap Index 03May2024

NSE Emerging Indices Comparison 31Mar2024

India Passive Funds and Their Asset Size 29Apr2024

Guide to Tracking Error of Mutual Funds 27Apr2024

Mutual Fund Asset Class Returns 31Mar2024

JP Morgan Guide to Markets 31Mar2024

Gilt funds worth considering

Global Market Data 31Mar2024

Understanding Real Sensex and Currency Debasement

Select Gilt Funds Performance

SEBI Categorization and Rationalization of Mutual Funds

AMFI List of Market Cap: Categorization of Large-, Mid- and Small-Cap Stocks

Stocks and Peer Comparison by Industry

India: Prospects and Challenges

Buyback Offers and Weblinks

Negative Impact of Debt Mutual Fund Tax Changes

Weblinks and Investing

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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.

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Sunday, 5 May 2024

NSE Indices Calendar Year Returns: 2006 to 2024 - vrk100 - 05May2024

NSE Indices Calendar Year Returns: 2006 to 2024

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While comparing stocks or equity indices, it's better to compare performance over long periods of time, rather than for short periods of time.

With passive management of equity funds getting decent traction in India, let us examine how different Nifty indices have performed over the years.

This is a follow-up blog to recent articles penned by the author in the past one week.

You can check them here:

How to Buy Nifty Midcap Index 03May2024

NSE Emerging Indices Comparison 31Mar2024

India Passive Funds and Their Asset Size 29Apr2024

As mentioned in a previous blog, in the category of 'Broad Market Indices,' some key indices are:

a) Nifty 50

b) Nifty Next 50

c) Nifty 100

d) Nifty Midcap 150

e) Nifty Smallcap 250

As you may be knowing, the structure of Nifty Broad Market Indices is given below for your ready reference:

All the above five indices flow from Nifty 500 Index.

2. Nifty Indices Calendar Year Returns: 2006 to 2024

While trailing returns of the Nifty Indices (NSE Indices) are readily available (Nifty Indices Return Profile), the same is not the case with calendar year returns.

Calendar year returns too are important to understand which index has done the best in a calendar year and which fund is consistently outperforming or underperforming other indices.

Additionally, rolling returns too are important in understanding the underperformance or outperformance of indices over long periods of times. We shall discuss the same in a later article.

Table 1: Nifty Indices Calendar Year Returns: 2006 to 2024:

2024 returns are up to 31Mar2024.

(please click on the image to view better)

If a particular index has done well in a single year, the trailing returns will be overwhelmingly influenced by the returns of the latest year and could distort the 3-year, 5-year and 10-year trailing returns.

Hence, it's better to complement the trailing returns with calendar year or annual returns and rolling returns.

While Nifty Smallcap 250 index falls heavily during market downturns, it tends to rally strongly during bull markets. With small- and mid-cap indices, investors need to brace for stomach-churning volatility.

As we're human beings, we tend to sell at times of maximum pessimism and tend to buy during times of maximum euphoria.

Behaviourally, we are unable to control our emotions of greed and fear.

With large-cap indices, investors may expect lower returns overall but they come with much lower volatility as compared to mid- and small-cap indices.

So, everything boils down to your returns expectations, risk appetite, your personal situation and overall asset allocation needs.

All the data in table 1 are based on TRI or total return index (not price-based).

The base date for both Nifty Midcap 150 and Nifty Smallcap 250 indices is 01Apr2005. Hence, comparison is possible only from calendar year 2006 onwards.

The same data as in table 1 above is presented in table 4 below, with green cells showing the best returns in a year while orange cells showing the worst returns in the same year. The results are self-explicit.

3. Nifty Indices Calendar Year Drawdowns: 2006 to 2023

Return data do not give a complete picture of the risks involved in investments. Hence, we need to check the drawdown of indices in a given year.

In the context of investments, drawdown means how much a particular asset loses from the top of an investment value to its bottom.

For instance, in calendar year 2022, S&P 500 index dropped 25 per cent from its peak in Jan2022 to its trough in Oct2022, though it recovered later and closed with a loss of around 19 per cent for 2022.

The largest intra-year drop of 25 per cent is the maximum drawdown for S&P 500 in 2022. Simply put, how much an asset loses from its peak to trough in a year is known as drawdown.

Table 2: Nifty Indices Calendar Year Drawdowns: 2006 to 2023:

While the data in table 1 are presented for five indices, data in table 2 are for three indices only, namely, Nifty 50 TRI, Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI.

As shown in table 2, Nifty Smallcap 250 has provided the worst drawdown, of the three indices, for 15 of the 18 years. It has provided the least drawdown of the three for one year (that is, 2021).

From a risk perspective, Nifty Smallcap 250 entails higher risk compared to Nifty 50 and Nifty Midcap 150. As such, the chances of losing money and the magnitude of such a loss are higher in case of Nifty Smallcap 250 -- though it tends to recover with bigger gains when market rebounds.

While Nifty Smallcap 250 has provided worst drawdown in 15 out of 18 years, Nifty 50 suffered worst drawdown only one year (2015) out of 18 years data analysed here. So, the chances of losing money and the magnitude of loss are lower for Nifty 50.

Nifty 50 index has enjoyed the least drawdown for 15 years, which is a positive factor for the index.

4. Nifty Indices Trailing Returns:

Table 3: Nifty Indices Trailing Returns Data for up to 10-years:

Data points are often funny. As on date, there is a wide gap between one-year returns of Nifty 50 and other indices, like, Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250.

This has overly influenced the trailing returns of these indices -- resulting in the underperformance of Nifty 50 for all the periods, 1-year, 3-year, 5-year and 10-year, not to speak of 1-month and 3-month.

If you check the trailing return data of these indices as on 31Dec2019 and 31Dec2020, you will find completely opposite results.

As mid- and small-cap indices have done exceedingly well in the past three years (table 1 above), the trailing returns are somewhat distorted by the latest numbers.

As you know, there is no guarantee the mid- and small-cap indices would continue to do well in future too.

5. Summary

It's not a good idea to depend on a few metrics while making investment decisions. It's always better to have a comprehensive view factoring in various future scenarios, while anlaysing the past data for longer periods of time as shown above.

We should not see things in isolation. We have found, for example, Nifty 50 suffers the least drawdown (table 2). While this is positive, it comes with the attended downside of lower returns.

Investors need to decide on which side of the spectrum they are. Are you in the low risk tolerance camp or are you in the high return expectations camp?