5 Major Things to look for
before selecting PMS - Portfolio management service..!
by Mr. Brijesh Ved, BNP Paribas AMC.
In today’s day and
age, the discerning consumer is not easily swayed by off the shelf products and
is more inclined to put his money on companies that engage in a higher level of
customization and engagement.
Similarly, in the
financial world, as income and subsequent wealth levels are burgeoning,
sophisticated investors are demanding professional advice that is customized to
reflect more than just their risk/return objectives. The market today is
teeming with investment avenues which can be likened to off the shelf products.
Portfolio management services (PMS) is a service offered by professional money
managers to the more discerning investors, which can potentially be tailored to
meet specific investment objectives.
In the last decade,
PMS has evolved to become one of the top investments in the Indian capital
markets. As per the December, 2015 bulletin of the Securities Exchange Board of
India (SEBI), total assets
under management (AUM) of the PMS industry had increased by 1.6 percent to INR
9,94,588 crore in November 2015 from INR 9,94,588 crore in October 2015. As on
November 30, 2015, AUM of discretionary PMS constituted 76.1 percent of the
total AUM of PMS followed by advisory PMS (18.4 percent) and non-discretionary
PMS (5.5 percent).
As per SEBI
guidelines, only those entities that are registered with the regulator for
providing PMS can offer said services to the client. Additionally, SEBI has
also provided the minimum investment required to open a PMS account should be
INR 25 lakh. Portfolio management services are offered by banks, brokerages,
asset management companies, and independent investment managers.
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| Brijesh Ved, Senior Portfolio Manager - BNP Paribas AMC. |
1. Getting down to
brass-tacks..!
PMS providers can
offer both standardized products as well as investments that are tailor made to
adhere to clients goals. The investor and the PMS provider usually enter into a
legally binding agreement which specifies the nature of the service provided,
the goals of the investor, risk profile of the investor, investment strategy
and other details.
The client can then
invest the minimum stipulated amount either through cheque / or money transfer
or by transferring existing shares held by the client to the PMS account.
The portfolio
manager then creates a portfolio of stocks based on the client’s investment
objective, which is held in a demat account opened in the name of the client /
or investor and can be transferred back to him in the event that he decides to
close the PMS account.
2. Types of PMS..!
There are broadly
three kinds of PMS which basically differ in the degree of participation in the
investment process by the client.
·Discretionary PMS..!
In a
discretionary PMS, the client gives the portfolio manager the authority to
undertake investment/trading decisions on his behalf.
·In this case the
investment is at the discretion of the portfolio manager and the client has no
involvement in the investment process. The client can however, give the
investment manager a list of negative stocks or industries which are to be
avoided.
·Non-Discretionary
PMS..!: under this service the primary role of the manager is to act as an
investment counsellor to the client. The portfolio manager only provides the
client with investment ideas while the choice as well as the timing of the
investment rests solely with the client. However, the actual execution of the
trade is done by the portfolio manager.
·Advisory PMS..!: in an advisory
PMS, an investment manager only provides the client with ideas, while the
decision to trade as well as the actual trade can be executed by the client.
3. Fee structure
Generally, the fee
structure for portfolio management services is flexible in nature and gives the
client the advantage of choosing between a fixed management fee and/or a
performance linked fee structure.
The method of
charging is however decided at the inception and documented in the agreement.
The different types of charges are elucidated below:
·Entry load: PMS products have
an option of charging the investor an entry load at the time of purchasing the
PMS.
·Fixed management
fees: in this
type of structure the portfolio manager levies a fixed charge which may vary
between different products. It is usually charged on a quarterly basis and can
also be charged annually.
·Profit sharing /
performance linked charges: in this type of structure, along with a fixed fee, the
portfolio manager charges a certain amount/percentage of profits over and above
the stipulated fund return.
·The fund manager can
claim a certain percentage of profit over and above a pre-determined hurdle
rate. In profit sharing PMS the percentage of fixed fee is usually lower.
In addition to the
above, all charges linked to equity investments like custodian fees, demat
account opening charges and transaction brokerage is chargeable to the client.
4. Advantage of PMS
Availing of
portfolio management services is the optimal way by which investors investment
decisions which are designed to meet their wealth creation goals with the help
of expert advise & assistance.
Other advantages are
as follows:
·Access to innovative
and sophisticated strategies which can provide the client with an opportunity
to choose from an array of investment opportunities.
·
·Higher degree of
customization usually takes into consideration individual investment needs and
goals, with the investment philosophy to help clearly reflect the risk profile
of the investor.
·
·Ability to take
focused positions in both stocks and sectors has the added advantage of being
beneficial once the true potential of the idea is realised over a period of
time.
·
·Transparency and
higher level of information: most PMS providers are technologically savvy and
provide the client with real time access to portfolio positions and value. PMS
managers are directly accountable to the client, who can seek clarifications at
will.
5. Choosing the
right PMS..!
Choosing the right
PMS provider is essential to maintaining long term portfolio discipline and in meeting
an individual’s financial goals. It should be a logical decision based on an
array of information relating to risk adjusted performance of the portfolio
manager, quality and experience of the portfolio manager, fee structure and
transparency in reporting and communication.
·Risk adjusted return..!
While choosing a PMS provider, it is important to start with by evaluating
the portfolio managers past performance relative to a benchmark. As an investor
one can take it one step further and compare various PMS providers who have a
similar investment mandate.
While there is no guarantee that historical performance can or will be
replicated, it is a good indicator of the managers’ skills and discipline. In
addition to returns, it is also imperative to evaluate the risk adjusted return
of the provider. Various tools like the sharp ratio and portfolio beta can be
employed to assess the same.
·Quality of Portfolio manager ..!
Given the fiduciary nature of the relationship, an ideal portfolio manager would
be someone with whom one can maintain a collaborative relationship. One can
start with examining the quality and discipline of the PMS providers and look
at factors such as experience and qualifications of both the portfolio manager
and the support staff.
·Fee structure..!
Understand the type of fee structure which would be best suited to you as
an investor and would justify the quality of services provided by the PMS team.
·Transparency ..!
The investment philosophy and decision making process should be clearly
outlined in the agreement.
Additionally, the PMS providers should maintain a high degree of
transparency with timely and accurate reporting.
To sum it up, a PMS
can provide investors with a transparent, highly skilled and customized
platform for investments, which are designed to help in long term wealth
creation and help enhance risk adjusted returns.
About the author
Mr. Brijesh Ved – Senior Portfolio Manager,
BNP Paribas AMC.
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