Portfolio managers have seen a fourth of their clients drop off over the course of the previous three years amid an increase in ticket size and sub-par returns.
Portfolio management services (PMS) providers had 161,465 clients in November 2019. That fell 25% to 120,978 as of November 2022, data from a monthly regulatory bulletin showed. However, assets under management grew nearly 50% to Rs 26.28 trillion during the same period.
“The hike in ticket size to Rs 50 lakh has impacted the number of new client additions, which is why the overall client count has reduced,” said Daniel GM, founder-director at PMS Bazaar, a data tracker.
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The PMS segment invests money on behalf of wealthy individuals. The minimum investment that regulations allow was doubled to Rs 50 lakh from January 2020. Sebi increased the amount as part of a larger tightening of PMS regulations, which included raising net worth requirements and compliance standards.
“In 2018-19, a number of wealthy individuals migrated from mutual funds to PMS in search of alpha. Many of the PMS schemes, barring the top performing ones, have not delivered alpha,” said Feroze Azeez, deputy CEO, Anand Rathi Wealth Management.
This means that a typical investor with four-six schemes in his portfolio would have not been able to beat Nifty returns in the last three years, he said. The PMS segment has, however, been marketed by depicting the performance of the best schemes.
Largecap PMS schemes have given average returns of 7.25% and 14.9% for one-year and three-year periods, underperforming Nifty 50 with returns of 10.4% and 15.8%, respectively. Similarly, multi-cap schemes have also underperformed Nifty 500 for these periods. Smallcaps have underperformed in the three-year period. Midcap PMS schemes are the only ones to have bucked the trend and outperformed the benchmark (23%) in the three-year period with average returns of 25.7%.
“Some of the schemes have not done too well and clients may not have had a compelling reason to stick around,” said Kirtan Shah, founder and CEO, Credence Wealth Advisors.
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PMSs have been mandated to furnish their performance data net of all fees and expenses. This has to be done on a consolidated basis after aggregating the performance of all the client portfolios for each strategy.
Investors have also become wary of giving access to their demat accounts in discretionary portfolios after a few front-running cases came to light in recent past, according to Azeez.
Front-running came into the spotlight this year after the Axis Mutual Fund episode involving a dealer. The market regulator this month barred two individuals and impounded unlawful gain of Rs 1.68 crore made by them from indulging in front-running trades. In June, it passed final orders in matters related to front-running while banning former dealers of IIFL Group and Fidelity Group.
PMS investors are also at a little disadvantage vis-a-vis mutual funds on the taxation and fees front. Investors have to pay an additional tax of 0.6-0.8% on the PMS schemes vis a vis equity MFs since all transactions happen on their respective trading accounts. In certain cases, they have to shell out profit share to the manager if returns are over a certain hurdle rate, said Azeez.
Assets of PMS and alternative investment funds are set to grow 2.5 times in the next three years to Rs 30 trillion, according to estimates by PMS Bazaar. Excellent disclosures, a supportive regulatory environment and robust returns from newer investment avenues may help these two asset classes take off, according to the data tracker.