August 4, 2016

6 Parameters for Selecting PMS Products for Your Clients

Sadique Neelgund

6 Parameters for Selecting PMS Products for Your Clients


PMS is supposed to be premium product with minimum investment of ₹25 lacs and it is supposed to be customized as well. However, there has always been a greater challenge, the performance of PMS Products is not in public domain.

Here, I have tried to place few of my thoughts on what could be topmost parameters to analyze a PMS product and accordingly recommend to investors. While I have tried to capture broader spectrum of parameters extensively in analyzing PMS schemes, this may not be an exhaustive list.

1. Performance

Invariably, we would have come across statement that “Past performance is not necessarily indicative of future results”, while this could be true, but assessing past performance helps us in challenging claims made by manufacturer of a product.

First and foremost, since all competitive PMS schemes do not provide data in standard format, it becomes really difficult to assess all PMS schemes on same parameter. Accordingly, more often than not, PMS schemes are compared with benchmark – Nifty 50 or BSE 100 or BSE 500. In fact, few of PMS houses publish data of their model portfolios. The same does not encompass portfolios of all clients. What is more relevant is net weighted performance of all clients, which are managed by PMS house within same mandate or same product category (whatever brand name they call with).

So, before recommending, it is better to ask for actual all clients weighted average performance, rather than just model portfolio performance. There could be counter argument from PMS house that few investors might have opted for variable fees and few clients might have opted for fixed fees. When any investor has an option to invest into Equity MFs as well as Equity PMS (one to one comparison), to make apple to apple comparison, one needs to opt for fixed charges option of PMS and compare that with net of fees performance of Equity MF return, over same time frame.

Like in Equity MFs, here as well, one needs to look at risk adjusted return (Sharpe ratio or Treynor ratio) and consistency in return over same time frame. It would also be nice to see cash calls being taken by PMS house, as it helps in positioning product as absolute or relative return product. In fact, 2008 could be good reference check as rarely any PMS house had created any cash call.

An intelligent way of assessing consistency in performance could be breaking down out-performance over Nifty in terms of % number of observations over longer period of time and whether overall out-performance is justified by more number of observations of out-performance or is it based on narrow number of observations but larger in value, which is driving out-performance.

Also, performance could be once again broken down into how it has fared during down-move of the market and up-move of the market. It will throw interesting inference about wrong cash calls being taken or selection of stocks could be high beta or low beta.

2. People – Organizational structure

Credibility of people behind PMS product becomes an important tool by distributors for selling such product. Before selling PMS product it makes sense to assess this aspect very much in detail. For the same, one can ask for references of other distributors as well as references of existing customers. One needs to ask very pointed question to PMS house before selling any such product.

Personalised investment solutions for Ultra HNIs could be an added advantage for PMS over MFs.

3. Processes

Research processes, trade execution, portfolio accounting and data dissemination are important processes to be reviewed here.

Few of critical points to assess here would be whether there is enough universe for PMS house to construct portfolio from time to time, without compromising on quality and liquidity and return in the PMS portfolio. PMS run a more concentrated portfolio of 15-25 stocks compared with equity schemes of MFs, which generally has 50-70 stocks. A concentrated portfolio increases the potential of higher returns but adds to the risks as well.

Over-arching Investment style (Growth / Value / GARP – Growth at reasonable price), which encompasses investment strategy determines risk and return for investors. Accordingly, research process – stock selection and allocation are important components in process of successful investing.  Fairness in trade execution, timely portfolio reporting, transparency across all PMS activities give comfort to the investors.

4. Theme of product categorization – strategy

Overall strategy or theme underlying the construct of portfolio should be in sync with investment strategy of distribution house. Here, there is a scope of creating some differentiator by PMS house and create concentrated portfolio vs. over-diversified portfolio of various MF schemes.

Also, product suitability with individual clients investment mandate should be considered before recommending. For some reason, if an investor wants an exit from a particular PMS product, there could be some decent exit load. This exit loads give flexibility to build portfolio of good quality and deep value portfolio with longer term horizon. So, theme / investment strategy, investment horizon and exit load should match with the investors expectations.

5. Regulatory aspects

While assessing integrity of PMS house, it makes sense to assess how stringent is insider trading rules.

Few of PMS schemes are run by stock broking houses. Its an additional business for them, its not core business. There is possibility of conflict of interest. In fact, measure of turnover ratio could be good check point before selecting a particular PMS scheme.

6. Fees structure

An investor has an option to invest in Equity MFs or PMS. Post sharing of performance fees, if net return to investor is lower than return through equity mutual fund, then the PMS product loses its viability. So more often than not, investor gets into fixed fees based PMS product rather than variable fees based PMS product.

As mentioned above, these are just few of parameters and not exhaustive list on which PMS products should be reviewed before recommending to investors. While PMS products give better commissions to distributors, mis-fit of such products in clients portfolio may result into allegations of mis-selling of products besides loosing out trust among investors. So be diligent on above parameters before recommending.

Happy investing!

Authored by,

Jignesh Shah

Founder & Owner
Capital Advisors

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