Returns from riches

Rajiv Bhanot is an entrepreneur with a feel for equity. Starting a decade ago, he has built a portfolio of over Rs 3 crore. Last year, with a booming stock market, he handed it over to a large brokerage firm, which had set up a portfolio management scheme (PMS) desk.

"With no time and the Indian equity markets on fire, I realised I needed professional help," he says.

Today, his portfolio manager is making the everyday decisions but Bhanot is happy that he has made more money than if he had handled it himself.

Bhanot represents a growing breed of investors with huge investible funds. And it is these high net worth individuals (HNIs) that brokerage firms and mutual funds and any number of independent consultants are making a beeline for.

From setting up PMS desks to wealth management cells, they all want a piece of the estimated Rs 3,500 crore portfolio management service market in India which, industry experts say is galloping ahead at roughly 30 per cent annually.

According to the industry watchdog "" the Securities and Exchange Board of India (Sebi) "" in fiscal 2002, there were only 47 firms in the portfolio management business and that climbed to 54 in the next year. In the first few months of this fiscal, the total tally has already zoomed to 78.

The early birds to set up PMS cells were Kotak Securities, Enam Securities, Motilal Oswal Securities, Parag Parekh Financial Advisory Services, ASK Raymond James and Prudential ICICI. Together, industry experts say that they account for around 85 per cent of the market.

More recently, other asset management companies (AMC) have added portfolio management to their core mutual fund business. AMCs like Birla Sun Life and Pru ICICI have been there for a while. The last one year had fresh entrants like HDFC, Templeton, UTI and DSP Merrill Lynch AMC. Waiting in the wings are SBI AMC, Reliance AMC, Principal AMC and HSBC AMC.

Says Kotak Securities' vice-president and head of portfolio management, Shashank Khade, "For us, it is widening the product basket and catering to the growing need of the financial investor. Leveraging on the existing infrastructure makes good business sense for everybody."

Adds Bharat Shah, CEO & managing partner at ASK Raymond James Wealth Management & Portfolio Services, "It has gained ground as it focuses on absolute returns and not on relative returns. Investment horizons are longer and you don't try to play short term trends."

But what exactly is PMS? Portfolio managers create and manage a unique portfolio of securities depending on the risk-reward profile of each individual client.

While it is completely discretionary, unlike mutual funds, PMS is a customised offering. The ticket sizes for many of the players varies from Rs 25 lakh stretching all the way to Rs 1 crore.

"For a small management fee, investors get the benefit of uniquely-tailored professional advice," says a fund manager.

Brokerage houses say portfolio management has caught on big time in the last one year. For Motilal Oswal, which set up its six-member PMS desk in March 2003, its HNI business, which includes the non-discretionary advisory services and the discretionary portfolio management, accounts for 30 per cent of its revenues. Of this PMS alone is 20 per cent and expected to grow 100 per cent over the next two to three years.

Or look at Kotak. According to Khade, Kotak's minimum ticket size is Rs 1 crore. It has about 400 customers and hopes to double its assets under management (AUM) in the next three years. "The systems are in place to service a growing clientele," he adds.

Vikas Sachdeva, head, marketing, Birla Sun Life AMC says the company's minimum ticket size is Rs 2.5 crore. At IL&FS, the minimum ticket size is Rs 5 lakh.

At the moment, the portfolio management market is barely 10 per cent of the mutual fund industry pegged at around Rs 30,000 crore of assets under management (AUM). But the players claim, that it is the hottest thing going.

Says Jiten Doshi, director at Enam AMC, "The markets are getting very efficient which calls for the services of a professional fund manager to manage investments."

Why are players betting big on this segment? "It is a low hanging fruit which has been there for plucking. You don't really have to invest a lot in it for results," says a broker.

That's not the entire picture. There are many factors that have led to the growth of the portfolio management business. For one, the equity markets have been on fire for more than a year.

Despite occasional blips, the 30-scrip strong BSE Index has been hovering in the 5,500 range, on the back of foreign fund inflows and an overall strong corporate performance.

But the single largest trigger for portfolio management, say market experts is the growing population of HNIs with huge investible incomes. Consider the household income survey conducted by National Council for Applied Economic Research (NCAER).

In 2001-02, the number of 'crorepati households' (with an annual income above Rs 1 crore) touched 20,000, a 26 per cent rise since 1995-96. This is expected to cross 1,40,000 by 2010.

Other segments too are growing rapidly. Two years ago, there were 40,000 households in the Rs 50 lakh to Rs 1 crore income bracket. By the end of next fiscal, it is likely to touch 100,000 and 2,50,000 by the end of the decade.

And the middle class with an annual earning power of Rs 2 lakh to Rs 10 lakh, is expected to rise from 2.8 per cent to a 12.8 per cent. What's more, two-thirds of the middle class is in rural areas.

Also, with diminishing interest rates, investment avenues are few and far between. And, with the short term capital gains tax shrinking from 30 per cent to 10 per cent in Budget 2004, and the withdrawal of long term capital gains tax, investors have been flocking to the equity markets.

Tapping this interest, Sebi has also made it easier for entities to enter the portfolio management market. Shahzad Madon, head of PMS at Pru ICICI AMC attributes the spurt in PMS to the change in regulations.

"Today, there are no lock-in periods, we have been given permission to charge a performance-based fee and use of derivatives were a huge incentive for the portfolio management industry."

That's why, any number of consultants and even banks have jumped into the PMS advisory business, as opposed to offering schemes. PMS advisory, say players covers the entire gamut of instruments like debt, equity and securities, while the PMS schemes focus largely on equities.

Says Kotak's Khade, "The non-discretionary or the advisory model is not as scaleable as the discretionary PMS. PMS is a very transparent product which is a huge advantage in a bearish market as the investor knows what the fund manager is doing unlike a mutual fund scheme."

That's why, today, PMS players offer both standard as well as customised products. While they are loath to divulge details of their schemes saying that with cut-throat competition, they will be frittering away their unique selling proposition, the customised offerings are aimed at really big ticket investors.

Today, Parag Parekh Services has three standardised products. IL&FS Investmart has six, Kotak has four and Pru ICICI has six. Sharad Shukla, head, investment advisory services, IL&FS Investmart says, that many retail investors are unclear on which schemes to invest in a mutual fund, and their new PMS offerings try and correct this.

It has recently launched a new product for investing in mutual funds with a minimum ticket size of Rs 5 lakh. "We are totally focused on performance and hence do not charge any minimum flat fee in any of our products," he adds.

Besides, the PMS revenue model is also very attractive for the operators. With players offering both structured and customised products, the minimum ticket size can range from Rs 5 lakh for structured products to Rs 1 crore and more for a customised scheme.

For this, fund managers offer the option of fixed fee which ranges from 1 per cent to 3 per cent of profits and/or a performance-based fee which can go up to 20 per cent and more of profits made.

Fund managers say that today, most investors prefer the fixed fee model to the performance-based one. "Investors took the performance-based fee model at the 3000 index levels and after paying out high fees, jumped at the fixed fee model at the 6000 levels," says a fund manager.

Adds Biren Lal, vice president PMS at Motilal Oswal Securities, "They have better control over completely managed funds than only an advisory."

That's why, players say that investors are gradually veering from mutual funds to PMS. Even as fund managers say that mutual funds have an edge in a clear trended market, as they invest immediately as opposed to PMS where they might spread the risk, investors, believe that the latter is more transparent without any lock-in period.

Moreover, PMS players say that while fund managers are actively managing an investor's portfolio, mutual fund investors don't know when to enter or exit.

Moreover, large-sized AUMs are difficult to manage for mutual funds and that's where portfolio management will have an advantage, reveals a fund manager.

That's because, as Vikas Sachdeva, head- marketing at Birla Sun Life AMC says, "Large mutual fund investors are target audiences for portfolio management services as they are more keen to actively manage their investments."

Birla has minimum ticket size of Rs 2.5 crore for customised products and Rs 50 lakh for standardised products. "This business works more on comfort than conviction and the investor's relation with the fund manager and the AMC," he adds.

Typically, depending on the quantum of business, a portfolio management team for both brokerages and fund houses varies from six to 20 people.

Others like Pru ICICI's Madon believe that PMS does not compete but is complementary to mutual fund schemes. "It is a different target audience. Mutual funds are more suited to the retail segment while PMS is targeted at HNIs," he adds.

Where do they go from here? ASK's Shah says that more than the size of the AUM, it is the quality of service that is important.

"We would like to be known as good fund managers first. First it is capital preservation and then growth," he says. He wants to double his AUM in the next three years.

Alok Vajpeyi, president, DSP Merrill Lynch AMC wants to garner at least Rs 1,200 crore in the next one year, while Khade makes a strong case for product differentiation and says that innovation is the key for growth.

But the players are still looking at critical mass. "We need to market ourselves better," says a broker. Adds Ashish Ranawade, fund manager at UTI AMC, "The real growth will come once large institutions like banks, corporate and public sector undertakings start investing in PMS." UTI AMC offers both a flat fixed fee model and a variable fee model with a minimum ticket size of Rs 25 lakh.

Commencing operations this year end, the SBI AMC hopes to mobilise Rs 100 crore in assets within the first year of operations. N R Ramakrishnan, chief marketing officer at SBI AMC says that it proposes to start with a smaller ticket size.

"The aim is to expand our retail base and offer all products under one roof. That is why PMS features on our list of priorities," he says. Incidentally, it is also a priority for the the HNIs.