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The rise in popularity of portfolio management services (PMS) products among wealthy individuals might attract senior fund managers from the mutual fund (MF) sector. Former fund manager Kenneth Andrade, who quit IDFC MF as head of investment last year, recently set up a PMS fund. His PMS is looking to garner at least Rs 500 crore with the help of a few wealth managers, notably IIFL Private Wealth and Kotak Mahindra Bank.
“If Andrade is successful, it might inspire other fund managers to set out on their own,” said Manoj Nagpal, chief executive, Outlook Asia Capital. Andrade joined the IDFC asset management company in February 2007 and was known for his differentiated picks, especially in the mid-cap space.
“Chief investment officers at large fund houses typically earn Rs 3-6 crore annually. Setting up one’s own PMS can be more rewarding monetarily, owing to the profit sharing clause, and offers greater flexibility to own a concentrated portfolio,” added a senior official at a large MF house.
While equity MFs charge between two and 3.25 per cent in expense ratios, fixed management fees in PMS might vary between one and 2.5 per cent. However, a PMS might have a separate profit sharing arrangement, wherein the fund management fee could also be zero in some cases. For instance, there could be an annual profit sharing arrangement of 20 per cent, meaning on a portfolio profit of 20 per cent at the end of the year, one will have to share the incremental 10 per cent return with the fund manager.
“Since PMS works on profit sharing, the profit share can be significant when the markets are doing well,” said Kaustubh Belapurkar, director, fund research, at Morningstar.
PMS can also be a draw for managers willing to take higher risks and with high-conviction ideas. A PMS runs a more concentrated portfolio of 15-20 stocks, compared with equity schemes of MFs, which generally invest in 40-60 scrips. A concentrated portfolio increases the potential of higher return but adds to the risk.
“PMS offers a much freer hand in portfolio construction in terms of stock limits and sector exposure. As an HNI (high net worth individual), you can customise your portfolio, rather than invest in a me-too MF structure,” said Belapurkar. For instance, no MF scheme may invest more than 10 per cent of its net asset value in equity shares or equity-related instruments of any one company. There is no such restriction in PMS.
“As one goes down the ladder from large-caps to mid-cap and small-cap stocks, investing through the MF route might become a less preferred option for HNIs, especially if the fund size becomes large. In PMS, size is not a constraint and you don’t face redemption pressure if other investors sell their shares, as portfolios are tailor-made,” said Ashish Kehair, head of wealth management and private banking at IDFC Bank.
