PMS players guard against rise in churn

Shackling effect of high cost

Churn is a growing concern in the estimated Rs 3,500 crore portfolio management scheme (PMS) industry and this is not limited to investors moving back and forth from one PMS operator to another.

Though fund managers are charging a flat and a variable fee linked to performance, the churning in portfolios is leading to high costs which are loaded on the investor.

Players said that high networth investors (HNIs), the prime targets for all PMS operators, are increasingly moving away from operators who churn their portfolios far too much for their comfort.

S Prasad, a HNI, said, "I moved from a big domestic brokerage house to another smaller entity to manage my funds, because the fund manager of the first PMS was prone to churning my portfolio repeatedly, increasing my costs. Besides, I believe in long term investing."

Prasad is not the only investor with this problem. Market sources said that broking charges are as high as 0.50 per cent on each buy/sell transaction and increased churning adds to that much cost. Players said these costs are acceptable in a rising market when the investor is making money, but most HNIs are averse to churn.

Besides, they are paying high fees to fund managers for PMS. Fund managers offer the option of a fixed fee which ranges from 1 per cent to 3 per cent and/or a performance-based fee which can go up to 20 per cent and more of profits made. The investor still pays the minimum fixed fee even if the investor makes losses.

But investors are getting smarter. They are spreading their 'risks' by involving more than one PMS operator now.

Dinshaw Irani, head of PMS at Sharekhan, said, "A lot of HNIs are increasingly going with multiple PMS operators as this allows them to compare results from different fund managers and also gives them a fair idea on fees being charged."

This has put fund managers on their guard as no one wants to lose the assets under his management (AUM).

Industry players peg the PMS market at around Rs 3,500 crore, up from about Rs 400 crore three years ago. Alok Vajpeyi, president at DSP Merrill Lynch Fund, said that the interest in offering PMS is in line with global trends and the PMS segment could become as big as the mutual fund industry in the coming years. But the Indian PMS market is dominated by few players as of now.

Industry sources estimate that a few players such as Kotak, ASK Raymond James, Enam, Pru ICICI AMC and Birla Sun Life AMC have almost 85 per cent of the total industry AUM. The mutual fund industry has about Rs 30,000 crore of AUM invested in equity.

In other words, the PMS industry is more than 10 per cent the size of the mutual fund industry and is fast growing despite PMS taking off only in the last two-three years. The un-registered PMS industry, run mostly by brokerage houses, would be as big as the official one, market sources say.