Choose the right PMS
Our Prospective client was a confident man. He was confident and optimistic. He had walked in to our office to inquire about our Portfolio Management Scheme and wanted to know the returns given by us in the last three months. He said that he would compare the same with the returns given by his existing PMS Manager and then decide whether to stay put, or switch to our scheme.
After comparing, he happily informed me that his current scheme has performed far better in the last three months and he would not switch right now.The client was not a prospect after all .Out of curiosity I wanted to know for how long had he been invested in the scheme and what were his returns. You may think that he was joking, but our man was dead pan serious. He had invested over three years back and in the ensuing three years his fund manager had given him only his capital back!
He was sitting on a 50 % loss till three months ago and it was only due to 'restructuring' of the portfolio that his fund manager had managed to recover all his capital. And since they have 'restructured', his current relationship manager has requested him to remain invested with them. Experience told me that what I thought about this situation was irrelevant and our man's mind was made up.
Relationship Managers have been pedalling PMS schemes based on one year returns (or worst still, last three month returns). They conveniently avoid showing three year or two year returns as negative or sub-index returns would clearly reflect in these.
The problem with evaluating Portfolio Management schemes is that unlike Mutual funds there is no clear manner in which SEBI requires PMS to publish return data. All kinds of methods are used, many of dubious nature. The appropriate method would be to take an average of all client returns on an IRR* basis. However most PMS schemes show the oldest client or their best client's portfolio returns in the fact sheet. This can be misguiding as a PMS unlike a mutual fund has different portfolios for different clients depending on fund manager's strategy and clients' time of entry into the scheme. Apple to apple comparisons between schemes in these cases is not possible. You must ask for the methodology adopted by the fund in arriving at returns before making comparisons.
In any case, when it comes to choosing a PMS fund manager, you should first evaluate the investment strategy and fund manager's track record before checking returns alone. Along with return evaluate risk in your portfolio. Instead of using complicated risk evaluation tools a simple way to check associated risk is by looking at performance during the worst period of the correction. Insist on being shown long term returns (3 years and above) too. It will help you know how well they performed during the crisis as well as the extent of wealth created for investors. Avoid looking for out performance on quarter to quarter basis. It is a waste of your time and doesn't really help you decide.
If I was in the place of our friend mentioned above I would want to take back all my money and run (fast) promising myself to never associate myself with a PMS manager who made zero returns for me in three years despite a full recovery in the market. Now is the time to act. Don't be averse to booking some losses too. It will be good to trim your portfolio of excess flab and increase exposures to investment managers who have done well for you.
* IRR or Internal Rate of Return accounts for inflows /outflows in the scheme and provides an annualized return which can be used to evaluate investments of all types.
After comparing, he happily informed me that his current scheme has performed far better in the last three months and he would not switch right now.The client was not a prospect after all .Out of curiosity I wanted to know for how long had he been invested in the scheme and what were his returns. You may think that he was joking, but our man was dead pan serious. He had invested over three years back and in the ensuing three years his fund manager had given him only his capital back!
He was sitting on a 50 % loss till three months ago and it was only due to 'restructuring' of the portfolio that his fund manager had managed to recover all his capital. And since they have 'restructured', his current relationship manager has requested him to remain invested with them. Experience told me that what I thought about this situation was irrelevant and our man's mind was made up.
Relationship Managers have been pedalling PMS schemes based on one year returns (or worst still, last three month returns). They conveniently avoid showing three year or two year returns as negative or sub-index returns would clearly reflect in these.
The problem with evaluating Portfolio Management schemes is that unlike Mutual funds there is no clear manner in which SEBI requires PMS to publish return data. All kinds of methods are used, many of dubious nature. The appropriate method would be to take an average of all client returns on an IRR* basis. However most PMS schemes show the oldest client or their best client's portfolio returns in the fact sheet. This can be misguiding as a PMS unlike a mutual fund has different portfolios for different clients depending on fund manager's strategy and clients' time of entry into the scheme. Apple to apple comparisons between schemes in these cases is not possible. You must ask for the methodology adopted by the fund in arriving at returns before making comparisons.
In any case, when it comes to choosing a PMS fund manager, you should first evaluate the investment strategy and fund manager's track record before checking returns alone. Along with return evaluate risk in your portfolio. Instead of using complicated risk evaluation tools a simple way to check associated risk is by looking at performance during the worst period of the correction. Insist on being shown long term returns (3 years and above) too. It will help you know how well they performed during the crisis as well as the extent of wealth created for investors. Avoid looking for out performance on quarter to quarter basis. It is a waste of your time and doesn't really help you decide.
If I was in the place of our friend mentioned above I would want to take back all my money and run (fast) promising myself to never associate myself with a PMS manager who made zero returns for me in three years despite a full recovery in the market. Now is the time to act. Don't be averse to booking some losses too. It will be good to trim your portfolio of excess flab and increase exposures to investment managers who have done well for you.
* IRR or Internal Rate of Return accounts for inflows /outflows in the scheme and provides an annualized return which can be used to evaluate investments of all types.
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