This distributor puts 99% of his clients' assets in PMS. Here's why.

Venkateswaran (popularly known as Venkat) worked at HDFC Bank before moving to Banyan Tree Advisors, a PMS provider in Bengaluru,and expanding their business significantly. He launched Pygmalion Renaissance in 2018. By this time, many of his long-standing clients from his time at HDFC Bank and Banyan Tree wanted more holistic financial guidance. Today, Venkat’s firm manages about ₹2,000 crore for more than 600 clients. in an interview with Mint, he explains why he chooses PMS for his clients.

Why do you invest 99% of your clients' funds through PMS?

Our clients primarily comprise high-net-worth and ultrahigh-net-worth individuals, non-residents, and entities like Hindu Undivided Families, companies, partnership firms and family trusts. A small number of our clients are retail investors with a corpus of less than ₹50 lakh. This is one of the reasons for our higher asset allocation to PMS."

Every investment product has inherent advantages and disadvantages. However, the primary objective of wealth management is to protect capital, which I call risk management. Through my experience of working with PMS fund managers, I feel the PMS structure helps manage risk better than most other investment products.

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PMS fund managers have shown they can better navigate various market conditions, be it a bear market or a bull market. Investors feel confident of investing when markets are at their peak, but this may not be the time to go all-in. While time in the market is very important, we can’t rule out the importance of timing the market.

PMS fund managers have the flexibility to construct portfolios based on their reading of the market. There are no regulations that force the PMS fund manager to deploy the capital immediately, as there are with a few other investment products. It helps with better risk management and results in better risk-adjusted returns in the long run.

Boutique PMS providers have offered us better comfort due to their willingness to grow organically, proven research capabilities, and client-centred approach. Fund managers at these firms are the owners, which again offers better comfort in the form of skin-in-the game and business continuity.

It has been easier for me to develop a close working relationship with a Boutique PMS providers, understand their culture, and build confidence in their investment philosophy.

What about the concentration risk in PMS?

While concentration can increase risk, well-researched concentrated positions in PMS can generate higher risk-adjusted returns than diversified mutual funds over the long run. PMS fund managers have the ability to do intensive bottom-up research and position-sizing to create a resilient portfolio.

Investing in a large number of stocks through mutual funds can dilute returns through overdiversification.  For example, Investing ₹1 crore in two PMS funds with a total of 60 stocks is better than spreading it across eight mutual funds with more than 400 stocks.

Going by the law of averages, a major part of alpha (returns above the benchmark) over time is generated by a few stocks. The well-researched, bottom-up approach of a PMS fund manager is crucial to offset the concentration risk.

How do you position PMS in a typical client’s portfolio?

We usually position PMS as the core of our clients' portfolios. Equity investments through PMS offer the best prospects for wealth creation over the long run. However, not everyone has the time or expertise to pick stocks directly. This is where a professional PMS comes into the picture. It provides well-diversified equity exposure through a portfolio of stocks chosen by experienced fund managers following a consistent process.

For elderly clients who are nearing retirement, I may recommend a larger allocation to less volatile multi-cap or large-cap focused PMS funds. But for those with a long investment horizon, we believe a flexi-cap PMS should form the core of their equity allocation. This allows them to capture upside from both large and small caps over cycles.

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We teach clients to see PMS as a tool for building their wealth over 10-15 years rather than a short-term, tactical asset class. This ensures they derive the maximum benefit from the expertise of experienced fund managers. Remember, investing in equities is for creating wealth, which happens over a long period of time. It is a marathon, not a sprint. Those with less an investment horizon of less than five should not invest through PMS.

How do you choose a PMS?

We have a rigorous process for selecting the right PMS for our clients. The fund manager's track record is of prime importance. We only consider those who have at least 5-7 years of experience in managing money through different market cycles. This gives us confidence that their investment approach and process has been proven in varying conditions.

It is equally important that the fund has an established research team to back the manager. We look for managers who follow a consistent value-investing strategy that's focused on business fundamentals and don't chase short-term performance.

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When we meet the fund managers,  we evaluate them thoroughly to understand their investment philosophy. We assess aspects such as the promoter's background, whether they have their own money invested alongside that of clients, and if their interests are aligned with those of our clients. We also analyse the fund's performance over various periods using rolling returns to check for consistency, and try to understand the fund manager’s attributes and behavioural patterns.

The fee structure is another important criteria to assess, to ensure the fund manager is not incentivised to chase assets at the cost of our clients' wealth. Intangible factors such as the promoter's ethics and organisational culture are also evaluated before we partner with a PMS provider.

Mint's take: Tread with caution

PMS is a riskier product than mutual funds and investors should exercise a great deal of caution before investing through it. PMS providers are not subject to several Sebi rules on diversification and expenses that govern mutual funds. They are also more opaque when it comes to distribution, with caps on the expense ratio or commission.

Using a PMS is also more tax-inefficient as you are taxed on booked profits even if you have not redeemed any money. In a mutual fund, you are only taxed on redemption. To offset these negatives, you should only consider a PMS whose returns have consistently beaten those of mutual funds.