The brutal market correction in view of the Kovid-19 lockdown is proving painful for investors who had invested in portfolio management schemes (PMS) in the boom times. Many people, who internally had entered the ‘high-risk, high-return’ category for the purpose of investors, are now finding that they lack the stomach for the kind of volatility that is still seen. is.
The worst-performing PMS in March is down 40.6 percent, according to data from PMSbazaar.com, a portal that provides analytics and advice related to PMS. Of the 141 funds that have data, 89 fell more than 22.5 per cent in the Nifty last month.
Main Pain Point: Some factors are causing pain mainly for PMS investors. The first is excessive allocation for the mid and small cap segment. Those entering PMS in 2016–17 opted for these categories mainly because they were showing very high returns back then. But the category has not performed well since January 2018. Many investors, who see poor returns even over a period of three years, are preparing to throw in the towel and opt out of these schemes.
Most PMS funds have concentrated portfolios. Such portfolios tend to be tougher than the more diverse ones during market downturns.
The number of PMS players has increased in recent years. But many of these fund managers have not seen such a brutal decline before. The lack of experience is also telling now.
Some have fared better: The news is not all negative, however. Many good fund managers in this space have also managed to provide sound risk protection to their investors. Their portfolio declined less than their respective benchmarks. For example, the best-performing scheme fell by only 3 percent in March (according to Pmsbazaar.com data).
Change in quality: Fund managers who have built strong portfolios are confident of going through this recession. Prateek Aggarwal, Business Head and Chief Investment Manager, ASK Investment Managers, says, “We raise high-quality businesses that have the ability to generate cash flow that can compound their earnings over the years, and for corporate governance. Issues are not. ” India runs an Rs 8,696 crore entrepreneurial venture.
Investors in large-cap PMS schemes, particularly where fund managers have been price-conscious and reluctant to overpay for their purchases, have less to worry about. “Large-cap has the advantage of scale and balance-sheet. They have faced this kind of economic downturn in the past as well and are therefore better placed to handle it than their younger peers. In fact, they gain market share during such a recession, ”says Shrey Lonkar, fund manager, equity PMS, Motilal Oswal AMC. Lunkar Largecap Oriented Motilal Oswal manages the Value Strategy. In addition, a large reason for the large-cap decline is large-scale withdrawal of funds by foreign institutional investors (FIIs). “As and when the economy improves and FIIs come back, this category will be at the forefront of recovery,” he said.
Pain, as previously stated, is greatest within the mid- and small-cap space. The Nifty has been flat (-0.3 per cent) over a three-year period, with the Nifty Midcap 100 losing 10.4 per cent and the Nifty Smallcap falling 18.7 per cent.
In this space, fund managers with strong portfolios will also fare better. “In the mid and small-cap space, more than 100 companies have given annualized annual returns of 20 percent or more in the last 10 years. In the large-cap space, you will not find many companies that have given such returns.
Your plan should invest in such outperformers, says Madangopal Ramu, fund manager at Sundaram Alternates. He manages the midcap-oriented Sundaram Emerging Leaders Fund. He applies filters such as sound return ratios, strong balance sheets, regular cash flows and quality management. “If you’re in a fund with such a disciplined approach, you don’t need to worry too much,” he says.
Time to return to basics: The latest market slowdown is once again an opportunity for investors to examine the portfolios they have created. First, of course, it needs to be diversified. “Look at your entire portfolio, including mutual funds. Make sure you have diversified into asset classes, market cap and fund managers, ”says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. If you have predominantly mid- and small-cap-oriented portfolios, switch to large- and multi-cap-oriented schemes.
Investors should also check the performance of their plan during this recession. “Quality portfolio schemes fall below their benchmark and recover faster,” says Ankur Kapoor, managing partner at Plutus Capital. If your plan’s portfolio has fallen more than the benchmark, you have a great reason to worry and you should consult your advisor. Kapoor says fund managers with a fundamentally-based, research-oriented approach will be better off than those who have a trading mindset and invest based on news flow. When examining the portfolio of the scheme, look for small companies with high debt load. Many such companies cannot survive the recession and this will damage the portfolio.
More worrying is another worrying sign in the portfolio in recent times. “This reveals a lack of long-term orientation in the fund manager,” Lonkar says.
Investors need to reassess their risk appetite. “Many PMS schemes have the potential to generate 25 percent mixed annual returns over a five-seven-year horizon. But they can also see a 40 percent drop in a given year. In such an environment, investors need to ask if they want to stay in such a high-beta portfolio, ”says J Shah, Founder, OneTreehill Wealth Partners. He also runs PMSkart.com.
Investors with a long-term horizon of 7-10 years can also use this opportunity to increase their equity allocation and benefit from attractive valuations. Older investors in PMS, however, find it difficult to do so. “The regulator has increased the minimum investment limit in PMS from Rs 25 lakh to Rs 50 lakh. Old investors entering with Rs 25 lakh may continue. But if they desire a top-up, they should get an amount of Rs 25 lakh more. This is proving to be very difficult, as most investors prefer to top-up with smaller amounts. ‘Investors who do not have large surpluses may have no option but to top up through mutual funds.
The recent closure of IndiaNivesh PMS also has lessons for retail investors. “Choose PMS homes that have assets of at least Rs 1,000 crore, as they are better equipped to meet their fixed costs and avoid recession,” says Dhawan.