The majority of portfolio management services (PMS) schemes underperformed the Nifty50 in CY 2022 amid sustained market volatility.
As many as 56%, or 168, of the 300 PMS schemes were not able to beat the returns generated by the benchmark in CY22. The 300 schemes collectively delivered average returns of -0.2% — far lower than the 4.3% delivered by the benchmark Nifty50, Nifty Midcap 100 (3.5%) and Nifty 500 (3%). Thirty two schemes delivered double-digit returns during the year.
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This means that a typical investor with four-six schemes in his portfolio would have not been able to beat Nifty returns in the last three years.
Among individual categories, large-cap PMS schemes (average returns of 1.3%), multi-cap schemes (-1.5%), and mid-cap schemes (-3.4%) underperformed their respective categories. Small-cap PMS schemes (6.5%) outperformed the benchmark Nifty Smallcap 100 (-13.8%).
Most PMS schemes tend to adopt concentrated portfolios, which can work both ways. If few of the calls go wrong, it can hit overall performance,” said Dhaval Kapadia, director – portfolio specialist, Morningstar Investment Advisers India.
Molecule Venture’s small-cap Growth strategy was the top performer with returns of 35.2%, followed by Counter Cyclical Investments’ small-cap strategy Diversified Long Term Value (29.3%) and ICICI Prudential’s Value Strategy (24.5%). Marcellus’ mid-cap strategy Rising Giants (-22.5%) was the worst performer in CY22. The AMC’s Kings of Capital (-4.4%), Consistent Compounders (-8.8%) and Little Champs (-10.5%) were other schemes that fared abysmally.
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“The world over, as the market matures, the alpha over the indices starts dropping even in actively managed funds. If the returns are dropping and the costs remain the same, with an expense ratio of nearly 2%, outperformance will come off significantly,” said Sameer Kamdar, founder & CEO, Smart Money. “The rejig of indices every six months, which results in the entry of new companies that are outperformers and exit of laggards, is also making it difficult for asset managers to beat the index.”
In 2018-19, a number of wealthy individuals migrated from mutual funds to PMS in search of alpha. Many of the PMS schemes, barring the top performing ones, have not delivered alpha.
PMS investors are at a little disadvantage vis-a-vis mutual funds on the taxation and fees front. Investors have to pay an additional tax of 0.6-0.8% on the PMS schemes vis-a-vis equity MFs, since all transactions happen on their respective trading accounts. In certain cases, they have to shell out profit share to the manager if returns are over a certain hurdle rate.
According to Kapadia, quality and growth kind of strategies have particularly suffered in the past year with value stocks gaining the spotlight. PSUs, banks and industrials have done better than quality and growth names in the FMCG and IT space, where stocks have become pricey.
“IT shares, for instance, rose substantially post-Covid, but corrected in the past year on rich valuations and on realisation that some of the growth assumptions during the pandemic may not materialise going forward,” said Kapadia.
PMS schemes managed Rs 21.9 trillion under the discretionary portfolio, Rs 2.28 trillion under the non-discretionary portfolio, and Rs 2.04 trillion under advisory, latest regulatory data showed.
The PMS segment invests money on behalf of well-off individuals. The minimum investment that regulations allow is Rs 5 million.