Performance of PMS Funds in 2022

The markets in 2022 were not easy for several investors. The BSE Sensex was up by 5 per cent in 2022 but a majority the portfolios reflected either flat returns or negative returns during a similar period. PMS returns have been disappointing as well. Yogesh Supekar discusses how the various PMS’ have performed in 2022 and which strategy has worked best for the top performing PMS
 

The markets in 2022 at best can be said to have been flat with bouts of volatility creating opportunities for the traders to make some quick gains. If you are a long-term investor and have been invested in the markets in a diversified manner, chances are that the portfolio has not done much in the past one year. Often owing to lack of portfolio management skills and market timing ability, investors park funds in PMS and or equity-oriented mutual funds. According to Dr. Mahesh Mulay, who is an HNI investor: “I have been able to make good money while trading the momentum stocks in 2022. However, I am a bit disappointed with my investments in PMS and mutual funds.”  [EasyDNNnews:PaidContentStart]

“My own investment portfolio where I have full control over decision-making is performing in line with the markets. There is no noticeable outperformance. With PMS I am paying the fund manager for outperformance and I haven’t got one in 2022 at least. Now, I am not sure if I should redeem my investments or should I continue with the same fund manager. How do I decide if I should withdraw my funds from PMS?” he adds. Several investors are facing this dilemma as portfolios across the board are seen underperforming the markets.
 

PMS Fund Performance in 2022

With more than 100 PMS funds delivering negative returns in 2022, it is easy to comment that 2022 has not been amongst the best years for the PMS industry. However, there are some shining stories with at least 32 PMS schemes delivering returns in excess of 10 per cent, ranging between 10 per cent and 35 per cent. Investors would be busy analysing the Molecule Ventures- Growth PMS fund because it is the top performing PMS fund of 2022 which generated returns of 35.2 per cent in 2022. In case you are curious, it is a Small-Cap PMS fund. 

What is interesting to note is that in 2022 the PSM funds that adopted value strategy and contra strategy to beat the markets have done well. For example, the ICICI Prudential Value Strategy PMS is up by over 24 per cent and the ICICI Prudential Contra Strategy has delivered 20 per cent returns in 2022. Marcellus Investment Managers’ Rising Giants and Motilal Oswal AMC Focused Mid-Cap Strategy PMS funds that invest in mid-caps and small-caps have been the worst performing PMS funds by clocking negative returns of 22.50 per cent and 21.40 per cent, respectively.

Who Should Invest in PMS?

A beginner in the stock market should avoid investing in PMS and may prefer a mutual fund route to stock market investing. The volatility is definitely high with PMS investing and the drawdowns could also be heavy when compared to mutual funds. It is not uncommon to see the fund manager of a PMS adopt a concentrated approach to outperform the markets. Such a concentrated approach to investing can create excess volatility and large drawdown for which an investor with less experience in the market may not be prepared for. As the ticket size of `50 laksh is also large for PMS, only HNIs are able to invest in a PMS fund. However, not all investors are willing to share profits with the fund manager and hence are discouraged to invest in a PMS fund. 

Says Amit Bora, an ultra-HNI: “I have closely studied all the options and I find that in the long term it is extremely difficult for any PMS or mutual fund to deliver more than 20 per cent on an annualised basis. There could be a few exceptions. However, what are the chances that you remain invested for the long term in a top performing fund for over a decade? And anyway, you get to know which fund is a top performing one only after several years. I have noticed that there is no consistent outperformance and after you consider the costs involved the whole exercise of investing in PMS may not be worth the effort.” 

“Especially when the PMS underperforms it is not easy to switch or redeem. It involves further costs. I prefer investing on my own and doing my own research. Even if I underperform in a top performing PMS fund, I don’t have to share profits and the costs are lower. Not to forget the joy of investing on my own and the benefits of gaining unique market insights when you do your own research and invest,” he adds. While those investors with ability to read financials and penchant for equity research may enjoy an independent approach to equity investing where the buy and sell decisions are made by the investor himself, there are several investors who would want an expert to make such decisions for them. 

Says Amit Karde, an HNI investor: “I have been investing in the equity market for more than 15 years. However, I started making money in the equity markets only when I started trusting the experts and parked my funds with a PMS fund manager. The best part of investing in PMS funds is that I can focus my core business activities and not worry about the equity markets. There is no value addition to the portfolio if I were to be involved myself and at the same time I have to constantly worry about the market tantrums. With PMS funds I not only make decent returns but I also am not constantly worried about market moods as I know an expert is taking care of my funds professionally. I have realised that it is important to have faith in the fund manager and understand the strategy he or she has adopted to beat the markets.”
 

Investing on Own versus PMS

There are many investors who like to invest their excess capital into the equity markets by researching themselves and building their own market-beating strategies rather than handing it over to the fund manager who charges fixed fees and a commission on profits. If an investor follows the portfolio guidelines in a disciplined manner, there is always the possibility of beating the markets in the long term. However, a strategy needs to be in place and the execution of the strategy needs to be flawless to make consistent money in the equity markets. It is common for a fund manager to invest a portion of the portfolio in small-caps and the so-called high-risk micro-cap stocks to generate alpha.

At times, exposure is taken in illiquid stocks to generate above average returns by the fund managers. It may not be too adventurous if investors invest a portion of the portfolio in the so-called illiquid and micro-cap stocks in pursuit of alpha. Micro-cap investing need not necessarily be as risky as perceived. With thorough due diligence and focus on quality stocks there is always a chance to beat the markets in the long term. Small-cap and micro-stocks can be looked at with a fresh perspective in order to beat the markets on a consistent basis. However, investing in micro-cap stocks is not always easy as the information is not readily available for such illiquid stocks. If one learns to deal with micro-cap stocks, beating the markets on a consistent basis is a high probability event. According to Gunavanth Vaid, a chartered accountant and an active microcap investor, “Just like an entrepreneur, investing is an isolated journey at the beginning, but you need to make sure you are not abandoned from the rest of the world and caught in an echo chamber (far away from reality and caught in a perception world). Wealth creation gradually happens when the majority accepts the idea by seeing the execution pan out. Most of my portfolio is in micro-caps and SME stocks. The most important thing that we as investors chase is growth.” 

“We keep on mentioning the word value investing. But value without any growth is just a value trap. What differentiates the growth factor among companies are ‘clarity’, ‘quality’ and ‘quantum’ of earnings’ trajectory. When all three are in sync together, rerating is longer and sustainable. In micro-caps investing, assessing fundamentals is not sufficient with quant analysis. If such was the case then people driving algos and screeners would have been billionaires. When the balance-sheet is empty and the cash flows are negative, one has to play outside the coaching manual. The thread that connects the investors with a winning idea is the ‘promoter’ – his hunger for growth and possession of some winning traits or unit economics. For me, market-cap is not PAT x PE but it’s the vision of the promoter x the execution or scalability of the business,” he adds. 

“The challenges in micro-caps in their early stages are plenty such as stretched working capital, client concentration, immediate conversion of profits into cash flows, liquidity issues, etc. Almost all stocks where I invested were illiquid. Most of my friends asked me about how I would sell the stocks and what I found out was that in a timeframe of 2-3 years the stock delivers numbers and the liquidity comes automatically. What used to take me over months to accumulate used to get sold in a day. Most of these companies are run by first-generation entrepreneurs. In majority of the cases, the prices used to run up first and then the numbers used to get delivered later. I look at micro-cap stocks and even SME stocks for wealth creation in the long term,” he further states.
 

"We follow the GARP (growth at reasonable price) philosophy. GARP-centric portfolios in the long term should offer superior risk-adjusted returns through their very nature of not overpaying for growth and at the same time, participating in the growth of the investee companies. By combining the best attributes of both value and growth investing, the GARP philosophy should yield superior long-term returns. As part of the investment process, we have filters for including a stock in the investment universe (high RoCE, low leverage, positive operating cashflows, and better governance), etc. We believe that many of these measures would help us avoid big mistakes thereby, contributing to performance." 

— Surjitt Singh Arora, Portfolio Manager, PGIM India Portfolio Management Services
 

"We create a list of stocks using a twin-filter criterion of double-digit YoY revenue growth and return on capital higher than the cost of capital, each year for 10 years in a row. Next, we build a portfolio of such stocks and hold them patiently for long periods of time, with very little churn. Marcellus Consistent Compounders Portfolio combines deep-dive stock-specific research with the benefits of the filter-based approach, to help generate outperformance of 4-5% per annum over and above these filter-based portfolios. This is achieved via 3 factors: portfolio concentration, identifying the real source of strong fundamentals and identifying one-off blips in historical fundamentals." 

— Saurabh Mukherjea, Founder and Chief Investment Officer, Marcellus Investment Managers

 

Conclusion

While taking help of a market expert (PMS) is fine, investing on your own and beating the markets year-on-year can prove to be more satisfying and wealth accretive for investors in the long run. Various strategies along with micro-cap investing can be explored for beating the markets. One should not judge the quality of the PMS with one-year returns. A period of three to five years shall help you understand if the strategy adopted by the fund manager at the PMS is working or not. In case after a three-year period the portfolio is not performing up to expectation, you can think of switching over to a different strategy. 

The trick with PMS investing is to do research beforehand and build conviction on the strategy that will be adopted by the fund manager. More research on the strategy before investing can be fruitful rather than casually investing in a poor-quality PMS. One of the common mistakes a lot of investors do is to give more weightage to the recent performance even though it is commonly understood that the past performance is no guarantee of future performance. It is easy to park funds in a top performing PMS only to find that the same top performing PMS has underperformed once you have invested your money in it. 

Often enough, proper communication with the fund manager helps and the frequency of communication also matters as it allows investors to focus on the most relevant aspects of the portfolio and markets and avoid the noise. A fund manager usually is accessible for PMS investors and would be more than willing to explain the portfolio strategy which can help investors remain invested during tough volatile times. If your PMS has underperformed in 2022 for whatever reason, it will be useful to check if the weakness will persist in the coming years as well owing to a poor strategy being implemented by the fund manager. 

For instance, in the past six odd months, we have seen growth stocks take a beating and value stocks outperforming the markets. This is evident in the outperformance of PMS that have adopted value strategy to beat the markets in 2022. However, things can quickly change if the growth stocks start outperforming the value universe. The picture in 2023 could be different and hence it will be erroneous to invest in those PMS’ which have shown outperformance in the recent period. The focus should be on strategy and the ability of the fund manager to beat the markets consistently. 

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