How portfolio management schemes invest

PMS offers investors bespoke portfolios in comparison to standardised ones of MFs

What is the difference between a mutual fund and a portfolio management scheme (PMS)? PMS products are different from off-the-shelf (OTC) MF ones by two broad measures: operational structure and objective.

Operational structure

The key difference between a PMS and a fund is that each investor in a PMS has an individual portfolio which may be different from that of other investors. This is unlike investments in funds, where all investors have exposure to the same stocks having the same weights. Given this difference, PMS managers could modulate building of portfolios. For example, some portfolio managers build portfolios over 1-2 months, while others may do it over a week.

This modulation may be a function of the manager’s assessment of the markets or of individual portfolio stocks. Such flexibility and customisation is unique to PMS. It offers clients bespoke portfolios in comparison to the standardised portfolios of OTC products.

Objective

Bottom-up approach: Investors seek PMS portfolios as they desire differentiated investment ideas compared with OTC products. There are a slew of funds that offer benchmark-hugging portfolios. Such funds generally hold stocks similar to those comprising benchmark indices, with minimal holdings outside of the benchmark.

For example, approximately 48 large-cap funds benchmark themselves to Nifty50, and 37 large-cap funds benchmark themselves to Nifty500. A cursory look at the top holdings of these funds will suggest that holdings are largely similar, since they are a part of the index. Weightages of these holdings may be dissimilar because, in order to outperform, these funds tweak the weightage.

In comparison, PMS portfolios have high disparity of holdings versus the benchmark indices. A look at the leading PMS portfolios and their benchmark indices suggests that portfolio stocks constitute only 3-10 per cent weights of their respective benchmark indices. Also, holdings are widely dissimilar within PMS portfolios.

These metrics aptly describe the bottom-up nature of PMS portfolio construct. Such differentials in weightages lead to widely disparate portfolio movements versus benchmarks. In OTC investment products, such weightage differentials will rarely be seen, if ever.

Concentrated positions: Most PMS portfolios hold 15-25 positions. In comparison, the most concentrated, widely accepted indices — the Sensex and the Nifty — are constituted of 30 and 50 stocks, respectively. Having 15-25 positions, PMS portfolios are relatively more concentrated than the most concentrated and well-accepted indices.

In addition to stock concentration, top holdings in PMS portfolios have large weights. Weightage of the top-10 stocks in leading PMS portfolios range from 50 to 70 per cent. Weightage differential and stock concentration are bound to cause disparity in holdings versus even the aforementioned widely accepted, concentrated indices.

Agnostic to market cap and industry: The key characteristic of bottom-up research is to seek out inefficiencies in pricing of stocks. The target in such research is to identify businesses that will have a greater value if they were private, than they presently do as listed equities. Restricting oneself by sector or by market capitalisation will blindside one to opportunities outside of these boundaries.

Hence, while seeking bottom-up opportunities, PMS portfolio managers are generally agnostic to market capitalisation and industry. PMS portfolios have diversified exposure to mid/small/large-cap stocks as also to sectors which may have marginal representation in respective benchmarks.

The result of these portfolio characteristics is that PMS portfolio performance could be widely disparate from indices — they may rise and fall in accentuated moves versus the benchmark. Their volatility may be greater than benchmarks. Besides, given the portfolio concentration, over short bursts, fundamentals may be overshadowed by market moods. Portfolio returns may also vary between various portfolios.

PMS investors must recognise that PMS products have differentiated characteristics in comparison to funds; hence, the trajectory of performance will also be different.

The writer is Portfolio

Manager and Head- PMS,

Kotak Mahindra AMC

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