How a Sebi
move to protect investors will put small PMS players at risk
If the minimum
ticket size for PMS investment is doubled to INR50 lakh, a number of players
will have to either shut shop or move to an AIF model.
12
Sep 2018
Anish Teli, who runs
QED Capital Advisors, a boutique portfolio-management service (PMS) based in
Mumbai, has a fresh challenge to handle. The ticket size of his PMS is INR25
lakh and his new task centres around that. For, market regulator Securities and
Exchange Board of India (Sebi) is considering an increase in the minimum ticket
size for PMS investments from INR25 lakh to INR50 lakh.
Sebi has sought the views of the PMS industry in a meeting last week. So, last week when a working woman walked into his office, Teli knew she was perhaps one of the last investors to enter his scheme with INR25 lakh.
But what triggered the Sebi action? The following points sum it up:
Sebi has sought the views of the PMS industry in a meeting last week. So, last week when a working woman walked into his office, Teli knew she was perhaps one of the last investors to enter his scheme with INR25 lakh.
But what triggered the Sebi action? The following points sum it up:
§ PMS products are
considered riskier than mutual funds as they invest in stocks of companies that
have higher liquidity and business risks but give good returns.
§ The regulator feels
that more retail investors are investing in PMS products without understanding
the risk-reward ratio.
§ Also, it wants to
restrict investors who may not have the risk appetite.
The PMS business is targeted towards high-net-worth individuals (HNIs).
A Credit Suisse report released in November 2017 states that India is home to
245,000 dollar millionaires. This number can touch 372,000 by 2022. These HNIs
are professionals who want to diversify their equity holdings and look at PMS
as a way out. This is the target client list that the PMS industry has set its
sight on. Big PMS managers feel that the industry is constantly changing, and
more and more Indians are becoming rich and they don’t mind a bigger ticket
size.
The big players say they are getting enough money even on a higher ticket size. For them, INR50 lakh is not a hurdle at all. “You look at the average ticket size of the industry as of now — it is INR60 lakh. And we are talking of the top players here. So, people have already invested way above INR25 lakh or have multiplied their wealth in the existing PMS,” says the CEO of a large PMS company.
While the big PMS schemes such as ENAM and Old Bridge Capital have a minimum ticket size that is at or above INR1 crore, a bulk of the industry has a lower ticket size. The total number of players in the PMS business works out to be 255. Of this, only around 10 players ask for a ticket size that is bigger than INR25 lakh.
The top 20 funds account for 75% of the total assets in the PMS business and that is what worries the smaller players. They feel the PMS industry will go the mutual fund way, where seven funds account for 70% of the assets. And if the ticket size is increased, many of the new PMS managers will have to shut shop or go in for an alternative investment fund (AIF) licence.
Big blow for small schemes
“Smaller boutique firms, who want to follow their own investment style and stay small and nimble, will have to scale up fast or move to an AIF model,” Teli says.
Increasing the minimum investment amount from INR25 lakh will impact retail investors looking for customised solutions. It will make it very difficult for professional fund managers to enter the industry,” he adds.
He has a point. The PMS business has attracted the risk-taking clients, who already know about investing in equity. They know that equity is a risky bet and invest only a part of their wealth in PMS. “These people are smart. They have a high risk-taking ability. But to expand the market, it makes sense to lower the ticket size. I think there is a big market out there which has the ability to take risk,” says Arindam Chanda, executive director and head of broking business at IIFL.
Chanda feels that the move to increase the ticket size is cosmetic. The average ticket size for the industry as of now is around INR60 lakh. This is proof that most people have invested more than INR25 lakh in equities through PMS. But this market is limited. Today the total size of the PMS market is restricted at INR1.2 lakh crore and it can only expand if the restriction on minimum investment is lowered.
Most of the industry doesn’t understand why the regulator is in such a hurry to increase the limits. It was only in 2012 when PMS limits were increased from INR5 lakh to INR25 lakh.
Parag Parikh Financial Advisory Services ran a very successful PMS till 2012 at a ticket size of INR5 lakh. It was at a time when many players had increased their ticket size to INR20 lakh-INR1 crore. But Parag Parikh felt that it was his job to turn the middle class into a rich class. He knew that the middle class did not have the risk appetite to shell out more than INR5 lakh for investing in equities.
When he did not have an option but to increase the ticket size to INR25 lakh, he converted his PMS scheme into a mutual fund scheme so that he could stay true to his dream of increasing the net worth of the middle-class investor. But launching the scheme required a capital of INR50 crore. It was not an easy task, but he managed to sail through. The Parag Parikh long-term equity fund today has a size of INR1,352 crore and has given high risk-adjusted returns to its investors.
The big players say they are getting enough money even on a higher ticket size. For them, INR50 lakh is not a hurdle at all. “You look at the average ticket size of the industry as of now — it is INR60 lakh. And we are talking of the top players here. So, people have already invested way above INR25 lakh or have multiplied their wealth in the existing PMS,” says the CEO of a large PMS company.
While the big PMS schemes such as ENAM and Old Bridge Capital have a minimum ticket size that is at or above INR1 crore, a bulk of the industry has a lower ticket size. The total number of players in the PMS business works out to be 255. Of this, only around 10 players ask for a ticket size that is bigger than INR25 lakh.
The top 20 funds account for 75% of the total assets in the PMS business and that is what worries the smaller players. They feel the PMS industry will go the mutual fund way, where seven funds account for 70% of the assets. And if the ticket size is increased, many of the new PMS managers will have to shut shop or go in for an alternative investment fund (AIF) licence.
Big blow for small schemes
“Smaller boutique firms, who want to follow their own investment style and stay small and nimble, will have to scale up fast or move to an AIF model,” Teli says.
Increasing the minimum investment amount from INR25 lakh will impact retail investors looking for customised solutions. It will make it very difficult for professional fund managers to enter the industry,” he adds.
He has a point. The PMS business has attracted the risk-taking clients, who already know about investing in equity. They know that equity is a risky bet and invest only a part of their wealth in PMS. “These people are smart. They have a high risk-taking ability. But to expand the market, it makes sense to lower the ticket size. I think there is a big market out there which has the ability to take risk,” says Arindam Chanda, executive director and head of broking business at IIFL.
Chanda feels that the move to increase the ticket size is cosmetic. The average ticket size for the industry as of now is around INR60 lakh. This is proof that most people have invested more than INR25 lakh in equities through PMS. But this market is limited. Today the total size of the PMS market is restricted at INR1.2 lakh crore and it can only expand if the restriction on minimum investment is lowered.
Most of the industry doesn’t understand why the regulator is in such a hurry to increase the limits. It was only in 2012 when PMS limits were increased from INR5 lakh to INR25 lakh.
Parag Parikh Financial Advisory Services ran a very successful PMS till 2012 at a ticket size of INR5 lakh. It was at a time when many players had increased their ticket size to INR20 lakh-INR1 crore. But Parag Parikh felt that it was his job to turn the middle class into a rich class. He knew that the middle class did not have the risk appetite to shell out more than INR5 lakh for investing in equities.
When he did not have an option but to increase the ticket size to INR25 lakh, he converted his PMS scheme into a mutual fund scheme so that he could stay true to his dream of increasing the net worth of the middle-class investor. But launching the scheme required a capital of INR50 crore. It was not an easy task, but he managed to sail through. The Parag Parikh long-term equity fund today has a size of INR1,352 crore and has given high risk-adjusted returns to its investors.
Sebi’s move to protect investors may
put them at higher risk
The PMS industry invests in a part of the market where price discovery is not easy. By looking for good investment ideas in companies that are small and illiquid, they actually make the market efficient. If the ticket size of PMS is increased, these investors will move out of mutual funds (MFs) and try to take risks on their own. That would be even more dangerous as they will not have any professional help.
The MF industry is going through a lot of change. While it is getting around INR6,000 crore every month, the MF business has become competitive and distributors are earning less commission, compared to the last five years. Direct plans are becoming a reality and many of the distributors are now distributing PMS products. “Some are targeting investors in mutual funds with investments more than INR25 lakh. They are shifting that money to PMS funds, exposing the investor to higher risks,” says the CEO of a large PMS fund who doesn’t want to take new clients without understanding their risk profile.
The problem is that risk profiles keep changing. At this point, when the markets are on a high, the average investor is in a position to take higher risk. But the same investor, rich or middle-class, doesn’t want to be in the market when the market is falling.
A PMS fund manager who understands the needs of the client is actually an advisor to his investor. He looks at the asset allocation of the client and in most cases, onboards the client only if he has the ability to stay with the fund when markets fluctuate.
“Instead of looking at an absolute number, Sebi should look at the asset allocation of the client. Basically, a 50:50 ratio between equity and debt for clients at the INR25 lakh ticket size would be a better idea,” says a fund manager.
Anybody who puts in INR25 lakh in a PMS scheme understands the risk. Most of them have a net worth of INR5 crore, sometimes only in equities. “The regulator should get in more smart fund managers into the industry by thinking of expanding this market than restrict it,” says Aashish Sommaiyaa, CEO, Motilal Oswal AMC.
The bottom line
The regulator has noble intentions, but they can be detrimental to both the PMS industry and investors.
A person, who is earning INR20,000 a month is allowed to take high risks and invest in mutual funds without any professional advice. Then why should someone with a net worth of INR2 crore-INR5 crore be restricted from approaching the PMS route with the help of an advisor?
Also, with 75% of the PMS assets resting with bigger players, it will be difficult for smaller players to survive. These are mostly new players who have come into the market over the last four years after the bull run started. Now before the end of the bull run, they are in for a bigger challenge that was faced by the PMS industry in 2012. But this time, survival will be tough.
The PMS industry invests in a part of the market where price discovery is not easy. By looking for good investment ideas in companies that are small and illiquid, they actually make the market efficient. If the ticket size of PMS is increased, these investors will move out of mutual funds (MFs) and try to take risks on their own. That would be even more dangerous as they will not have any professional help.
The MF industry is going through a lot of change. While it is getting around INR6,000 crore every month, the MF business has become competitive and distributors are earning less commission, compared to the last five years. Direct plans are becoming a reality and many of the distributors are now distributing PMS products. “Some are targeting investors in mutual funds with investments more than INR25 lakh. They are shifting that money to PMS funds, exposing the investor to higher risks,” says the CEO of a large PMS fund who doesn’t want to take new clients without understanding their risk profile.
The problem is that risk profiles keep changing. At this point, when the markets are on a high, the average investor is in a position to take higher risk. But the same investor, rich or middle-class, doesn’t want to be in the market when the market is falling.
A PMS fund manager who understands the needs of the client is actually an advisor to his investor. He looks at the asset allocation of the client and in most cases, onboards the client only if he has the ability to stay with the fund when markets fluctuate.
“Instead of looking at an absolute number, Sebi should look at the asset allocation of the client. Basically, a 50:50 ratio between equity and debt for clients at the INR25 lakh ticket size would be a better idea,” says a fund manager.
Anybody who puts in INR25 lakh in a PMS scheme understands the risk. Most of them have a net worth of INR5 crore, sometimes only in equities. “The regulator should get in more smart fund managers into the industry by thinking of expanding this market than restrict it,” says Aashish Sommaiyaa, CEO, Motilal Oswal AMC.
The bottom line
The regulator has noble intentions, but they can be detrimental to both the PMS industry and investors.
A person, who is earning INR20,000 a month is allowed to take high risks and invest in mutual funds without any professional advice. Then why should someone with a net worth of INR2 crore-INR5 crore be restricted from approaching the PMS route with the help of an advisor?
Also, with 75% of the PMS assets resting with bigger players, it will be difficult for smaller players to survive. These are mostly new players who have come into the market over the last four years after the bull run started. Now before the end of the bull run, they are in for a bigger challenge that was faced by the PMS industry in 2012. But this time, survival will be tough.
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