The mutual fund (MF) space has grown significantly in the past two decades. However, being a mass product, MFs follow the law of averages when it comes to risk and returns. This works for retail investors but fails to meet the risk and return objectives of high net worth individuals (HNIs).
This is where portfolio management services (PMS) and alternative investment funds (AIFs) come into the picture. “MFs are standardised schemes with a lot of investment restrictions. PMS and AIF offer more flexibility,” says Rahul Jain, Head, Edelweiss Wealth Management. The recent rigid classification of MFs by Sebi has made it worse.
“PMS managers construct a focused, client-centric portfolio with fewer high-conviction stocks having healthy earnings visibility, quality balance sheets and business leadership,” says Rajesh Cheruvu, CIO, Validus Wealth.
Most PMS plans get their returns from equity markets, they cannot remain completely insulated from significant developments in the market. Concentration of stocks generates superior returns in normal course. However, it can be risky in case of a broader market correction like the one at the beginning of the year which eroded wealth of most equity investors. The good part is that it was followed by an equally impressive recovery in subsequent months. “The recovery has been fast. The deluge of global liquidity created by governments and central banks has found its way into various assets, including equities, gold and bonds. Equity markets are placed as if Covid never happened, erasing the losses suffered in February and March,” says Unmesh Kulkarni, Managing Director, Senior Advisor, Julius Baer India.
The BSE Sensex is only around 7 per cent short of its all-time closing peak on January 14. A few top performing funds are giving positive one-year returns while a good number are still in the negative territory. One of the biggest PMS funds with assets of ₹10,778 crore, ASK – IEP, has returned 5.3 per cent in one year and a CAGR of 16.40 per cent since its inception more than 10 years ago. ACCURACAP ALPHA10 has delivered a return of 17 per cent in one year and a CAGR of 14.29 per cent since inception around nine years ago.
However, the recovery has changed many things for these funds. “The large-caps were knocked down in the pandemic-driven crash by approximately 40 per cent while mid-caps and small-caps were beaten down 50 per cent or more. The recovery has been phenomenal for both smallcaps and mid-caps with some stocks trading at as much as 2.5 times their pre-Covid 2020 highs,” says Rajesh Cheruvu, CIO, Validus Wealth.
The market is also betting on new favourites. “The initial recovery was led by quality large-caps. The gains later percolated down to select mid-caps and small-caps. The bulk of the returns have come from sectors that have either been less affected by the pandemic or benefited — pharmaceutical, healthcare, technology, agriculture, rural consumption, etc,” says Rajesh Saluja, CEO & MD, ASK Wealth Advisors.
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September 20, 2020