With the mainstreaming of Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), the choice of investors has deteriorated. Presently, there are over 365 Portfolio Managers and 900 AIFs registered with the markets regulator SEBI, and the number is increasing rapidly. Asset managers typically rely on parameters that have traditionally been used to evaluate investments in mutual funds: past performance, comparing returns relative to benchmark or peer group funds over different time periods and horizons, and Risk-adjusted returns. This approach is not sufficient, as portfolio managers under PMS or AIF platforms have more latitude in managing money and run free portfolios with flexible pricing options.
The portfolio manager selection process can be made more comprehensive by including some of the parameters used by foreign institutional investors (FIIs) when they evaluate investments across different asset classes, target geographies and investment strategies in global markets. As the portfolio manager of some of the largest sovereign funds in the world, here are some lessons from the team at Karma Capital.
Asset Managers and Asset Gatherers: An asset manager will maintain a limited number of funds with any other related or unrelated businesses, to ensure that significant time is given to managing the funds and other linked activities. An asset manager will launch a PMS or AIF in a manner that is only open for a limited period of time or with clear guidance on the optimum or maximum size of assets under management. This approach ensures that it remains manageable for the asset manager without affecting the risk and returns of investors.
Some asset collectors, however, try to maximize fee income by launching multiple funds that compensate new investors or employees based on the assets they bring in, cross-selling or upselling related services. Many large foreign university endowment funds in the US invest in India almost exclusively through boutique PMS firms – choosing them over large well-known sponsored entities.
Long-term outlook: It is generally accepted that portfolio managers with long track records see troughs in performance, both absolute and relative, in comparison to a benchmark or peer group. Instead of placing maximum emphasis on the volatility of portfolio results, FIIs evaluate whether the portfolio manager believes in a broad investment philosophy, has adhered to the approach, has demonstrated discipline with the process, and adopts an unbiased approach to investing. Has the ability to maintain. , despite short-term price movements.
Alignment of Interest: A significant amount of co-investment of personal capital by an employee-owned portfolio management firm or portfolio managers ensures a strong alignment of economic interest. There are other areas of alignment of interest as well. For example, some investors avoid ‘sin’ stocks or gravitate towards an ESG-conscious investing style, while others seek a specific investment style. A sudden change by the investor or portfolio manager would be neither practical nor ideal to create a long-term asset for both parties.
Trust investment advisors: Although FIIs have some of the best or largest internal investment and research teams, many rely on external investment advisors to identify suitable portfolio managers. They understand that an investment advisor will be able to give them an unbiased view of many portfolio managers, identify their competitive advantages, and perform certain aspects of due diligence on their part in a way that maximizes portfolio results. Can you In fact, almost all the largest private and public pension funds have advisory firms to help them with their investment processes.
Yogesh Thakkar is Co-Head, Business Development at Karma Capital
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