Positive regulatory intervention and the ‘financialisation’ of savings in India has galvanised the Portfolio Management Services (PMS) industry in India. Once seen as a niche corner of the asset management sector, the PMS sector industry is increasingly at the vanguard of dynamic innovation in the Indian asset management sector.
The year was 2017 and the Indian stockmarket was booming in the aftermath of demonetisation (the Nifty rose nearly 30% that year). Mutual fund inflows were rocketing and on Dalal Street stories abounded of the vast wealth being created by the prominent mutual fund houses. As per AMFI, net inflows in FY2017 into mutual funds were Rs 3.43 lakh crores. However, elsewhere in a quieter corner of the asset management industry, the PMS industry was not seeing this sort of boom. The growth in assets under management for the PMS industry in FY17 was Rs 1.85 lakh crores (source: SEBI’s website) with much of this growth the result of the market moving upwards. PMS managers were seen as pale imitations of the larger-than-life legends who straddled the mutual fund industry. Advisors to HNW individuals saw the PMS industry as being characterised by high costs, low transparency and indifferent investment performance.
In 2018, my colleagues and I founded Marcellus Investment Managers, a SEBI regulated PMS provider. Now, as Marcellus approaches a billion dollars of assets under its care, we are a proud constituent of a vibrant and revitalised PMS industry. At the end of October 2020 , AUM managed by the PMS industry stood at Rs 19.2 lakh crores, up 40% on the October 2017 figure (source: SEBI’s website). New PMS providers with high quality fund managers are increasingly visible in the media and in the wealth management industry’s online conferences. Advisors to HNW individuals increasingly now view the PMS product as an essential part of a discerning investor’s portfolio.
So how did the transformation take place in a short span of four years? To my mind three different forces have intertwined to transform the fortunes of the PMS industry.
Firstly, SEBI noticed in 2019 that a holistic update of PMS regulations was due given that over two decades had elapsed from the time the original PMS regulations were expedited in 1993. The regulator created an internal team which worked alongside a group of PMS industry experts through 2019 to review the regulations governing how PMS managers conducted themselves and treated their customers. Alongside other senior executives from the asset management and wealth management industry, I was part of that working group and I remember that it was gruelling work with SEBI exhorting the working group to simplify and update the PMS regulations to reflect the modernisation of India’s capital markets.
There were five critical areas where SEBI’s new rules upgraded the regulations for the PMS sector: (1) PMS managers could no longer charge clients upfront fees in any shape or form, a construct that had been implemented in the mutual fund industry in 2009; (2) the way PMS managers reported their performance to clients in marketing literature and on their websites was standardised to prevent these managers from selectively reporting performance in a way which flattered their investment credentials; (3) the minimum corpus required to open a PMS account was raised from Rs 25 lakhs to Rs 50 lakhs to prevent misselling of the product to customers who were not HNWs by any stretch of the imagination; (4) the way PMS managers report their performance to SEBI was also standardised to, once again, prevent selective reporting; and (5) PMS managers’ minimum networth requirement was doubled to Rs 5 crores thus raising the bar for who could become a PMS manager.
In January 2020, the new PMS regulations were published and within months I could see how the wealth management industry’s (and their HNW clients’) perception of the PMS industry had changed.
Secondly, the last four years have seen Indian HNWs increasingly allocate their wealth to financial assets rather than to physical assets like real estate and gold. The retirement maths for a typical Indian upper middle class family can be understood through a simple example. Assume that such a family currently lives off a post-tax income of Rs 50 lakhs per annum. Assume further that the income earning people in the family have 20 years to go to retirement implying that 20 years hence they will need Rs 3 crores per annum to have the same quality of life (as they do today) post-retirement. To maintain an annual income at this level for a 25-year retirement this family will need to have in (in today’s money) a Rs 15 crore corpus.
Having spoken to over 20,000 such families over the past couple of years, we can see that most Indian HNWs have figured out for themselves the implications of the retirement maths outlined above. In particular, they have figured out their land, their property and their gold will not be enough to fund them through retirement (note: the RBI’s well researched August 2017 Household Financial Committee report says that 95% of Indian households’ stock of wealth is in physical assets). As most people now know, physical assets struggle to keep up even with the rate of inflation.
The practical implication of this is that the smaller the town, the lower the returns from physical assets, the quicker the HNW warms up to a credible PMS product. So, using Tamilnadu as an example, a pitch which takes an hour in Chennai, takes 45 minutes in Coimbatore (population: 1.6 million), 40 minutes in Tirrupur (population: 0.8 million) and around 30 minutes in Erode (population: 0.5 million).
Thirdly, much like what the mutual fund industry did five years ago, PMS providers are increasingly coming up with innovative products which make it easy for HNWs to save & invest prudently through India’s equity markets. For example, in December 2020, my colleagues in Marcellus launched a Systematic Investment Plan (SIP) product for our PMS clients. This SIP allows Marcellus’ clients to drip feed into their PMS account a relatively small, fixed sum of money each month provided the client’s corpus exceeds Rs 50 lakhs.
Over the next decade, as the refreshed regulatory construct for the PMS industry combines with the financialisation of India’s household wealth, the PMS industry is likely to grow assets under management at around 15% per annum implying that by 2030, this industry is likely to be managing around US$1 trillion, more than three times the corpus under management today.