Frequent churning of portfolio, high management fees followed by dismal returns and dwindling profitability is leading to several Asset Management Companies (AMCs) exiting the portfolio management service (PMS) business. Such exits would have not been normally noticed because PMS is a privately sold service. But one of them, from Franklin Templeton, has turned controversial after the fund house abruptly exited from the PMS business, leaving the investors and distributors high and dry. According to distributors, Franklin Templeton has failed to offer enough reasons to them and investors for impetuously pulling out two equity products—FT Select and FT Opportunities.
The distributors are now angry with the fund house for putting them in an awkward situation in front of the clients, to whom they were once encouraged to sell PMS. “During the bull run, AMCs tried to convert PMS from a large value item into a retail item. But as the market crashed, they realised that it was not the right place for them to be,” said T Srikanth Bhagavat, managing director, Hexagon Capital Advisors Pvt. Ltd. Zankhana Shah, co-founder, Moneycare Financial Planning Ltd, said, “I was surprised with Templeton’s move. I had to incur 50% loss because of this.”
In an attempt to underplay the crisis, Harshendu Bindal, president, Franklin Templeton Investments India said, “We haven't closed down our PMS business but pulled out only two equity products—FT Select and FT Opportunities.”
Before 2005, if an investor wanted to enter the PMS business, the entry level charge used to be anywhere between Rs50 lakh and Rs1 crore. During 2005- 2006 when the stock market was bullish, AMCs had slashed the PMS entry level charge between Rs5 to Rs10 lakh in a bid to attract more retail customers.
Besides Templeton, DSP BlackRock Investment Managers has also shut down its PMS business.
The profit-sharing fee charged by most PMS houses is also on the higher side. Most PMS houses charge 20% more than the hurdle rate profit-sharing ratio. Even if the scheme shows poor performance, the PMS house charges a fixed fee which is very high. Again there is no control on the cost in terms of churning and the brokerages paid to distributors. There is no transparency in the process.
Some distributors don’t even like PMS. “I do not like PMS schemes and I do not sell these schemes. It’s my personal choice as I am not convinced with what fund houses like Templeton have done,” said Kolkata-based Brijesh Dalmia, founder, Dalmia Advisory Services.
When asked whether PMS is a dubious product because of high costs and poor returns, Dalmia said,”PMS is a good product but the paradox is that customers do not understand it. PMS is sold as a customised product, but in reality, it is not. This is because the cost is very high compared to other investment options available in the market. The taxation is not suitable for customers. Besides, there is no control on the churning part by the fund house or the fund manager.”
“I find there is no logic to differentiate PMS from a mutual fund. The PMS schemes are operated in a manner where there is no fixed fee structure and capping on expenses on churning. This is obviously not in the interest of the client. In the last couple of years, I have not seen any PMS which has beaten the benchmark index of any diversified equity fund. Of course, PMS will be promoted by the distributors and financial advisors because of high commission offered by the fund houses which range anywhere between 2%-4%,” said Dalmia.