Bespoke wealth management solutions: Here's what is driving the surge

As India sees a rise in the number of billionaires, the demand for bespoke wealth management solutions for high net-worth individuals—in the form of portfolio management services—has also gone up

Did you know that the billionaire capital of Asia also minted the highest number of new billionaires last year? And, according to the 2024 Hurun Global Rich List, it’s not Beijing, Shanghai, Dubai, or Hong Kong. It is, in fact, Mumbai. For the first time in recent history, Mumbai has pipped Beijing to the top spot—India’s financial capital is home to 92 billionaires with 27 new entrants, higher than Beijing’s 91 billionaires, with six new additions. More importantly, India added a record 84 billionaires—in sharp contrast to China, which saw the number dip by 155—in a single year. Only the US, with 109 new additions, minted more billionaires last year.

With the number of wealthy individuals rising in the country, it comes as no surprise that the demand for professional money managers for the well-heeled has also gone up. While mutual funds (MFs) have become the go-to investment product for retail investors, for wealthy investors—known as high net-worth individuals or HNIs in market parlance—have found their panacea in portfolio management services or PMS.

Simply put, PMS refers to a fund management firm where a fund manager manages a portfolio of stocks—typically between 20 and 30—as part of a scheme that could be designed around themes like value investing, growth stocks or entrepreneurship, among other things. The minimum ticket size for a PMS scheme is Rs 50 lakh.

The growing demand for PMS is corroborated by the fact that the total assets under management (AUM) of the sector has more than doubled in the last five years, growing to Rs 32.22 lakh crore as of January 2024 from Rs 15.40 lakh crore in January 2019. In fact, the number of portfolio managers has more than doubled in the last seven to eight years to 400-plus.

“ The industry has demonstrated its capabilities with continuous alpha generation by well reputed and professional managers ”

SUNIL ROHOKALE
MD & CEO
ASK Investment Managers

“The portfolio management industry has demonstrated its capabilities with continuous alpha generation by well reputed and professional managers, thus increasing the inflows and AUM in the industry. This coupled with new entrants has led to strong growth,” says Sunil Rohokale, MD & CEO of ASK Asset & Wealth Management Group, one of the largest PMS firms of the country.

Further, data from the Association of Portfolio Managers of India (APMI), the industry body of PMS firms, shows that of the more than 400 Securities and Exchange Board of India (Sebi)-registered entities offering PMS services in India, around 20 have an AUM in excess of Rs 10,000 crore each. Another 60-odd firms are each managing AUM between Rs 1,000 crore and Rs 10,000 crore.

All of this has been possible because of regulatory changes that have enhanced the level of disclosures and transparency in the PMS arena, once known to be fraught with opaque fees and performance metrics. In 2020, markets regulator Sebi amended the PMS regulations that were first formulated in 1994. The regulator increased the minimum investment ticket size from the then existing Rs 25 lakh to Rs 50 lakh—clearly signalling to the industry that PMS had to be sold only to HNIs and not retail investors, who have the option of MFs.

“While increasing the ticket size would have initially reduced the addressable market size, the uniformity in performance disclosure standards and the setting up of APMI, a self-regulatory association of PMS players, has helped in enhancing the confidence of investors,” says Hiren Ved, Director & CIO of Alchemy Capital Management, a PMS provider with AUM in excess of Rs 7,000 crore.

Thereafter, disclosure norms were enhanced, performance measurement was standardised and loopholes or grey areas that encouraged mis-selling were plugged. For instance, upfront commissions—which typically incentivise distributors to push their clients for regular but unnecessary churning of schemes—were banned, akin to what was mandated for MFs earlier.

“Regulations right from operational aspects such as POA (power of attorney), pool account, minimisation of in-house brokerage related conflict of interests have all gone to institutionalise the business and have provided an added layer of safety to client assets,” says Nitin Raheja, Executive Director, Julius Baer India, a wealth management firm catering to HNIs and ultra-HNIs.

The choice between PMS and MFs assumes significance in the realm of wealth management. While both .offer growth opportunities, their approaches diverge. PMS, tailored for HNIs and ultra-HNIs, provide a bespoke investment experience with higher customisation and flexibility, while MFs adopt a standardised approach managed by fund managers, catering to a broader audience with pre-determined objectives. Also, PMS portfolios, characterised by concentrated holdings, offer direct ownership for clients over their stocks, while MFs offer investors units of schemes that have invested in the stocks.

Akhil Chaturvedi, Chief Business Officer of Motilal Oswal Mutual Fund, believes that PMS offers multiple opportunities to investors to participate in the Indian stock markets for long-term wealth creation.

“With the rise of HNIs/UHNIs (ultra-HNIs) over the last 10 years, there has been growing interest in investing in boutique portfolios through the PMS platform,” says Chaturvedi, whose firm is among the largest players in the space.

“ The relatively smaller fund sizes enable flexibility, nimbleness, and an ability to provide concentrated portfolios to provide alpha ”

NITIN RAHEJA
Executive Director
Julius Baer India

But how does one pick the right PMS? Selecting the right one involves assessing the firm’s experience, investment philosophy and performance history, as well as reviewing the fee structure. A good PMS helps investors diversify portfolios, manage risks, navigate complex investment landscapes, and avoid erratic investing decisions. Choosing a reputable PMS can bring professionalism to investments and assist in achieving financial goals. So, it is important that potential investors make time and effort to choose the right service. This assumes significance as PMS is all about the perennial search for alpha—or return over and above that of the underlying benchmark—and this throws up interesting statistics.

Data shows that not a single portfolio manager catering to affluent investors witnessed a fall in their portfolios in the last 12 months till February 2024. And, the Top 5 alpha generators recorded gains of more than 100% even as fund managers believe that the robust Indian economy and the government’s thrust on capital expenditure, which is providing buoyancy to the equity markets, will continue to present similar opportunities in the long run.

Going ahead, the scope of growth for PMS as an industry is huge as India is expected to see a strong uptrend in the number of wealthy individuals, who typically look at bespoke investment solutions that a mutual fund cannot offer. PMS is the best option for such HNIs and ultra-HNIs.

“I see tremendous growth for the PMS industry. The number of HNIs is growing in India, and they need sophisticated and boutique managers to manage their wealth. Digital distribution, direct pricing, greater transparency, and innovative strategies are expected to drive AUM as well as client growth in excess of 20% annually in my view,” says Ved of Alchemy Capital Management.

This desire for a differentiated strategy has led to the emergence of boutique PMS firms—mostly launched by well-known and marquee fund managers who chose to embark on their own entrepreneurial journey after having worked under the shadow of a big firm for many years.

Chaturvedi of Motilal Oswal Mutual Fund believes that competition is always healthy and leads the industry to grow, while investors are offered choices, and fund managers will be more competitive to deliver consistent returns.

In the pages that follow, find out all about PMS schemes and the strategies that worked best.