On average, equity PMS investment approaches have delivered 18.99% returns beating the benchmark in the past five financial years (as on March 2024).
Financial experts often recommend long-term equity investments for wealth creation. This strategy applies to equity Portfolio Management Services (PMS) as well. PMS are customised portfolios that typically hold a certain number of stocks.
Looking at a 10-year period ending in March 2024, PMS delivered strong results. The average return during this time was around 18%. Even better, 48 out of 57 PMS tracked by PMS Bazaar for over 10 years generated returns exceeding 15%. This outperformed the Nifty 50 TRI, which returned 14% over the same period.
While the long-term benefits of PMS are clear, what about medium-term performance? Let's see how PMS fared over the past 5 years.
PMS 5-YEAR PERFORMANCE
Indian equity performance
The past five years have been a period of immense challenge for the global and domestic economy. The COVID-19 pandemic and its aftermath of supply chain disruptions, followed by the Russia-Ukraine war, caused significant economic disruptions. These geopolitical crises triggered a rise in key raw material prices, including crude oil, leading to global inflation and Central Banks raising interest rates to combat it. As a result, stock markets experienced increased volatility. The Indian VIX, a measure of expected short-term market volatility, surged on the day of the Russian invasion to 32 points, reflecting investor anxiety. However, it has gradually come down to 13 (March 2024), indicating a return to some stability.
Despite these global headwinds, the Indian equity market has shown remarkable resilience since 2019. A key factor behind this is the surge in retail investors. The number of demat accounts skyrocketed post-pandemic, with young investors entering the market in droves. The number of Demat accounts in March 2020 stood at roughly about 4 crore. It grew to a whopping 11.4 crore in March 2023 and now (March 2024) stands at 15.1 crore. These retail investors acted as a buffer during heavy foreign investor sell-off periods, providing much-needed stability. Favourable regulatory changes along with India's strong economic growth prospects further bolstered the equity market.
Macro factors help PMS growth
The strong Indian economic story not only attracted retail investors but also sophisticated investors. The number of ultra-high-net-worth individuals (UHNIs) in India has steadily increased and is expected to grow in the coming years. By definition, UHNIs are those with a networth of USD 30 million or more while HNIs are those with networth greater than USD 1 million. As per Knight Frank Wealth Reports, the number of UHNIs was 12,287 in 2020 and increased to 13,263 in 2023. By 2028, UHNIs are expected to reach 19,908. Similar trends are seen in the High net-worth individuals (HNIs) population. In 2016, the number of HNIs stood at 4.87 lakh and this number grew to about 7.97 lakh HNIs in 2021. This segment of the population is expected to reach 14.07 lakh in 2026. The demand for professional wealth management services has also grown with the rise of wealthy investors.
HNIs and UHNIs increasingly opt for Portfolio Management Services (PMS) to manage their investments, seeking personalised portfolio management and the potential for superior returns compared to traditional investment options. Sample this, from 1.27 lakh PMS clients (including discretionary, non-discretionary and advisory) in March 2021, it grew to 1.53 lakh in February 2024 as per SEBI data.
As such, in the past 5-years, the average of returns from PMS investment approaches based on PMS Bazaar data stood at 18.99% while Nifty 50 (total return index – TRI) stood at 15.27% and that of BSE 500 TRI was 17.38%. Let’s do a deep dive into the 5-year performance of equity PMS investment approaches.
How did PMS categories fare?
Equity Portfolio Management Services (PMS) is a personalised investment option for high-net-worth individuals where a PMS manager actively picks and manages a concentrated portfolio of (few) stocks tailored to themes like value investing or growth. With a minimum investment of Rs 50 lakh, PMS caters to a niche clientele. The benefit lies in the portfolio manager's flexibility. They can be more aggressive in their stock selection than other investment options, such as mutual funds, aiming for higher returns. As such, these (PMS) investment approaches can potentially outperform benchmarks not only in the long run but also in the medium term of a 3–5-year timeframe. Let us understand the data to see how PMS has performed over the past five years.
PMS Bazaar's data shows that of the 163 PMS investment approaches with a five-year track record, 158 have delivered double-digit returns (Data as of March 2024). Over the past five years, 100 PMS investment approaches have outperformed Nifty 50 TRI and BSE 500 TRI. This strong track record and the ability to navigate market volatility effectively make PMS a compelling choice for HNIs and UHNIs seeking to grow their wealth.
While most equity PMS categories have outperformed their respective benchmark in the 5-year timeframe, the degree of outperformance varied. For instance, in the large-cap category of the 17 PMS investment approaches, 9 of them outperformed the benchmark indices (53% outperformance). On the other hand, the small-cap category saw 91% benchmark outperformance. Similarly, mid-cap witnessed 87% outperformance. See the table below for category-wise outperformance:
Let us see how some of these categories have performed in the past 5-years.
Large-cap funds invest in companies with a large market capitalisation. These are well-established corporations with a significant market presence and are typically among the biggest companies in the stock market. These companies are known for their stability, strong finances, and established brands, making them a safe choice for investors.
Investing in large-cap PMS means allocating money to reliable companies that form the core of your investment portfolio. These companies are industry leaders with a long history of success. They have proven their ability to navigate through economic ups and downs, demonstrating resilience in the face of market fluctuations. For example, in the recent correction of mid and small cap, the segments fell from their high in Feb this year (up to March), down 2.4% and 6.9% respectively while the Nifty 50 index was up 1.8% during the same period. This consistent track record of weathering storms in volatile markets is a testament to their stability and ability to adapt. This aspect is particularly attractive to investors, who are risk-averse and seek a balance of steady growth and reliable performance in the long run, especially during uncertain economic times.
Having said that, small and mid-cap stocks have significantly outperformed large-cap stocks in the past five years. This is likely due to favourable macroeconomic and domestic factors that have fuelled a rally in the Indian stock market. While large-cap stocks, as represented by the Nifty 50 index, rallied 14% between March 2019 and March 2024, small-cap and mid-cap indices significantly outpaced this growth. The small-cap 250 and mid-cap 150 indices were up 22% and 21% respectively during the same period.
A similar trend was seen in the PMS investment approaches as well. Based on the data with PMS Bazaar, the small and mid-cap categories have seen a substantial outperformance of 91% and 87% respectively compared to the large-cap category. The average return for small and mid-cap PMS categories was around 23% and 22% respectively for the five years between FY19 and FY24.
This trend suggests that investors who focused on small and mid-cap companies in the past five years may have seen better returns than those who invested solely in large-cap stocks. It is important to note that past performance is not necessarily indicative of future results. Investors should carefully consider their risk tolerance before investing in small and mid-cap categories.
Unlike large-cap funds, which prioritise stability, and small/mid-cap funds, known for volatility with potentially high returns, multi-cap offer diversification across all company sizes. This mix has led to a respectable 54% outperformance compared to the benchmark over the past five years, as per PMS Bazaar data. While large-cap funds provide a safe haven, multi-cap captures growth opportunities in smaller companies without sacrificing stability entirely. In other words, the PMS multi-cap category tries to make a good balance between risk and reward.
Where do equity PMS invest?
Even though portfolio managers adjust their holdings based on market conditions, individual stocks may not be held for the entire 5-year period. Therefore, focusing on the overall portfolio performance is more important than tracking individual stock entries and exits within a PMS.
That being said, to give you an idea of the types of stocks that have contributed to PMS success, here is a list of stocks commonly held by PMS portfolios as of March 31, 2024. Keep in mind that, just because a stock is under a large-cap or small-cap category doesn’t mean that it is held in a large-cap or small-cap PMS portfolio. For instance, portfolio managers of small-cap PMSes can take exposure even in large or mid-cap companies, to an extent.
Top PMS performance in 5-years
Overall top 10 performers in PMS in the past 5 years:
Takeaway
The average return on PMS investments over the past 5 years was 18.99%, outperforming the Nifty 50 and BSE 500 TRI. Among the PMS categories small-cap and mid-cap categories significantly outperformed other categories such as large-cap. This is likely due to the overall optimistic market aided by favourable economic growth forecasts.
While investors from small and mid-cap segments could have seen better returns in the past five years, they should consider their risk tolerance before investing in such segments going forward on account of increasing concerns towards valuation. Further, past performance is not indicative of future results. That said, PMS could be a compelling choice for HNIs and UHNIs seeking to grow their wealth with strong performance across categories and the ability to navigate market volatility.
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