Portfolio Damagement Schemes and distributors

(This appeared in www.moneylife.in)

A big fund house recently announced the redemption of a three year real estate PMS scheme. The investors were happy as they got back a total of one hundred and three percent of the money they invested. Yes, a pathetic return, but the investors were happy to see their principal back. Of course, it is more psychological than logical. In real terms, probably each investor lost around thirty percent of his principal, if inflation or purchasing power is factored in! Not a very prudential investment.
Several interesting takeaways from this:
i) Though the scheme collected money in 2007 (property prices even today are around fifty percent higher than that period), the investment must have been so bad that the net return to the investor is so pathetic. Or it is likely that the fund manager/s has done sweetheart deals with investee companies and made good money on the side;
ii) There would have been some investment costs (brokerage, due diligence etc);
iii) The distributor made a total of around five percent upfront, when he sold the scheme to the investor; and
iv) The AMC or the investment manager charged a three percent entry load and an annual management fee of two percent. Totally, the AMC made around nine percent of which five percent was given to the distributor. In effect, the AMC made four, the distributor five and the investor three! All the investment was of the investor. So, for the distributor and the investment manager, the return is infinite and for the investor, it is less than one percent per annum!
Alas, even today PMS schemes continue to lure investors.
The latest among the PMS schemes are the ‘debt’ PMS schemes, with return promises of around twenty percent per annum for three to five years. The collected money is lent to investment companies belonging to industrialists who in turn pledge their holdings in listed companies. The money is used by the investment companies to either buy more shares or to manipulate the share prices. Not all the investment companies are actually disclosed to be promoter entities as per the official records. And since there are no investment limits etc on PMS schemes, often, the entire pool of money is lent to one entity! This is nothing but backdoor money lending!
For selling these funds, the distributor can get two to five percent commission, upfront.
I happened to see a PMS account statement of a gentleman who had invested money in to a scheme focused on ‘consumption’ theme. In one year since investment, the person was down eleven percent, in spite of keeping cash balance of close to 45%! In the same period, the sensex has given a positive return of twenty percent! I found the arithmetic difficult to digest. My guess is that what I saw was just the snapshot of the statement date. Perhaps there has been active churning and trading which would have eaten away most of the money. Investors never seem to learn!
It is rare that PMS schemes give returns higher than the mutual funds. In spite of that, people with too much money, seem to get easily conned by the sales folk who push the PMS schemes at them because the selling commission is much higher than a mutual fund. It is time SEBI raised the minimum ticket size for PMS to at least a few crores of rupees. Then, it is a case of the rich putting their money knowingly. Today, people with less than even a crore of investment portfolio, are being lured in to PMS. Of course, they too do not deserve any sympathy, but greed is a normal human tendency and if the regulator can curb it somewhat, the investor who keeps away from such rotten schemes, would be protected.