With the equity markets up almost 50 per cent over a year--and many individual stocks far more--the good times are here for a number of equity investment-related business. All kinds of people whose purported profession it was to help you make money from equities have crept out from the woodwork over the last few months.
The biggest example is that of Portfolio Management Schemes (PMS). Suddenly, after a long time, PMSs seem to have gone into intensive marketing mode. Friends, acquaintances and people who write in for investment advice are reporting being approached by portfolio managers whose pitch is the fabulous profits that they have made for other clients.
PMS services are sold on a premise of managing investors' portfolios on an individual basis, customised to each customer's needs. They can either a flat fee or a performance-linked one, although the latter is more common. Generally, the fee is likely to be a fixed 2 per cent of the asset value, plus about 20 per cent of profits above a pre-decided benchmark.
No doubt, the fees are high. However, that's not the real problem with these schemes. The real problem is an utter lack of transparency. There is simply no way to get authentic information about what exactly do PMSs deliver to their customers. I've never heard any PMS that, after charging expenses, has sustained returns which are meaningfully above market performance, or above that of average mutual funds. In fact, there is a large amount of anecdotal evidence that PMSs generally do far worse.
However, there is no way of knowing what they do on an aggregated, and independently verifiable basis. Which is true--PMSs' marketing pitch, or what one hears from investors? I've heard of marketing pitches that blithely promise returns of 8 to 10 per cent a month. On the other hand, I've had emails from an investor who told (with full evidence) of losing about 30 per cent in a period when the markets lost 9 or 10 per cent. Which of the two is more likely to happen to you? That's anybody's guess.
Actually, from what I've observed, both are likely to happen to a customer. Because PMSs periodically skim off a percentage of the gains, but still keep getting a small fee when there are losses, they are in a 'heads I win, tails you lose' position vis-a-vis their clients. Their preferred strategy is to use risky, leveraged strategies and deliver high returns when the markets are rising. This earns them a cut of the profits. However, when the markets fall, the same strategy leads to big losses. However, the losses belong to the customer alone, so this doesn't matter to the PMS providers.
Because SEBI doesn't force any transparency norms on PMSs, they operate under the radar and never engage in any public interaction. When I write critical articles about mutual funds and insurance schemes, I generally get a lot of pushback from providers and sellers of these products. However, this never happens with PMS providers. The reason is that in order to respond, they'll have to talk about real performance data. However, these people are in the business of hiding and fudging information, not providing it. Aided by the regulators' benign neglect, they prefer to ignore public criticism and go on quietly targeting customers, most of whom may not have heard anything negative.
Clearly, the solution lies with the regulators. Offering investment services is an otherwise highly regulated industry in India. There is simply no excuse to allow PMSs to make unauthenticated claims while marketing their services. At a minimum, they should be forced to reveal independently audited information about the range of post-expense returns that they have been able to offer their customers over the past few years. There's a well-known saying that sunlight is the best disinfectant. It's time the regulators shone some light on this dark and stinking corner of the market for investment services.
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