As the new CEO of Emkay Investment Managers, what are your three key priorities for the company?

In the immediate term, my priority is the safety of my employees. While we have systems and processes in place to work remotely, I personally feel that physical meetings and interactions have a major role to play in creating a winning culture. Till that happens, the attempt is to make sure that there is a constant dialogue with them to ensure their health and well being.

The long term strategy consists of a few primary levers. The first is to collaborate with the smartest minds in the industry and co-create investment solutions for customers. We are looking at solutions which can help us create unique, customer-friendly solutions across products, backend processes, digitization and risk management processes.

Another priority will be the digitization of the onboarding process. Unlike mutual funds, complete online onboarding of customers is still not possible in PMS despite the fact that the ecosystem of vendors servicing the industry is completely digitized. We will be engaging with our peers in the industry, as well as the regulator with a solution-oriented mindset to do the needful

Lastly, we are actively looking at solutions based on ETFs and factor investing. We believe ETF is actually a broking product and can be scaled manifold by the industry due to its inherent domain knowledge.

Interestingly, I personally believe that if SEBI looks at the concept of “Small MFs” with a lower net worth and a complete focus on ETF products, it will get a huge boost from the broking fraternity and you could see innovation and efficiencies dramatically increase the scope of such products, pretty much like what the “small banks” are doing in the banking sector.

What investor needs do PMSs satisfy that mutual funds cannot?

I remember when mutual funds were in their nascent stage in 1995-96, people used to compare mutual funds with FDs. Now, people compare mutual funds with PMSs and AIFs.

In my view, these three products cater to different categories of investors – savvy investors (mutual funds), very savvy investors (PMSs) and very very savvy investors (AIFs). In fact, the market regulator understands this and segregated these products depending on minimum ticket size i.e. Rs.500, Rs.50 lakh and Rs.1 crore.

I think that emotional engagement with clients is very high in PMS. While one may not be aware on a concurrent basis what your fund manager buys in an equity fund, each stock bought or sold gets immediately notified to the PMS client, thereby having a very high level of interest and emotional engagement. A savvy investor in PMS has a far more detailed interaction with you at regular intervals to discuss what is in his portfolio.

Finally, while mutual funds have a lot of disclosures standards and practices, it is a retail product and hence will be always subject to far more regulatory oversight than what is available to more savvier clients. As is happening globally, we believe that PMS and AIFs will attract investors who are more focused on alpha and beta driven passive investors will go towards ETFs.

Many believe that the higher ticket size in PMS can hamper its growth in the near to medium term. Your comment.

I don’t think putting Rs.50 lakh for HNIs is challenging. People invest in PMS for a better experience, flexibility and returns. It has nothing to do with its ticket size. Investors are looking for the right investment avenue, ticket size is not a constraint.

From October 1, 2020, PMS players can introduce direct plans just like mutual funds. How will it help PMS players grow business?

It is very challenging to price direct plans in PMS. Unlike mutual funds where fund houses remove distribution cost to price direct plans, the PMS model has multiple fee models. It will be interesting to see how this space develops.

Anyways, please remember, there are 400 players and competition intensity itself gives the very savvy client the best pricing option currently. Personally, I don’t see any reason why direct plans should be there in a PMS. Clients do not invest crores just on the basis of pure trust – this is a savvy segment which is very hands-on – They understand what their advisors bring to the table.

SEBI has banned upfront commission in PMS and asked the PMS industry to move to trail model to compensate their distributors. In such a scenario, why do you think distributors should continue to offer PMS?

While there is no denying that distributors depending on upfront commission may face difficulty in the near future, the fact is that the trail model is more attractive for them as it grows with clients’ investments. Secondly, there will be no direct impact on investors who want to invest in PMS. The demand for PMS will always be there irrespective of commission structure.

Recently, SEBI has asked PMS players to furnish a quarterly report to the clients in which they have to disclose details of commission paid to distributor among other things. How will it impact the distribution of PMS?

Investors investing in PMS with a min ticket size of Rs.50 lakh are very aware of the pricing at play. These things do not matter as long as investors see value addition – value is more important than cost most of the time.

How does the Emkay Investment Manager go about constructing PMS portfolios? How do you protect the downside?

One of the key tenets we focus on is on before investing is companies having good governance models. Once you are back a company that is well-governed, all you need is a good team to drive its growth. One of the reasons why in our entire portfolio, we did not see a single stock blowout despite the series of misadventures most other PMS providers went through.

Over the years, we have seen fund managers’ performance is affected by two biases – selection bias and allocation bias. Selection bias is when a fund manager gets too focused on the results rather than the process – there would be an unintentional error in picking up an under-researched stock which could backfire later. An allocation bias is quite the opposite where the fund manager gets emotionally invested in a sector or stock beyond a period of time, irrespective of what the data flow looks like.

To overcome these two biases, we have the “Smart Alpha” framework which works in a defined market cap range, focuses on leaders with high ROCEs in excess of 12%, earnings growth predictability of around 10% and are in the value migration and consumption spaces. These are concentrated portfolios of 12-15 stocks and are equi-weighted with an annual rebalancing discipline.