We onboarded a client with a portfolio of around INR 50 Crores, earlier managed by a big & reputed wealth management company. The portfolio was constructed for retirement purposes with a 12-year investment horizon. The risk profile of the client is moderate.
When we did the portfolio health check-up, we found that there were close to 50 products in the portfolio. 40% allocation in Alternative Investment Funds (AIFs) and 20% average in debt. The annualized returns were around 10% over the last 5 years.
All investments were in commission-based regular plans generating a commission of at least INR 50 LAKHS ANNUALLY for the wealth management company and the client had NO idea about the hefty commissions going out every year.
What’s wrong with this portfolio?
– Over-diversification: An idea portfolio shouldn’t have more than 15 products (max. 20 depending upon certain cases). When you invest in mutual funds, PMSs, or AIFs, the fund managers are anyway going to spread the investments across multiple securities. There is no point in having multiple products with multiple managers in your portfolio. A concentrated portfolio with high-conviction products brings better focus to generate better-than-average market returns. This is a simple understanding then why so many products? Usually, a new product offers a higher commission to distributors. This becomes a strong incentive to keep introducing new products to the portfolio even when it’s not suitable for the portfolio.
– Low returns: Despite one of the best rallies in equity markets in the last decade, the portfolio generated sub-optimal returns and underperformed substantially despite only 20% average holdings in debt. The portfolio underperformance was due to poor-performing equity investments across mutual funds, PMSs, and AIFs. Why these schemes were not changed could be due to the lack of focus of the relationship manager on the portfolio or higher trail commission from these products.
– Low liquidity: Excessive exposure to AIFs and some locked-in debt products offered no liquidity to swiftly change allocation in the portfolio if any opportunity arises. Many a time, these products offer much higher commissions and make it difficult for a client to shift his/her portfolio.
– Unsuitable portfolio construction: Despite a moderate risk profile, the portfolio consisted of high-risk AIFs and only around 20% in debt. This is certainly not aligned with the investment suitability and risk profile. AIFs pay higher commissions than PMSs which pay higher commissions than MFs. A client relying on this portfolio for his retirement planning could be in a rude shock in a sharp market correction.
We made the following changes to the portfolio:
– Asset allocation alignment: Created a broader level asset allocation strategy across equity, debt, and gold to align with the risk profile and investment objective of the client.
-Shift to zero-commission Direct Plans: Created a plan to shift all the investments gradually to direct plans of mutual funds, PMS, and AIFs. This will save the client upwards of INR 50 lakhs in commission payout and will be added to the portfolio gains. The client pays fees directly to us which is less than 25% of the commissions saved.
– Minimize shifting costs: We removed all the underperforming funds by minimizing tax and exit load impact.
– Focused portfolio: Reduced the number of products to 14 with weightage based on risk profile and degree of conviction on the fund managers.
The exercise took some time to complete but it was worth the effort to see a satisfied client who knows his retirement portfolio is in reliable hands.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
