Let’s take two well known examples – from the Marcellus fund house, their flagship PMS scheme, the Consistent Compounders Portfolio (CCP) and from the White Oak India fund house, their flagship PMS scheme, the Pioneers Equity Portfolio.

The Consistent Compounders Portfolio (CCP) is a large cap focused PMS fund holding just fourteen stocks (as on 30 Nov 2022) in its portfolio, a perfect example for the concentrated approach with its inception on 1 Dec 2018 while the Pioneers Equity Portfolio is a multicap PMS fund encompassing fifty nine stocks in its portfolio (as on 30 Nov 2022) and unabashedly following the broad-based approach with its inception on 9 April 2019. While both fund houses have developed their proprietary algorithms for screening companies that make it to their portfolios; both the PMS have outlined a similar bottom up approach to stock picking, focusing on the fundamentals of a company, picking the strong and adaptive companies, irrespective of the macro economic factors; rather than a top down approach of trying to predict the macro economic factors first and then picking the companies that then to do well given the tailwind in macros. And how have their performances fared so far?

On looking at their YTD performance, as on 30 Nov 2022, the Pioneers Equity Portfolio has delivered -3.3% return as against it’s benchmark, the S&P BSE 500 delivering 8.2% returns, a clear underperformance in 2022; but since inception the PMS has returned 18.7% CAGR for over three years while the benchmark has returned 16.5% CAGR over the same period.

Meanwhile for Marcellus CCP, the CY 22 YTD return is at -5.3% as against it’s benchmark, the Nifty 50 TRI delivering 9.5% returns, again underperformance; but since inception the PMS has returned 18.64% CAGR for four years while the benchmark has returned 16% CAGR over the same period.

This is not much help as clearly both funds have underperformed the respective benchmarks for the current year, while in the long run, both are showing returns above the benchmark. Correct, but it is also noteworthy that the benchmarks are different for the narrow and focused CCP approach and the broad-based Pioneers Equity Portfolio.

For the Pioneers Equity Portfolio, its benchmark the S&P BSE 500 has 500 stocks that are a mix of value, growth, quality, large cap, mid cap, small cap, domestic and export oriented, services and manufacturing, private and public and across all sectors of the economy. Hence to outperform this broad-based benchmark, their portfolio is also by design broad-based so that it reflects the heterogeneity of the underlying mix of companies and is able to capture the alpha from wherever it emerges. But the PMS portfolio still has a limited itself to 59 stocks from the 500 companies in the benchmark and it is in no way trying to replicate the index, as the active share of this PMS scheme (which indicates its distinction to the benchmark) is 69%.

For the CCP scheme, the Nifty 50 is the benchmark and from the lot, they have focused on fourteen companies betting on the quality and the moat factor (or competitive advantage) in business. They have zeroed in on the fundamentally strong companies from the Nifty 50 which by themselves minus the laggards will give returns higher than the benchmark in the normal course and in a bear market will halt the downside.

The strategy for both PMS works out the same – astute stock picking based on fundamentals to outperform the respective benchmarks and the number of stocks in their portfolio is determined purely by the number of companies they need to have in their portfolio to ensure an overarching reach across the benchmark to guarantee the outperformance. And hence the number of stocks is dependent on the choice of benchmark. The first yardstick for measuring performance is “Has the PMS fund beaten the benchmark ?” and only the second criteria is “By how much ?” and over what time horizon(s) and then what is the CAGR?

Hence the question is not whether a concentrated portfolio is better or a broad-based one; but what is your risk tolerance and investment time horizon ? Are you willing to invest in a large cap PMS or in a multi cap PMS which may have 30-40% exposure in the mid and small cap space? The large caps offer better risk adjusted returns while the mid and small caps space hold promise of higher returns.

Also, you can have a concentrated portfolio with relatively higher exposure to the mid and small caps like the PMS fund house Ambit’s 10X fund which benchmarks itself to the S&P BSE 400 MidSmallCap (which excludes the top 100 companies)

Nevertheless, PMS funds have scored badly this year while the respective benchmarks have fared well. This is because both the PMS funds have kept out of the domestic sectors that have outperformed this year, namely the PSU banks, utilities, oil, metal and commodities. These sectors are under the purview of the government, considered to be fundamentally weak companies and cyclical in nature. Their profits are dependent on the macroeconomic conditions such as the government policies, tail events like war, which are difficult to predict and hence the PMS fund houses instead focus on the secular sectors and companies with strong fundamentals which can be calculated and forecasted to provide some level of certainty on the future performance and act accordingly.

Hence whether it is a concentrated or broad-based portfolio, ultimately, it’s the fund manager’s stock picking that will drive the returns of the PMS and the number of stocks in the portfolio depends on the management thought/philosophy that determines what number (of stocks) is needed to outperform the respective index. The investor should decide the choice of PMS fund based on his/her risk appetite, time horizon and return objective and finally based on the track record on the fund house and conviction on the fund manager to deliver.