Portfolio, Asset, Wealth

Management.
(Fund houses)
─

Key Points Of this Report:-

1) Detailed information about portfolio, asset, wealth
management.

2) Current problems in the industry of fund houses.

3) Solutions to these problems.

By- SilverLight
2

What is a portfolio?
● A portfolio is the combined collection of an investor's
assets, and it can include stocks, bonds, real estate, cash
and cash equivalents, etc.
(Source-https://www.thebalance.com/what-is-a-portfolio-5091720)

What is portfolio management?

● Portfolio management is the process of selecting and
overseeing a group of investments that meet the long-term
financial objectives and risk tolerance of a client, a
company, or an institution.

UNDERSTANDING PORTFOLIO
MANAGEMENT
● Professional licensed portfolio managers work on behalf
of clients, while individuals may choose to build and
manage their own portfolios. In either case, the portfolio
manager's ultimate goal is to maximize the investments'
expected return within an appropriate level of risk
exposure.
●
● Portfolio management requires the ability to weigh
strengths and weaknesses, opportunities and threats
across the full spectrum of investments. The choices
involve trade-offs, from debt versus equity to domestic
versus international and growth versus safety.

(Source-https://www.investopedia.com/terms/p/portfoliomanagement.asp)
3

TYPES OF PORTFOLIO MANAGEMENT

Active Portfolio Management:-

● The aim of the active portfolio manager is to make better

returns than what the market dictates. Those who follow
this method of investing are usually contrarian in their
approach. Active managers buy stocks when they are
undervalued and start selling when they climb above the
norm.
●
● Active portfolio management involves the quantitative
analysis of companies to determine the cost of stock in
relation to its potential. To do this, the active manager
shuns the efficient market hypothesis and instead relies
on ratios to support his claim.
●
● To downsize risk, the active manager prefers to diversify
investments amongst the various sectors. The issue with
active portfolio management is that it all comes down to
the manager's skill.
4

Passive Portfolio Management:-

● At the opposite end of active management comes the

passive investing strategy. Those who subscribe to this
theory believe in the efficient market hypothesis. The claim
is that the fundamentals of a company will always be
reflected in the price of the stock. Therefore, the passive
manager prefers to dabble in index funds which have a low
turnover, but good long-term worth.
●
● With index funds, your cash is invested percentage-wise in
proportion to the market capitalization. What this means
is that if a company represented 2% of the 500 Index, then
Rs. 2 would be invested into the company for every Rs.100
put into the 500 fund.
●
● The point of opting for the lower yield is to combat the
cost of management fees, while profiting through stability.
5

Discretionary Portfolio Management

● A discretionary manager is given full leeway to make

decisions for the investor. While the individual goals and
time-frame are taken into account, the manager adopts
whichever strategy he thinks best.

Once the cash has been handed to the professional, the

investor sits back and trusts that the profits will roll in.
6

Non-Discretionary Portfolio Management

● The non-discretionary manager is simply a financial

counselor. He advises the investor in which routes are best
to take. While the pros and cons are clearly outlined, it is
up to the investor to choose his own path. Only once the
manager has been given the go ahead, does he make a
move on the investor's behalf.
●
● Whether you decide to use a portfolio manager or you
choose to take on the role yourself, it is important to opt
for a viable strategy and ensure that it is put forward in a
logical way. The merit of maintaining a sensible portfolio is
that it cuts down the confusion while providing
investments that fit the individual's goals.

(Source:-
https://www.moneyworks4me.com/about-stock-market/portfolio-managem
ent)
7

Why is portfolio management important?

● Portfolio management helps an investor to achieve good

returns on your investments with minimum risk possible.

Key factors to focus on while making a

portfolio:-
● Allocation of funds for maximum returns
● Reducing risk
● Diversification
● Tax planning
● Managing adverse conditions
● Etc.

(Source-https://www.adigitalblogger.com/pms/how-important-is-portfolio-
management/#:~:text=Portfolio%20management%20is%20important%20bec
ause,funds%20in%20times%20of%20emergencies.)
8

My Take:-

● To achieve the best possible returns through the

investment (portfolio); one needs to manage his/her
portfolio actively. As a full time investor it's possible to
study all the key factors of making a portfolio, although
the full time investors/ the big investors have their
research team or contacts.

● A common retail investor can’t focus on all the factors

mentioned above (there are many more factors which
aren’t included in the list).They find it difficult to cope up
with and hardly fetch better results than their professional
counterparts. Actively giving time to making a portfolio
isn’t everyone's cup of tea. Few terms mentioned above are
unknown to the common retail investors. Also they don’t
have access to the quality information even though it’s
available in the public domain. Nevertheless, they fake it
that they knew everything even though they knew nothing.
If this was the thing then why do big players are getting
better results and getting rich day by day and the small
investors aren’t able to replicate the same results.

On their behalf, professional fund managers (AMC) manage the

money of the amateur retail investors. (even portfolio managers
manages the HNI’s money as they don’t have the time to invest
them self)
9

What is AMC?
● What Is an Asset Management Company (AMC)?

● An asset management company (AMC) is a firm that invests

pooled funds from clients, putting the capital to work
through different investments including stocks, bonds, real
estate, master limited partnerships, and more. Along with
high-net-worth individual (HNWI) portfolios, AMCs manage
hedge funds and pension plans, and—to better serve
smaller investors—create pooled structures such as
mutual funds, index funds, or exchange-traded funds
(ETFs), which they can manage in a single centralized
portfolio.

● AMCs are colloquially referred to as money managers or

money management firms. Those that offer public mutual
funds or ETFs are also known as investment companies or
mutual fund companies. Such businesses include
Vanguard Group, Fidelity Investments, T. Rowe Price, and
many others.

● AMCs are generally distinguished by their assets under

management (AUM)—the amount of assets that they
manage.
10

KEY TAKEAWAYS
● An asset management company (AMC) invests pooled
funds from clients into a variety of securities and assets.

● AMCs vary in terms of their size and operations, from

personal money managers that handle high-net-worth
(HNW) individual accounts and have a few hundred million
dollars in AUM, to giant investment companies that offer
ETFs and mutual funds and have trillions in AUM.

● AMC managers are compensated via fees, usually a

percentage of a client's assets under management.

Why AMC?
Because of the following factors:-
● Professional, legally liable management
● Portfolio diversification
● Greater investment options
● Access to quality information
11

Why are AMCs better?

● It is quite clear that in current times where the
conventional methods of keeping money like banks, fixed
deposits do not grow the capital at all, we must look to
make a well-balanced portfolio.

● A good portfolio is a good mix of different kinds of assets

where funds are allocated according to one's own
preferences and risk-taking ability.

● The task does not just end here at building a portfolio.

Active management is better than passive management in
terms of returns and minimizing risk

● Therefore, managing a portfolio at regular intervals of

time is equally important. managing a portfolio includes
actively buying and selling assets in order to reap better
returns in less time.

● Portfolio management is important because it covers a

certain amount of risk through diversification and
shuffling of funds among different assets according to the
returns they are generating.

● It also helps in planning regarding tax obligations.

Moreover, it helps in arranging funds in times of
emergencies.

(Source-https://www.adigitalblogger.com/pms/how-important-is-portfolio-
management/#:~:text=Portfolio%20management%20is%20important%20bec
ause,funds%20in%20times%20of%20emergencies.)
12

What are the pros & cons that investors

need to see while investing through AMCs?

Pros
● Professional, legally liable management
● Portfolio diversification
● Greater investment options
● Economies of scale (In microeconomics, economies of scale are the
cost advantages that enterprises obtain due to their scale of operation,
and are typically measured by the amount of output produced. A decrease
in cost per unit of output enables an increase in scale.)

(Source- https://en.wikipedia.org/wiki/Economies_of_scale)

Cons
● Sizeable management fees
● High account minimums
● Risk of underperforming the market
13

How AMCs Invest?

● An asset management company (AMC) is a firm that invests
pooled funds from clients, putting the capital to work
through different investments including stocks, bonds, real
estate, master limited partnership (A master limited partnership
(MLPs) is a business venture that exists in the form of a publicly traded
limited partnership. They combine the tax benefits of a private
partnership—profits are taxed only when investors receive
distributions—with the liquidity of a publicly traded company.), and
more.

How do AMCs earn money?

● In most cases, AMCs charge a fee that is calculated as a
percentage of the client's total AUM. This asset
management fee is a defined annual percentage that is
calculated and paid monthly. For example, if an AMC
charges a 1% annual fee, it would charge $100,000 in annual
fees to manage a portfolio worth $10 million. However,
since portfolio values fluctuate on a daily and monthly
basis, the management fee calculated and paid every
month will fluctuate monthly as well.

● Continuing with the above example, if the $10 million

portfolio increases to $12 million in the next year, the AMC
will stand to make an additional $20,000 in management
fees. Conversely, if the $10 million portfolio declines to $8
million due to a market correction, the AMC's fee would be
reduced by $20,000. Thus, charging fees as a percentage of
AUM serves to align the AMC's interests with that of the
client; if the AMC's clients prosper, so does the AMC, but if
14

the clients' portfolios make losses, the AMC's revenues

will decline as well.

● Most AMCs set a minimum annual fee such as $5,000 or

$10,000 in order to focus on clients that have a portfolio
size of at least $500,000 or $1 million. In addition, some
specialized AMCs such as hedge funds may charge
performance fees for generating returns above a set level
or that beat a benchmark. The "two and twenty" fee model
is standard in the hedge fund industry.

What is a buy-side AMC?

● Typically, AMCs are considered buy-side firms. This status
means they help their clients make investment decisions
based on proprietary in-house research and data
analytics, while also using security recommendations from
sell-side firms.

What is a sell-side AMC?

● Sell-side firms such as investment banks and stockbrokers,
in contrast, sell investment services to AMCs and other
investors. They perform a great deal of market analysis,
looking at trends and creating projections. Their objective
is to generate trade orders on which they can charge
transaction fees or commissions.

(Source-https://www.investopedia.com/terms/a/asset_management_compa
ny.asp#:~:text=An%20asset%20management%20company%20(AMC)%20is%2
0a%20firm%20that%20invests,master%20limited%20partnerships%2C%20an
d%20more.)
15

On what basis should an investor choose an

AMC?

● You must check the track record of the AMC and also the

assets under management (AUM) before choosing an AMC.

It helps if you choose an AMC with large assets under

management that can handle the sudden redemption

pressure of large investors. Market savvy investors can

also check the performance history of various mutual fund

schemes managed by the AMC during both market ups

and downs to get an idea of performance across market

cycles.

●
16

● Investors can consider the following points while

choosing an AMC:-
1. The reputation of the AMC:- A fund house does not

earn its status in a day; it takes months or years to do

so. For example, an AMC gets a good reputation after

performing consistently over 5 or 10 years.

2. Check the reviews:- You must talk to other investors,

and check if the past performance has been

consistent and if there are any grievances against

the AMC.

3. Fund manager’s credentials:- You must check the

track record of the fund manager and the investment

style. There are many mutual fund schemes whose

performance is dictated by the investment style and

skill of the fund manager. You must never invest in a

mutual fund if you are not comfortable with the

investment style of the fund manager. Moreover,

mutual funds display the style box to help you gauge

the investment style of the fund manager.

17

Are fund houses as reliable as banks?

● There is a widespread notion that mutual funds are not as

safe as bank accounts or investment schemes offered by

banks. People fear that AMCs can shut down at any time or

run away with their money. This is because banks are

regulated by the Reserve Bank of India (RBI and people .

However, people often overlook the fact that mutual funds

are regulated by SEBI, the capital market regulator and

AMFI looks after investor education and their interests.

● The sponsor creates or sets up an AMC under the

Companies Act, 1956. The AMC charges a fee and acts

under the supervision of the trustees, who are, in turn,

regulated by SEBI. The primary reason for this is to ensure

objectivity and transparency with the operations of the

AMC.
18

Role SEBI & AMFI in AMC Operations

● An AMC works under the supervision of the board of

trustees. But, they are answerable to India’s capital market

regulator, the Securities and Exchange Board of India

(SEBI). The Association of Mutual Funds in India (AMFI) is

another statutory body that addresses investors’

grievances and looks after their interests. Every mutual

fund house must comply with the set of risk management

guidelines by SEBI and AMFI.

● While SEBI is a government body, mutual fund companies

have formed the AMFI. Together, they keep the functioning

of the industry ethics-driven and transparent. RBI also

plays an essential role in regulating AMCs, and mutual

funds need approval if they are launching guaranteed

schemes. Finally, the Ministry of Finance works as the

authority for all these regulators.

19

SEBI and AMFI guidelines investors should

know:-

The following are some of the practices and

guidelines for mutual fund companies that SEBI,

AMFI, and RBI mandate:

● An AMC shall not serve as the trustee of any mutual

fund.

● The company shall not invest in any of its schemes

unless full disclosure of its intention to invest has

been made in the offer documents.

● They shall submit quarterly reports on its activities

and the compliance with these regulations to the

trustees.

● Key personnel of an AMC should have a clean record

(not convicted of any economic offense such as fraud

or insider trading).
20

● The Chairman of the AMC shall not be a trustee of

any mutual fund.

● The AMC should have a net worth of less than Rs 10

crores.

● SEBI has guidelines for the reports that must be

submitted by AMCs to the trustees. AMCs must submit

the compliance certificate to the trustees on a

bi-monthly basis.

Regulatory requirements:-

● Hedge funds in India do not need to be necessarily

registered with Securities and Exchange Board of India

(Sebi), our markets regulator or disclose their NAVs at

the end of the day. All other mutual funds are required

to follow these regulatory requirements.

21

Where does the AMC stand in the overall

mutual fund structure?

● The Government of India and RBI formed the Unit Trust of

India (UTI) in 1963. Later, when the government permitted

public sector banks and institutions to set up mutual

funds, the need for an impartial regulator arose. As a

result, they passed the SEBI Act (1992) and made AMCs

integral to the mutual fund structure in India.

● To understand the functions of an AMC better, you must

know where the AMC stands in the mutual fund structure.

All the entities mentioned in the box work in tandem to

create different mutual fund types catering to different

sets of investors.
22

Sponsor Forms a trust and appoints

the board of trustees
Trustees Regulates the mutual fund
while adhering to SEBI and
AMFI norms
Asset Management Company Takes a call on which
(AMC) securities to sell/buy/hold
and manages the investments
of unit holders
Custodian Responsible for holding and
safeguarding the mutual fund
units
Registrar and Transfer Agents They are the record keepers
(RTA)

(Source:-https://cleartax.in/s/asset-management-company-amc#:~:text=Key%20

personnel%20of%20an%20AMC,less%20than%20Rs%2010%20crores.)
23

How to choose the best AMC to invest in?

In the interest of creating riches for the investors,

the AMCs which are the best among all possess

the following traits:-

● Confirms to the Regulatory Reforms: The corporate

houses which manage the funds of various investors

have to be well regulated as per the latest implemented

reforms. It makes them compliant in all regards. The best

AMCs in India are regulated as per the norms of SEBI

and registered under the Companies Act. They comply

with all the provisions of the Indian statute and ensure

corporate governance.

● Style of Investing: In spite of being a well-regulated

entity, the best fund houses in India ensure the usage of

pre-eminent techniques for making investments. In

addition, they provide an effective investing approach

as well, which is a distinguishing feature. As the style of

24

investment is the criterion for an asset management

company, we provide you with such fund houses which

are proficient ones.

● Management Team: The fund of investors is handled by

the team of experts in an AMC. Accordingly, it is quite

important to make sure that the fund managers of the

company are having the required skills and experience

of making the best use of the capital. The list of the

mutual fund houses that has been provided in this blog

includes the companies that hold an astute team of

industry experts.

● Growth Prospects: It is crucial to get associated with

such an organization that has the capacity to flourish in

the future. Obviously, if the money managers will grow

higher, then only they would be able to create wealth

from our money. The fund houses that we have

recommended here, possess the proficiency of raising

higher and building money into wealth.

25

● Market Performance: In addition to the

above-mentioned properties, the market well-being of an

organization is also of vital importance. The overall

ranking and rating that it holds reveal the capability of

that entity. One must opt for an AMC that has a good

market reputation and ensures to maintain it in the

future as well.

Top 5 AMCs in India:-

1. ICICI Prudential Mutual Fund

● AMC: ICICI Prudential Asset Management Company Ltd.

● Sponsored by: Prudential Plc and ICICI Bank Ltd.

● Trustee: ICICI Prudential Trust Ltd.

● AUM(Asset Under Management): Rs. 193295.97 crore as

on 30th June 2016

● Market Share in Percentage: 13.36%

26

2. Reliance Mutual Fund

● AMC: Reliance Capital Asset Management

● Sponsored by: Reliance Capital Limited

● Trustee: Reliance Capital Trustee Co. Ltd.

● AUM: Rs. 167009.17 crore (Jun-30-2016)

● Market Share in Percentage: 11.60%

3. DSP BlackRock Mutual Fund

● AMC: DSP BlackRock Investment Managers Ltd.

● Sponsored by: DSP HMK Holdings Pvt. Ltd & DSP Adiko

Holdings Pvt. Ltd (collectively) & BlackRock Inc.

● Trustee: DSP BlackRock Trustee Company Pvt. Limited.

● AUM(Asset Under Management): Rs. 41415.65 crore as on

30th June 2016

● Market Share in Percentage: 2.93%

27

4. SBI Mutual Fund

● AMC: SBI Funds Management (P) Ltd.

● Sponsored by: State Bank of India

● Trustee: SBI Mutual Fund Trustee Company Private

Limited

● AUM(Asset Under Management): Rs. 119878.20 crore

dated 30th June 2016

● Market Share in Percentage: 8.32%

5. Tata Mutual Fund

● AMC: Tata Asset Management Ltd.

● Sponsored by: Tata Sons Limited & Tata Investment Corp.

Ltd.

● Trustee: Tata Trustee Company Pvt Limited

● AUM(Asset Under Management): Rs. 35331.70 crore

(Jun-30-2016)

● Market Share in Percentage: 2.44%

(Source:-https://blog.mysiponline.com/how-to-choose-the-best-amc-for-

mutual-fund-investments)
28

Some other examples-

29

Market Size:-

What is the size of the finance industry?

● The global financial services market is expected to grow

from $20490.46 billion ($20.4 trillion) in 2020 to $22515.17

billion in 2021 ($22.5 trillion) at a compound annual

growth rate (CAGR) of 9.9%.

(Source:-https://www.mordorintelligence.com/industry-reports/global-fin

ancial-services-application-market-industry#:~:text=The%20Financial%2

0Services%20Application%20market%20was%20valued%20at%20USD%20

103.99,the%20forecast%20period%202020%20%2D%202025.)

● Market Size. As of October 2021, AUM managed by the

mutual funds industry stood at Rs. 37.33 trillion (US$

500.67 billion). As of October 2021, the total number of

accounts stood at 114.4 million. (Indian Data)

30

(Source:-https://www.ibef.org/industry/financial-services-india#:~:text=vib

rant%20capital%20markets.-,Market%20Size,accounts%20stood%20at%2

0114.4%20million.)

● Is the finance industry growing:- The growth of the

financial sector in India at present is nearly 8.5% per year.

The rise in the growth rate suggests the growth of the

economy. The financial policies and the monetary policies

are able to sustain a stable growth rate.

(Source:-https://business.mapsofindia.com/sectors/financial/growth.html#:

~:text=The%20growth%20of%20financial%20sector,sustain%20a%20stable%2

0growth%20rate.)

● Financial sector is synonymous to the economy (the

financial sector in India will also grow along with the

growing economy, this implies that there is a huge

opportunity in the financial market for the new players.)

31

(Source:-https://www.mordorintelligence.com/industry-reports/global-finan

cial-services-application-market-industry#:~:text=The%20Financial%20Servi

ces%20Application%20market%20was%20valued%20at%20USD%20103.99,the

%20forecast%20period%202020%20%2D%202025..)
32

What is involved in the financial sector?

It involves:-

● Banks

● Investments bankers

● Financial institutions like AMCs, hedge funds, VCs, etc.

● Insurance companies

● Financial softwares

● Financial apps

● Etc

(Source:- Through all the links mentioned above)

33

The Bottom Line Of Financial Sector:-

● Although it is difficult to obtain specific figures, the

financial services sector is a major building block of the

world economy. It consists of banks, investment firms, and

insurance companies, all of which play a large role in the

workings of the market.

● There are several different ways to measure the size of the

financial services sector in relation to the world economy.

While these estimates vary, most put the financial services

sector at around a quarter of the world's economy.

A Growing, Shifting Sector:-

● Market estimates project that by the end of 2021, the

financial services market is likely to reach $22.5 trillion,

growing at a rate of 9.9% from the previous year. This is

lower than previous projections, due to the recession

caused by the coronavirus pandemic. With global GDP

expected to reach $93 trillion in the same year, that

34

would mean that financial services comprise about 24%

of the world's economy.

● This represents a significant improvement over the

financial sector of 2010, which was then struggling to

recover from the Great Recession. The sector is expected

to grow and shift to mobile and online banking as

Millennials and Generation Z become more

economically powerful. This growth has led to an

increase in funding for startups and fintech companies

looking to compete for a share of that business.

(Source:-https://www.investopedia.com/ask/answers/030515/what-percen

tage-global-economy-comprised-financial-services-sector.asp)

Imp Information:-

As compared with the United States (over 30,000), India has

less (Over 44) financial firms/ AMCs.

35

Asset Management vs Wealth Management

Infographics:-
36
37
38

(Source-https://www.educba.com/asset-management-vs-wealth-management/)
39

4 challenges facing the asset/ wealth

management industry:-

● Challenge 1: Achieving and demonstrating

regulatory compliance.

The FCA made it clear in their 2020/2021 business plan

that they will take action against firms that continue to

under invest in technology, particularly where this

negatively impacts a firm’s ability to meet regulatory

requirements.

The cost of regulatory compliance is already non-trivial,

and regulatory demands are not decreasing any time

soon. So it’s about working smarter rather than harder

to achieve compliance.

Furthermore, any fees earned by asset managers will

face increased scrutiny from both policymakers and

regulators due to the ongoing push for more

transparency and more comparability. More

40

transparency means more auditing and reporting, which

unless automated costs more, and further erodes

profitability.

● Challenge 2: New competition.

There is a growing body of competitors entering the

asset management industry space. Due to their reach,

lack of technical debt, knowledge and influence with

banking alliances, several social media and technology

heavyweights have the potential to provide their own

compelling asset management services.

This may shake-up the structure that has been in place

for several decades. If a social media giant like

Facebook or Twitter team up a bank or acquire a

back-office servicing firm, or payments servicing

specialists like PayPal develop an operating model, their

reputation among the general public could immediately

make them big players in the industry.

41

The acquisition of Tianhong Asset Management Co. by

Alipay is an early example of this trend in action. If this

becomes the norm, these organizations’ resources will

place further pressures on asset management firms who

may not be able to provide their services at such

competitive prices.

● Challenge 3: Cost pressures.

Margins in 2020 are lower than in the best years of the

post-financial crisis era. This is a trend that will not

change going forward.

Despite the squeeze on margins now is not the time to

curb investment in technology – especially data

management. Doing so will lead to firms missing

opportunities to maximize their distribution, leverage

new technologies to scale and reduce overheads, and

keep up with increasingly rigorous regulation and

reporting needs.
42

● Challenge 4: Reliance on human resources

As well as managing increased costs, asset management

firms also need to be aware of their resources being

overstretched. The skills required to meet the added

complexities posed by this evolving distribution

landscape will test firms of all sizes.

For instance, wealth managers will now be shifting focus

to dealing with the decumulation of wealth among their

clients rather than accumulation, as baby boomers

manage their retirements and transfer wealth to the

younger generation. This will present different and

increased pressures on resources in an already

resource-intensive industry.
43

What makes a successful asset

management company?(asset manager

too)

● They make well-timed investment decisions on behalf of

their clients to grow their finances and portfolio.

Working with a group of several investors, asset

management firms are able to diversify their clients'

portfolios.
(Source-https://www.brightnetwork.co.uk/career-path-guides/asset-inve

stment-management/what-does-asset-management-firm-do/)

● Educated & well experienced asset manager.

● 3 Qualities:-

The first quality is differentiation:- Successful firms can

do many things well (products, asset classes,

geographies); do one thing extremely well (steadfast

active manager T. Rowe Price, for example); have serious

44

scale (like BlackRock); or benefit from vertical

integration.

When Warren and his equity research colleagues assess

U.S. managers’ competitive power, they look for

differentiation foremost. For example, does the company

have a more diversified product set that would make

assets sticky across market cycles? If not, is it a niche

provider that investors will stay with because switching

is expensive?

The second quality is price point:- “Active funds need to

be more cost-competitive,” Warren wrote. “We believe that

by gradually lowering management fees and expense

ratios, active asset managers can give their products a

leg up over higher-cost offerings in the same category,

as well as eventually make themselves more

cost-competitive with passive products.”

45

The third quality is:- long-term success hinges on

consistently outperforming the competition and making

sure investors know it. “The impetus is on active

managers to improve the disparity that exists between

their performance and their benchmarks.”

(Source-https://www.institutionalinvestor.com/article/b1jv8210tmfbz3/The

-Four-Traits-of-Successful-Asset-Managers)
46

Report By Northill Capital:-

What are the factors that make asset management

businesses successful in the long term?

Despite the last few years of difficult markets and

changing regulations, the asset management business –

alternative or traditional – is the most profitable major

part of the financial services industry with the highest

returns on capital and profit margins which are

consistently higher than most other sectors. The period

between 1980 and 2007 was a ‘golden age’ for

independent asset managers when barriers to entry

were low, competition from incumbent banks and

insurance companies was weak and demand

– driven by demographics, deregulation and excess

liquidity – was high.

Many of the factors which drove this benign environment

have now disappeared and, in aggregate, the net flows

47

of new money into the asset management sector have

stopped. This has created a backdrop where many asset

managers have struggled and the environment for new

managers is extremely poor. The recent statistics for

manager failures as outlined recently in The Economist

showed that almost as many managers went out of

business as there were new entrants to the industry in

2012. We Suspect that these figures substantially

understate the problem as many start-ups fail to

progress

The environment for many existing managers is no less

punishing. To get a flavor for this we need look no further

than the numerous protracted, tortuous or failed sale

processes for substantial-sized managers owned by

banks. There are still a number of these managers for

sale, most of them characterized by large AUM, low fee

levels, wide product ranges, bloated cost bases and

mediocre performance. As I described earlier, asset

management is a business which normally has high

48

returns on equity, high operational gearing and high

average profit margins yet many of these firms have

contrived to lose money or have bottom decile profits on

AUM levels in the tens of billions – which should be

impossible. There are also several examples of publicly

listed managers in the US and UK which have been

assembled through acquisition and, despite buoyant

markets, have experienced negative flows, declining

margins and troubled performance in their key product

areas.

We have around $1bn of capital available to invest and,

across the start-ups and existing managers, we have

made five investments in asset managers and intend

making up to five more before we close our investing

activities. We also have a controlling shareholding in a

publicly quoted firm Alpha Strategic plc which finances

alternative asset managers by buying revenue shares in

their businesses. Our business was founded in 2010, but a

number of our partners and senior management worked

49

together with me for a decade or more at Mellon (later

BNY Mellon) where we made a number of successful

asset management acquisitions. During this time we

have met with, researched or done extensive diligence on

literally hundreds of managers with assets under

management ranging from under $100m to well over

$100bn. We would not lay claim to any level of genius but,

like all reasonable people, we learn from our mistakes

and we are smart enough to notice patterns or common

themes when we see them. Based on our experience, I

thought that it might be worth sharing some of what we

believe makes great managers succeed, poor ones fail

and what, most importantly of all, turns great managers

into mediocre ones over time.

50

Focus:-

Blackrock or Fidelity would probably disagree but we

believe that great investment managers always tend to

be focused: focused on one asset class, one style of

investing or a single investment process. In fact, some of

the best firms only have one portfolio. We believe that

focused firms don’t waste energy on non-core activities;

they don’t attempt to diversify to mitigate their business

risk.

Diversification can be superficially attractive for an

owner of investment businesses but, if I was a client, I

want my manager to suffer when they underperform and,

I’m happy for them to do well when they outperform. I

don’t want them wasting energy or intellectual capacity

on constant extensions of their business. In short, we

believe clients want 100% of the firm’s talent and time

devoted to the portfolio or product that they are

investing in and nothing else.

51

This actually makes sense for the managers too. The

benefits of diversification don’t play well with the key

investment talent. If I am a portfolio manager at a

diversified firm and my team has a great year of

performance, why should I see part of ‘my’ incentive

compensation go to another group within the firm who

has experienced a poor year? I don’t identify with them,

they don’t do what I do, they may even have investment

views that I believe are flawed. In short, in ‘diversified’

firms it is our opinion that the culture breaks down,

politics rear their ugly head and time is wasted on fixing

these issues which should be spent on managing the

clients’ money.

In practice and based on our experience, ‘at scale’,

focused managers always tend to be very profitable

because they don’t need outsized product development

teams or lots of general management. So even in the bad

years when their style or asset class is out of favor, they

52

can pay their people appropriately and reinvest in the

business.

True, unflinching management of capacityEveryone says

they do it. But they don’t. Not really. Most managers say

they have limited capacity but I’ve lost count of the

number of times I’ve heard firms try to justify pushing the

boundaries to take in another $500m for that ‘strategic’

relationship or to boost the bottom line ahead of an IPO

or trade sale. Private equity ownership or the public

equity markets can be particularly poor stewards of

capacity. Sell side analysts always ask “what were the

flows this quarter?” as if this were a key measure of the

firm’s real success. The fact is that if taking in an extra

$200m pushes your investment process to the point

where performance degrades by 1% on a $2bn portfolio

at 2 and 20, then the extra fees earned on the $200m are

completely negated by the loss of fees on the existing

assets. A private equity owner may not care because the

firm is being sold next year, net flows make the business
53

look better and the sale price higher. But let’s not get

confused; it is not a long-term recipe for success.

Great firms are very clear-sighted about what their real

capacity is and they don’t get deflected by short-term

greed or convince themselves that coming up with a

version 2.0 of what made them great to get another

$500m through the door is desirable or even sensible.

Simplicity:-

This is not a point about the effort involved in good

investing. For example, our Asian value equity business

Ellis Munro does months’ worth of work on every stock in

its (very concentrated) portfolio to try to understand

exactly what drives the companies they invest in and to

try to understand them better than anyone else in the

market. Yet, at heart it’s still a very simple philosophy: find

great businesses which are mis-priced and hold them

54

until the market recognises their true value. Most

successful investment philosophies can be summarized

in the same way yet it’s amazing how often managers

stray away from simplicity and get lost in complexity.

Here are some hypothetical statements based on real

examples we have seen:

“Ours is a fundamental investment process, our leading

portfolio position is a poor business with a poor

management team but it’s very cheap.” Translation: We’re

traders.

“We are a fundamental research driven investor. We hold

around 100 stocks in the portfolio and our average

holding period is three months.” Translation: research for

us means reading broker notes and preparing a one

page spreadsheet.

“We invest in equities but use very sophisticated

techniques to give the portfolio bond-like volatility and

returns which are slightly above those from bonds.”

55

Translation: we use complex derivatives to get you what a

good bond manager can do but for higher fees.

The last point is particularly important. We believe we see

far too many firms who are working very hard to try and

make something that is highly correlated to equity or

bond markets uncorrelated. I have to ask the question:

why bother? Investors have an increasing choice of

investable real assets which bring varying levels of

correlation to equity markets – why pay someone to

engineer something with all the additional risk that

entails?
56

Passion:-

This may seem to be an odd or even slightly flaky point

but it’s a crucial factor for us when we back a manager.

What do we mean by passion? Put simply, most of the

truly great managers we know do what they do as a

vocation; not a job. They live what they do; they invest in

the way they invest because it’s not a style choice or a

fashion but a reflection of their character. Value

investors or growth investors or quant investors can’t

change how they invest to suit the market.

We notice this whenever we meet leaders of asset

management firms that we like; they can be geeky and

introverted or loud and extroverted but the one thing

which animates them most is talking about what they do,

why they do it and why they love the investments that

they make. They are tough on themselves when they

make mistakes but, at the same time, they enjoy it

57

because they’ve learnt something new by making that

mistake and they are determined to never do it again.

We often meet these individuals when they are

contemplating selling their businesses but the sale

process is never simple for them. With few exceptions–

they do not equate retirement with stopping what they

love doing. They simply recognise that the roles of CEO,

owner, key client contact and leader of the investment

process are becoming a grueling ordeal and are no

longer enjoyable. Ask these individuals what they enjoy

doing and it’s always a very simple answer – investing.

Everything else is just a chore. So, if they sell their

business they want to know that they can carry on

working in the firm in an environment which still feels

familiar, doing what they enjoy best. For many of them

that’s what retirement looks like; not a beach or a future

as a serial board member.

58

Background:-

This final point may be controversial but I make it

because I really believe it to be true and it relates very

closely to the point above about passion. We believe that

proprietary traders and generalist investment bankers

are really poor at building asset management

businesses for the long term; yet, if you look at any

industry magazine from the last 10 years, you will find

headlines such as ‘Top prop trading team raises $500m

for hedge fund start-up’ or ‘M&A veteran leaves xyz to

form new hedge fund business’. In fact, in the last couple

of years as Dodd Frank, Basel III and EU legislation bites

and compensation structures change, running a hedge

fund or asset management business of some kind has

suddenly become the refuge for just about every bulge

bracket escapee. Of course, in the short term, these

people can be successful; raising money is easier if

59

you’ve got a big name and of course they can always

kick in

$10m or $20m of their own cash to get things started. But

what we continually fail to see is the mindset to actually

build a business: why? For the investment bankers it’s the

point I made earlier; this is not a passion for them, it’s

not their life’s goal; it’s a new venture to see them

through the next 10 years and hopefully make some

serious cash and stop wearing a suit and tie. Their

business plans are long on macro and short on detail

and always seem to involve multiple products and a

desire to get really, really big very quickly.

With the prop traders there are different issues. To be

successful at a leading firm in a prop trading role you

don’t share, you don’t mentor – you might build a team –

but it’s with you at the apex and we believe the general

attitude is always: what’s in it for me this year?

Consequently, we notice firms with this background still

have that same ‘dog eat dog’ culture prevalent on the

60

trading floors – it can work, but it doesn’t build a

long-term organization which thinks about strength in

depth and succession planning. However, there is one

additional problem which goes right to the heart of the

investment process. Every time we look at a prop trading

team’s investment process it has perhaps a dozen

‘buckets’: a special situations ‘bucket’, a relative value

‘bucket’, a macro ‘bucket’ etc, add it all up and it can

often mean 200 or 300 positions and normally quite a

high turnover. In short, prop traders don’t like to be

constrained (particularly once they’re out of a bank) but

they know they have to put an investment process on

paper because of ‘annoying people’ like clients and

consultants – another new experience for them by the

way – and so their investment process is drawn so widely

that they can invest almost anywhere they want,

whenever they want. We doubt very sincerely whether this

is a recipe for success – or indeed what most clients

want.
61

To summarize, these are some of the things which we

believe come together to make great investment

management firms. There are lots of other things I could

have mentioned but these are some of the key factors.

62

Do you need it Or who should take the

service?

The individual who wants holistic financial advice to grow and

protect his/her wealth, then an AMC/ a wealth management

firm's advice goes beyond just providing advice on a client's

investments or designing a financial plan for them.

63

What are the different types of his friends

in the market?

There are mainly three types

● Domestic hedge funds:- Domestic hedge funds are open

to only those investors that are subject to the origin

country's taxation.

● Offshore hedge funds:- An Offshore hedge fund is

established outside of your own country preferably, in a

low taxation country.

● Fund of funds:- fund of funds are basically Mutual Funds

that invest in other hedge Mutual Funds rather than the

individual underlying securities.

64

What are the different strategies of hedge

fund investing?

These funds can also be categorized by the

complex strategies their fund managers adopt to

maintain their funds.

● Event driven:- There are few event driven hedge mutual

funds that invest to take advantage of price movements

generated by corporate events. For example: merger

arbitrage funds and distressed asset funds.

● Market neutral:- There are also some market neutral

funds that seek to minimize market risks. This category

included convertible bonds, short and long equity funds

and fixed income arbitrage.

65

● Long/Short selling:- By definition, short-selling

means that you sell a security without actually

buying it but with the notion of buying it at a

predetermined future date and price. You hope for

the share price to drop on this predetermined

future date and book profits.

● Arbitrage:- An arbitrage-oriented strategy means

buying a security in one market where the security

is trading at a lower price and then selling the

same security at a higher price in another market

to book some profit. This can also be used for

buying and selling two very highly correlated

securities simultaneously to book profit when

markets are moving sideways. This is called relative

value arbitrage. Both the securities could be from

one asset class or multiple ones.

66

● Market-driven:- Hedge mutual funds also take

advantage of global market trends before they make the

decision to invest in securities. They look at global

macros and how they will impact interest rates, equities,

commodities and currencies.

These categories comprise the top hedge funds that are

available in the market. However, there are also some other

pooled investment vehicles which have some similarities with

the varying types of hedge funds.

Fees and minimum investment:-

● The fee structure consists of both: a management fee

which is generally less than 2% and a profit sharing

technique which varies between 10 to 15%. The minimum

ticket size to invest in hedge mutual funds is Rs 1 crore

67

per investor and an entire fund needs to have a

minimum corpus of Rs 20 crore.

How are hedge mutual funds taxed?

● These funds fall under category III AIF and are taxed

according to taxation rules applicable to AIF category

III. Category III AIF, as of now, are not considered as

pass-through vehicles.

● This means that the fund on the whole has to pay a tax

when it realizes gains or gets income in any form. In

other words, hedge mutual funds are taxed at the fund

level.
68

● The tax obligation will not be passed through to the unit

holders or its investors. This may be one of the reasons

why they have not been able to take off in India. The high

tax burden acts as a deterrent.

● The taxes are withheld before the profits are distributed

to you. This automatically curbs the returns that finally

end up with the domestic investors.

69

What is the Risk and Return Profile of

Hedge Funds?

● The aforementioned points on relaxation of regulatory

requirements speaks volumes on the high risk level that

this product carries.

● Apart from the fact that the underlying securities that

top hedge funds invest in also carry high risk, the

product is not legally bound for a SEBI registration or

disclosure of NAV. These two points keep the rest of the

funds under a close watch and closely regulated. This

does not mean that SEBI leaves these funds unattended

but no legal binding does work the risk level upwards.

● We all know that risk and returns are directly

proportional. Hedge fund returns, just like its risks, are

on the higher side. Average annual returns can go as

70

high as 15% as well and the credit for this is attributed to

the hedge mutual fund managers.

Who should invest in Hedge Funds?

● Since hedge funds are those mutual funds that are

managed by experts, they tend to be quite costly. They

can be easily afforded by those who are financially

sound, have surplus funds, and have a good risk

appetite.

● Also, if you are a beginner, you might need the

assistance of a fund manager to take care of your hedge

funds. Such managers have a high expense ratio i.e the

fee charged by them is quite heavy. Thus, consider

investing in hedge funds once you have substantial

experience in the field or you find a fund manager whom

you can trust confidently.

71

How are hedge mutual funds different

from mutual funds?

● The basic structure of these funds is just like other

mutual funds. They are a pooled investment vehicle.

They collect money from a pool of investors and use that

money to invest in other assets and there is a fund

manager who manages the fund as well.

72

Here’s a table that explains the difference between mutual

funds and hedge funds:-

(Source-https://groww.in/p/hedge-funds)
73

Why are hedge funds not popular in India?

● In other words, hedge mutual funds are taxed at the fund

level. The tax obligation will not be passed through to the

unit holders or its investors. This may be one of the

reasons why they have not been able to take off in India.

The high tax burden acts as a deterrent.

(Source-https://groww.in/p/hedge-funds)

● Note:- The increase to 42.7 percent from 35.9 per cent in

the tax rate on annual earnings over 50 million rupees

($730,000), announced in the first annual budget after

Prime Minister Narendra Modi's reelection, has a more

vocal victim: overseas funds investing in India.

(Source-https://economictimes.indiatimes.com/markets/stocks/news/india

s-hedge-funds-threatened-by-higher-taxes/articleshow/70239536.cms)
74

How AMCs/ hedge funds save taxes?

● One major tax planning strategy for hedge funds is to use

carried interest from a hedge fund to the general partners

for performance fees paid to hedge fund managers. A

newer tax strategy many funds are using is to enter the

reinsurance business with a company based in Bermuda.

These two methods allow hedge funds to reduce their tax

liabilities substantially.

What Carried interest?

● Carried interest, or carry, in finance, is a share of the

profits of an investment paid to the investment manager in

excess of the amount that the manager contributes to the

partnership, specifically in alternative investments. It is a

performance fee, rewarding the manager for enhancing

performance.

● For example, a hedge fund has $100 million of invested

capital from 10 investors. The hedge fund has told the

75

investors to expect at least a 5% return on their

investment. In addition, the fund manager will earn a 20%

carry on the profits above the 5% hurdle rate.

(Source- wikipedia)

What is bermuda reinsurance business:-

● Many prominent hedge funds use the reinsurance

businesses in Bermuda to reduce their tax

liabilities.Bermuda does not charge a corporate income

tax,so hedge funds set up their own reinsurance

companies in Bermuda. Remember, a reinsurance

company is a type of insurer that provides protection to

insurance companies. They handle risks that are

considered to be too large for insurance companies to

take on on their own. Therefore, insurance companies can

share the risk with reinsurers, and keep less capital on the

books to cover any potential losses.

76

● Hedge funds send money to the reinsurance companies

in Bermuda. These reinsurers, in turn, invest those funds

back into the hedge funds. Any profits from the hedge

funds go to the reinsurers in Bermuda, where they owe no

corporate income tax. The profits from the hedge fund

investments grow without any tax liability. Capital gains

taxes are only owed once the investors sell their stakes in

the reinsurers.
77

Conclusion:-

● Problems with current AMCs/ wealth

management firms/ hedge funds:-

1. Lockup period:- Usually the lock-up period of the

prominent funds is typically minimum 2-3 years.

Incase, an individual investor wants to redeem his/

her money; the fund house won't allow them.

(Source-https://hedgefundlawblog.com/hedge-fund-lock-up-perio

d.html)

2. Amount of investment:- Only qualified or accredited

investors can invest in hedge funds. They are

mainly high net worth individuals (HNIs), banks,

insurance companies, endowments and pension

funds. The minimum ticket size for investors

investing in these funds is Rs 1 crore.

78

(Source-https://www.kotaksecurities.com/ksweb/mutual-funds/wh

at-is-a-hedge-fund#:~:text=Hedge%20fund%20investors%20are%20'

accredited,invest%20in%20a%20hedge%20fund.)

3. Lack of awareness:- General Indian public is

non-familiar with the names (AMC, hedge fund,

wealth managers). Due to low per capita income,

Indian People feels non qualified for the product as

the ticket sizes for these products are

comparatively high.

(Source-https://streetfins.com/the-importance-of-financial-literac

y-in-india/#:~:text=In%20comparison%20to%20other%20major,still%

20scope%20for%20more%20improvement.)

4. Personalization/ personalized services like HNIs:-

Aren't available for the common retail investors, so

they feel left out & eventually end up ignoring the

product & its value.

79

(Source-https://www.kotaksecurities.com/ksweb/mutual-funds/wh

at-is-a-hedge-fund#:~:text=Hedge%20fund%20investors%20are%20'

accredited,invest%20in%20a%20hedge%20fund.)
80

Solution to the above mentioned problems:-

1. Lockup period:- No restriction on lock-up period.

2. Amount of investment:- Any general retail investor

with minimum capital of Rs. 10,000/- can invest in the

funds house.

3. Lack of awareness:- The fund house culture wasn’t

part of the Indian economy due to lack of

information and limitations because until now it is

available only to wealthy individuals, this need to be

changed through marketing campaigns.

4. Personalization/ personalized services like HNIs:-

Customization in the financial products for retail

investors is need of an hour.

Note It Down:- The main thing which makes you

stand apart from other fund houses is fetching

more returns along with offering customer friendly

solutions.
81