Portfolio Management Services Strategies

Portfolio Management Services Strategies

Portfolio Management Services provides investment management and advisory to wealthy clients. So, it is only natural that they use some of the best investment strategies to generate wealth for their clients.

Not sure what Portfolio Management Services are? Here's The Ultimate Guide to Portfolio Management Services

PMS Strategies can be classified into various types depending on the following factors:

  • Asset class focus
  • Active or passive
  • Market cap focus
  • Factor focus
  • Theme/sector focus

Types of PMS Strategies: Asset Class Focus

Portfolio Management Services typically invest in stocks, especially mid cap and small cap stocks. However, some PMS Services also invest in portfolios that focus on different asset classes like debt and a mix of debt and stocks (hybrid).

Depending on asset class focus as the factor, we have 3 types of PMS strategies:

Equity strategy

Equity PMS strategy can be based on various other sub-factors like market cap focus, factor focus and theme/sector focus. Equity PMS can take exposure to the equity asset class via listed stocks, mutual funds, and unlisted equity (with restrictions).

For example, Dezerv’s flagship PMS strategy is called ‘Equity Revival Strategy’ since it focuses on equity investing through mutual funds.

Debt strategy

PMS with debt strategies investing in debt mutual funds and corporate bonds. They may use hold to maturity (HTM) or take duration calls based on interest rates.

Read this blog to learn more about Bond Investing Strategies that PMS and smart investors use.

Hybrid strategy

A hybrid strategy is mainly based on investing in asset classes that are expected to perform in the immediate future. This is referred to as dynamic asset allocation. However, a hybrid strategy may also aim to keep a consistent asset allocation and not seek opportunities dynamically to achieve specific financial goals.

Most other factors that we discuss in the following paragraphs are related to equity PMS.

Portfolio Management Service Strategies: Active or Passive

When it comes to investing, portfolio managers can invest in specific stocks that they think will perform better than others or they can simply invest in an index like NIFTY 50. The first approach is called active investing whereas the second approach is called passive investing.

Portfolio Management Services take the active approach in most cases but may also offer some passive investing strategies. 

However, PMS Services generally don’t offer purely passive investment strategies but rather invest in passive instruments like NIFTY 50 Index Funds and Target Maturity Funds (for debt allocation) and resort to a dynamic asset allocation to generate higher-than-benchmark returns.

Types of PMS Strategies: Market Cap Focus

Equity portfolio management strategies generally have a market cap focus. They generally focus on one of the following:

Large cap stocks

Large cap PMS strategies invest majorly in large cap stocks. SEBI has defined large caps as the 100 companies with the highest free-floating market capitalization. The risk of investing in large cap stocks is relatively lower than investing in mid and small cap stocks. At the same time, generating super high returns by investing exclusively in large cap stocks is also difficult.

Mid cap stocks

Mid cap PMS strategies invest in mid cap stocks, i.e. companies ranked 101 to 250 as per highest free-floating market capitalization. The risk of investing in mid cap stocks is relatively higher than the risk of investing in large cap stocks. But with good mid cap stock picking, portfolio managers can generate higher returns than large cap investing.

Small cap stocks

Small cap PMS strategies investing in small cap stocks to generate superior returns through stock picking. This is because the scope of research in small cap stocks is way higher than in large and mid cap stocks. So portfolio managers can research aggressively and make outsized returns with good small cap stock picking.

Small and mid cap stocks

Many PMS strategies focus on both small and mid cap stocks and aim to generate higher returns higher than pure large cap investing strategies.

Flexi cap strategy

Portfolio managers resort to flexi cap investing strategy if they want to be agnostic to the company size. Such portfolio managers evaluate stocks on the basis of fundamental and technical analyses, or other evaluation methods. This allows the portfolio managers to evaluate stocks irrespective of market capitalization. Flexi cap strategy could backfire if the PMS doesn’t have enough resources to research all or most of the stocks worth considering.

Types of PMS Strategies: Factor Focus

As we saw that equity PMS strategies generally have a market cap focus or may be flexi cap in nature if they are market cap agnostic. But even within a market cap, portfolio managers may have some bias to stocks that exhibit specific characteristics. 

For example: Portfolio managers may have bias towards value investing so they will try to find fundamentally strong businesses that are undervalued by the market. 

There are a number of factors equity PMS managers may rely on and we have listed some of them:

Value investing

Value investing is the investing strategy of the most popular investor of our generation, Warren Buffet. It involves identifying fundamentally strong businesses with stock prices that are affordable or undervalued. Investors of such PMS strategies make money when the market prices undervalued stocks correctly.

Growth investing

Growth investing involves investing in companies that are still growing rapidly. These are generally emerging companies that have faster-than-industry earnings growth. Growth investing is considered to be the opposite of value investing because growth companies are generally overvalued because the market gives them a premium unlike value companies which are undervalued by the market.

Momentum investing

Momentum investing is often confused with growth investing. However, they are distinct. Growth investing places importance on the company’s business and earnings growth whereas momentum investing places importance only on the momentum of the company’s stock price. More mathematical in nature, momentum investing looks at stock price trends and attempts to buy a stock when its price is rising and exit it when its price is on the decline. Momentum investing involves more buying and selling then value and growth investing and hence not tax or cost efficient.

While the above are the most common factors PMS strategies focus on, PMS may focus on less popular factors like quality and low volatility.

Thematic/Sector Portfolio Management Services

Thematic investing involves investing in stocks of companies belonging to a particular sector. For example: IT (Information Technology), BFSI (Banking, Financial Services and Insurance) etc.

Thematic or Sector PMS strategies are among the riskiest because sectors may go out of favour for long periods of time. The NIFTY IT Index has generated a -5% return in the last one year (as of 10 May, 2023) compared to the 15% return generated by NIFTY 50.

Thematic or Sector PMS strategies are far and few and unless you are very confident that a theme/sector is going to do well, investing in them is not wise.

PMS Investing Strategies: Frequently Asked Questions (FAQs)

How many strategies can a PMS offer?

A PMS can offer any number of strategies. However, the SEBI recommends PMS houses not to have multiple strategies that are similar in nature.

What are the most common PMS investing strategies available?

Most PMS strategies focus on investing in equity and in small caps and mid caps within equity. Flexi cap or Multi cap equity investing is another popular PMS strategy.

What is the best PMS investment strategy for me?

The best PMS investment strategy depends on your risk tolerance and financial goals. It is recommended that you talk to a financial advisor before investing in a PMS strategy.