It was only in 2019 that the company launched PMS (portfolio management services) offerings with four model portfolios—active balanced portfolio, active growth portfolio, active aggressive portfolio and active aggressive plus. These four products invest in a combination of active and passive mutual funds with varied exposure to equity, fixed income, international equity and gold asset classes depending on asset allocation mechanism.

Prior to its PMS venture, the firm introduced a web-based platform called Morningstar Adviser Workstation, a B2B service for mutual funds distributors, among others, by providing tools for investment research, portfolio analysis and investment planning.

The winding-up decision by Morningstar, which advocated long-term investing, within four years of launching the PMS business took many by surprise. Also, the timing of its decision, when the markets are underperforming, is a matter of concern. Existing investors have to either redeem their holdings or transfer that to another of their demat accounts before the specified time.

As per the last available disclosure by Morningstar PMS with market regulator Sebi, the firm has 78 clients with assets under management (AUM) of about ₹77 crore.

At the time of launching the PMS, the firm said it aimed to grow to an asset base of ₹1,000 crore over the next three years. But that did not happen.

“The wind-up call was taken by the company as the business was not growing in line with expectations. This is predominantly due to lack of product-market fit in a space dominated by equity-only portfolios. Direct stock or equity PMS strategies comprise over 95% of the PMS industry AUM and Morningstar was effectively trying to create a market for multi-asset strategies. Besides, the pandemic and extended lockdowns, occurring within a year of launch, negatively impacted our ability to effectively market the proposition,” said Dhaval Kapadia, portfolio manager responsible for leading Morningstar’s managed portfolios business in India. Kapadia reiterated that the decision has nothing to do with the performance of the portfolios so far.

Mint did an analysis of one of the firm’s product. For lack of long-term track record, benchmark and portfolio data in public domain, we confined our analysis to 3-year performance of Active Aggressive Plus fund that invests 60-100% in domestic equity. The fund doesn’t score well on a relative basis at 13.5% CAGR, against 14.3% average return delivered by the flexi-cap mutual fund category during the said period. Similar is the case when weighed up against the flexi and multi-cap category in the PMS industry.

Talking about the performance, Kapadia said “we’ve been slightly underweight Indian equities and overweight debt since mid-2021 due to rich valuations, which initially impacted performance in 2021 and early 2022. Since then, Indian equities have seen a correction and the underweight stance has benefited the portfolio performance in terms of lower drawdowns.”

Vishal Dhawan, a Sebi registered investment adviser said, “the cycle of underperformance is short. For advisers to work with Morningstar, they would require a track record for a longer period. But with the decision to exist the business so soon, they may have been an opportunity that was cut short as enough time was not given to the fund.”

Further, one of the key distributors to Morningstar PMS in the initial years, said the PMS uses ‘valuation-driven asset allocation’ method.

Simply put, this merely suggests that the holdings in the portfolio are value accretive in the long run.

However, this distributor based in Bangalore who did not want to be identified, wasn’t happy with the higher churning witnessed in the PMS portfolio. “I asked a few questions about the portfolio, including the churning, and did not receive proper communication from them. Higher churning would impact not just performance but also taxation of PMS clients” he added. He also said the investors’ money was deployed in a single shot and not in a staggered manner, which bothered him.

But Kapadia disagrees with the above claims. “Our approach is driven by long term risk & return expectations (typically 5 to 10-year forecasts) for each asset class. And these forecasts typically change in scenarios where market movements particularly equities, are sharp, say plus or minus 15-20%. Accordingly, the portfolio churn is relatively low (around 9-12%),” argued Kapadia.

Other than this, the portfolio manager monthly report on Sebi’s website does not show any data related to Morningstar since September 2022. Responding to this, the management maintains that the firm has been facing an issue in uploading the disclosures for the last few months and following up with the regulator.

What does it mean for you?

The PMS investing space is fairly regulated by Sebi in India. Yet, investors are left in the lurch if any portfolio manager takes a decision to exit. Though there have not been many such instances in the past, this risk has to be taken into account by investors, especially when the PMS division is only a small part of the organization.

Morningstar primarily researches, evaluates, and monitor stocks, ETFs, and MFs. A significant portion of the parent company’s revenue is generated from paid memberships for its analytical data and online advertising sales and not from PMS business(see graphic).

“Most PMSes in India grew in size only in the last 3-4 years of the last decade. They didn’t shut down when their growth was moderate. Multinational companies have this tendency to close the vertical if it doesn’t grow as anticipated in 3-5 years time,” said Santosh Joseph, founder of Germinate Investor Services LLP.

This incident drives home the point that investors need to be aware of the portfolio manager structure and its role in the overall organisation and industry.

Then, there is the relevance of PMSes offering model portfolios comprising MFs. R. Pallavarajan, founder of PMS Bazaar said, “there are only a handful of PMS funds with mutual funds as its core portfolio. Even if the exposure to mutual fund exists, it is mostly in the liquid funds.”

Feroze Azeez of Anand Rathi Wealth said this model hasn’t grown in India as the scope to charge fee is minimal in this structure wherein investments are done in the direct MF schemes, for which the distributor commission is nil.

While a typical PMS focuses on absolute return generation, managed portfolios focus on overall asset allocation based on risk profiling. Note that such asset allocation services can be availed by investors from a trusted registered investment adviser as well as a mutual fund distributor, said Dhawan.