PMS empanelment: how to evaluate a manager

1. Investment process — is it repeatable or vibes?

The first question: can the manager articulate their investment process in a way that's repeatable, falsifiable, and consistent with what they actually do? Or is it vague (we pick good stocks, we focus on quality)?

Repeatable process: written investment philosophy, clear screening criteria, position sizing rules, sell discipline. You should be able to look at any stock in the portfolio and explain why it's there using their stated framework.

Vibes-based process: the manager's personality is the strategy. Works for some star managers; falls apart when they leave or when their style is out of favour.

• Ask: Walk me through how you decided to buy your top holding. What's your sell discipline for it?
• Ask: How does your process behave in different market regimes? What did it tell you to do in March 2020? Oct 2022?
• Red flag: vague answers, references to instinct, refusal to share written framework.

2. AUM trajectory — growth pattern matters

AUM growth tells a story. Steady, multi-year growth typically indicates a mature, repeatable strategy. Sudden spikes followed by contraction often indicate fund chasing a hot theme or styling.

• Healthy: AUM grew from ₹100 Cr to ₹2,500 Cr over 8 years, steadily.
• Yellow flag: AUM went from ₹500 Cr to ₹5,000 Cr in 18 months. Often the strategy doesn't scale; performance degrades.
• Red flag: AUM peaked 3 years ago and has been declining. Investors are exiting; ask why.
• Ask: What's your strategy capacity? Will you close the fund at a certain AUM?

3. Drawdown behaviour across cycles

How a strategy behaved in 2008, 2018–19 (mid/smallcap correction), March 2020 (Covid crash), 2022 (rates + inflation regime) tells you far more than peak-to-peak returns.

• Did the strategy drop with the market, lose less, or lose more?
• How long did it take to recover to prior peaks?
• Did the manager change style mid-cycle (style drift is a red flag) or stay disciplined?
• Compare strategy drawdowns against Nifty 500 in the same window.
• Ask: Pull out your worst 12-month rolling return in the last 5 years. Explain what happened and what you did.

4. Key-person risk

Does the strategy depend on one Portfolio Manager? What happens if they leave? Are there documented decision-making processes that can survive a PM departure?

• Single-PM funds: returns can be extraordinary, key-person risk is enormous.
• Team-based: more institutional, harder to attribute alpha, but more durable.
• Ask: How long has the lead PM been managing this specific strategy? What's the succession plan?
• Red flag: PM has been on the strategy less than 5 years, or has had multiple strategy changes within the firm.

5. Fee transparency

PMS fees come in three flavours. Make sure you understand the full picture, including any hidden charges (custody, transaction, brokerage, audit, advisory).

• Fixed-only (2-2.5% / year) — simplest. Manager paid regardless of performance.
• Performance-only (20% above hurdle) — rare. Aligns interests but managers prefer hybrid for income stability.
• Hybrid (1-2% + 10-20% above hurdle of 6-10%) — most common. Read carefully; can be expensive in good years.
• Ask for fee illustration: if your strategy returns 15% gross over 3 years, what does my account look like net of all charges?
• Red flag: Refusal to provide written illustrative fee breakdown. Refusal to disclose related-party transaction policies (broker selection, etc.).

6. Concentration discipline

Does the PMS have written position-sizing rules? Or does the manager bet large when conviction is high?

• Healthy: max 8-10% per single position, sector concentration limits, written rebalancing rules.
• Risky: 20%+ single positions, unconstrained sector tilts.
• Both can work — concentrated PMS can deliver outsized alpha but can also drawdown brutally. Match concentration tolerance to your risk profile.
• Ask: What's your max single position size? How do you decide when to trim a winner that's growing into the portfolio?

7. Track record duration and verification

Has the manager managed THIS specific strategy across at least one full market cycle (5-7 years)? SEBI now requires aggregate performance disclosure across all clients — that's the number to compare across managers.

• Less than 5 years: manager hasn't seen one full cycle. Be cautious.
• 5-7 years: includes at least one significant drawdown. Look at how they handled it.
• 7+ years: includes a major drawdown cycle. Returns are more trustworthy.
• Verify aggregate TWRR (Time-Weighted Rate of Return) at strategy level, not cherry-picked client returns.
• Ask: Share the SEBI-format aggregate performance disclosure for the last 7 years.