Sebi Issues Performance Reporting Guidelines for Portfolio Managers

Sebi has come out with performance reporting guidelines for portfolio managers, which will clearly distinguish categories of products and bring more transparency for clients by selecting appropriate benchmarks. Reviewing the requirements related to performance reporting and benchmarking by portfolio managers, the regulator has asked them to adopt an additional layer of broadly defined investment “strategies” while managing the clients’ funds.

This is in addition to the investment approach (IA) — the documented investment philosophy — adopted by portfolio managers while managing the client funds in order to achieve investment objectives.

The new framework, aimed at helping investors in assessing the performance of portfolio managers, would be applicable from April 1, 2023.

“In addition to the investment approach IA, an additional layer of broadly defined investment themes called “strategies” shall be adopted by portfolio managers,” the Securities and Exchange Board of India (Sebi) said in a circular.

These broad strategies would be equity, debt, hybrid and multi-asset. “This is a great move by Sebi to create clear distinct categories of products and more transparency for clients by selecting appropriate benchmarks.This helps in reflecting the true performance of the strategy,” said Siddharth Vora – Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher.

Explaining further, he said for example a multi-asset or hybrid strategy that is compared to equity benchmarks might grossly outperform in bear market and underperform in a bull market, therefore misrepresenting the strategy performance. “Having relevant benchmarks helps in fair evaluation of the strategy. A hybrid fund manager’s true performance can be best observed by comparing it to a hybrid benchmark,” he added.

Under the guidelines, Sebi said that each IA will be tagged to only one strategy from the specified strategies and this tagging would be at the discretion of the concerned portfolio manager.

The Association of Portfolio Managers in India (APMI) would prescribe a maximum of three benchmarks for each strategy. These benchmarks would reflect the core philosophy of the strategy. “While tagging an IA to a particular strategy, the portfolio manager shall select one benchmark from those prescribed for that strategy to enable the investor to evaluate relative performance of the portfolio managers,” Sebi said.

Further, the board of the portfolio managers would be responsible for ensuring appropriate selection of strategy and benchmark for each IA. Once an IA is tagged to a strategy or a benchmark, the tagging can be changed only after offering an option to subscribers to the IA to exit without any exit load. The performance track record prior to the change would not be used by the portfolio manager for performance reporting.

The changes in strategy and benchmark would be recorded with proper justification and would be verified as part of the annual audit. The regulator asked APMI to prescribe standardised valuation norms for portfolio managers, same as the corresponding norms applicable to the mutual funds. Further, valuation of the portfolio debt and money market securities by portfolio managers would be carried out in accordance with the standardised valuation norms prescribed by APMI.

Portfolio managers would mandatorily use valuation services obtained from such empanelled agencies for the purpose of valuation of debt and money market securities in portfolios managed by them. Further, portfolio managers will present the time-weighted rate of return (TWRR) of the IA along with the trailing return of the selected benchmark when advertising or publishing performance of an IA.

The portfolio managers would disclose relative performance of its investment approach in all the marketing material where performance of the concerned investment approach is being presented. Such disclosure of relative performance would include the performance relative to the selected benchmark as well as performance relative to other portfolio managers within the selected strategy.

In addition to Sebi, portfolio managers would submit the monthly reports to APMI within 7 working days from the end of each month. APMI would make available the monthly reports of the portfolio managers on its website in a user-friendly manner facilitating ease of comparison so as to provide access to portfolio level, investment approach level, portfolio manager level and industry level information to all the stakeholders.

Further, APMI would also make available relative performance of each investment approach within the strategy to concerned portfolio manager and also disclose the same on its website.

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