Sebi orders portfolio managers to follow ‘high water mark principle’

Sebi orders portfolio managers to follow ‘high water mark principle’

Mumbai: In an effort to enhance transparency in the way portfolio investors are charged, the capital market regulator Securities and Exchange Board of India or Sebi on Tuesday directed the portfolio managers to calculate profit /performance on the basis of high water mark principle over the life of the investment.

At present, there is no uniformity in practice on how the profit/performance of the portfolio is computed. Sebi said that for the purpose of charging performance fee, the frequency can not be less than a quarter.

The portfolio manager shall charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark.

Consider that frequency of charging of performance fees is annual. A client’s initial contribution is 0 lakh, which then rises to 2 lakh in its first year; a performance fee would be payable on the lakh return. In the next year the portfolio value drops to 1 lakh, hence no performance fee. If in the third year the portfolio rises to 13 lakh a performance fee would be payable only on the 1lakh profit which is portfolio value in excess of the previously achieved high water mark of 12 lakh, rather than on the full return during that year from 1 lakh to 3 lakh, Sebi said.

Close