Performance standards—the missing piece in curated stock portfolios

Stock investing has always lured retail investors. One new form of stock investing  is curated stock portfolios (CSPs). For better visibility, these CSPs are showcased on broking platforms with a variety of metrics. However, they do not provide ‘real’ information needed for an informed investment decision. 

Investment universe, asset allocation, screening method, rebalancing information, factsheets, and varied disclosures are provided on these CSPs to enable easier assessment and selection by investors. However, the deluge of information lacks depth and uniformity and could perhaps mislead the investor. In short, the standardization of performance measures that can enable informed investing is a missing piece in the CSP ecosystem.

CSPs such as smallcase, Wealthdesk, and many others provide retail investors with a variety of stocks and exchange-traded funds (ETFs) backed by research analysts and investment advisors and based on specific themes, strategies, sectors, and risk profiles. This approach gained traction, particularly during the pandemic and also after the ticket size of portfolio management services (PMS) increased from ₹25 lakh to ₹50 lakh, which possibly caused many investors to shift to CSPs. 

Need for standardization 

Our peek into the performance data available on websites hosting CSPs showed that most of these products posted stellar growth, but there have been concerns.  First, the methodology for computing returns either differs or is not categorically disclosed by some CSP providers. It is quite possible that these are the returns since the inception of the product. However, there are some CSPs that do not reveal the product launch date. 

Second, there is no defined/uniform period for which the return calculations are put out for a host of similar CSPs. For example, in case of mutual funds, the regulator has prescribed a set of norms for reporting returns for specific periods and the calculation methodology which enables comparison among peer MF schemes. However, CSPs hosted on the brokers/aggregator websites provide returns for different periods. For instance, some products provide a 6-year CAGR, while others provide it for 9 or 13 years. The possibility that the best-performing period is selected for showcasing the returns for a CSP cannot be ruled out. All this, also makes it difficult to draw comparisons between similar CSPs. 

Three, returns displayed for some of these CSPs, though true, seem to be quite unrealistic and unsustainable from a long-run perspective. Even the most active and alpha funds may not provide such returns on a sustainable basis. 

Thus, all this raises the issue of transparency in the performance measurement of CSPs and necessitates laying down uniform performance standards for their evaluation and monitoring. 

What can be done 

To put things into perspective, in case of a mutual fund, a scheme can be evaluated based on growth in net asset value, assets under management, comparison with benchmarks, and the like. Regulations mandate that for schemes that have been in existence for more than 1 year, the compounded annualized returns should be given and for schemes that have been in existence for less than a year, the returns have to be the absolute returns since inception. This information is provided in the scheme information document, websites, and other forums. While some CSPs follow a combination of the above metrics, the concern is the lack of standardization. In case of PMS, SEBI has prescribed the use of time-weighted rate of return (TWRR) method for communicating the past performance. Portfolio managers are required to submit a client reporting format that includes information on the performance of the client account, portfolio manager, and the appropriate benchmark. Perhaps CSPs could follow similar standards. 

Globally, the CSP industry has been able to tide over this challenge by adopting and complying with the industry-recognized Global Investment Performance Standards (GIPS). These standards are based on the principles of fair representation and full disclosure. It is pertinent to note here that there are a few CSP providers in India that are providing factsheets with rich data and disclosures in accordance with global best practices. 

What is needed for CSPs is a standardized performance measurement format prescribed by the regulator. This could include usage of certain performance metrics, benchmarks, disclosure of assets under management, to name a few. Further, some rating mechanism could be developed by an independent agency/research houses and published regularly which will bring transparency in performance measurement of CSPs. 

Mitu Bhardwaj and Rasmeet Kohli are working with National Institute of Securities Markets.