SEBI amends disclosure and benchmarking norms for portfolio managers

The portfolio managers in India are not allowed to disclose any model portfolio returns or the performance of one or more cherry-picked portfolios in any communication to their clients. They are also required to disclose the relative performance of their investment approach in all the marketing material – 1) performance relative to the selected benchmark; and 2) performance relative to other portfolio managers within the selected strategy.

These new guidelines are as per the SEBI’s circular titled – ‘Performance Benchmarking and Reporting of Performance by Portfolio Managers’ dated December 16, 2022

In this circular, the regulator reviewed and proposed certain performance reporting and benchmarking norms to enhance transparency in the disclosures of portfolio management services firms (PMSes). The provisions of this circular will come into effect from April 01, 2023.

Benchmarking

For benchmarking purposes, SEBI mandates the Association of Portfolio Managers of India (APMI) to prescribe a maximum of three benchmarks for each strategy such as ‘equity’, ‘debt’, ‘hybrid’ and ‘multi-asset’. For each strategy, the portfolio manager must select one benchmark, which must reflect the core philosophy of the strategy.

Siddharth Vora - Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher said, “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. For eg, a multi-asset or a hybrid strategy that is compared to equity benchmarks might grossly outperform in a bear market and underperform in a bull market, therefore misrepresenting the strategy performance. Having relevant benchmarks helps in the fair evaluation of the strategy. A hybrid fund manager’s true performance can be best observed by comparing it to a hybrid benchmark.”

The portfolio managers can choose to change the benchmark, if required, only after offering an option to subscribers to exit without any exit load. And the performance track record of the strategy prior to the change shall not be used by the manager for future reporting purposes.

Performance reporting

The PMS managers are required to disclose the time-weighted rate of return (TWRR), which excludes the impact of intermittent cash flows from subscriptions and redemptions on returns for each strategy. This is along with the trailing return disclosures of the selected benchmark. They also must present the extended internal rate of return (‘XIRR’) for each strategy that the investor invests in.

Since PMSes cater to individual investor requirements, the portfolio of one investor may not match that of others.

The effect of this must be explicitly communicated to the investor that the “performance of your portfolio may vary from that of other investors and that generated by the (same) investment approach implemented across all investors because of 1) the timing of inflows and outflows of funds; and 2) differences in the portfolio composition because of restrictions and other constraints,” as per the SEBI circular.

They are also required to disclose the relative performance – against the benchmark and other portfolio managers within the selected strategy – in all their marketing material.

Further, they must refrain from disclosing model portfolio returns and the performance of one or more cherry-picked investors in any communication with the clients. However, aggregated performance statistics can be used for aggregated performance reporting.

So far, the PMS managers are submitting monthly performance reports to the regulator, SEBI. Going forward, the managers are also required to submit the monthly reports to APMI in addition to SEBI within 7 working days from the end of each month. APMI will make available the monthly reports of the portfolio managers on its website in an intuitive and user-friendly manner facilitating ease of comparison.

Valuations

Coming to the valuation of the portfolio of debt and money market securities, the PMS managers have to follow the norms, which will be prescribed by APMI. The rules will be the same as the corresponding norms applicable to mutual funds.

APMI is required to empanel the valuation agencies for the purpose of providing security-level prices to portfolio managers. The portfolio managers shall mandatorily use valuation services obtained only from one or more of such empanelled valuation agencies.