Best Performance Reporting & Benchmarking by Portfolio Manager

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Introduction

A Portfolio Manager is required to disclose to its clients the performance of the Portfolio Manager periodically. Disclosure of model portfolio returns is not allowed for a Portfolio Manager in any communication with their clients. Hence, this disclosure plays a very prominent role to a client to know the performance of their portfolios and a benchmark to compare it, thereby bringing more transparency. SEBI has issued new directions regarding Performance Benchmarking and Reporting of Performance by Portfolio Managers vide circular dated December 16, 2022, which will come into effect from 1st April 2023.  

How is Performance benchmarked?

Performance is benchmarked by tagging with an Investment Approach. An Investment Approach (IA) is the documented investment philosophy that is adopted by Portfolio Managers while managing the funds of their clients to achieve their investment objectives. Now, SEBI has introduced an additional layer that defines the investment themes called ‘Strategies’ which must be adopted by the Portfolio Managers. The Strategies are broadly classified under categories as ‘Equity’, ‘Debt’, ‘Hybrid’, and ‘Multi-asset’. Thereby, distinct categories of products are created, and the client has transparency while selecting the product and a benchmark to evaluate.

The Association of Portfolio Managers in India (APMI) shall prescribe a maximum of three benchmarks under each Strategy wherein its core philosophy will be reflected. Each IA is to be tagged with any one of the Strategies at the discretion of the Portfolio Manager. The Board of Portfolio Managers has to ensure the appropriate selection of Strategy and Benchmark for each IA.

Can the strategy or benchmark be changed?

Once a strategy/ benchmark is selected, the Portfolio Manager will continue the same. However, if the Portfolio Manager wishes to change the tagging of the strategy or benchmark with an IA, then the same can be made only after offering an option to subscribers to the IA to exit without any exit load. Post-change of the strategy or the benchmark of an IA, the performance track record prior to the change shall not be used by the Portfolio Manager for Performance Reporting. Any changes in Strategy/ Benchmark made are to be recorded with proper justification for making the change and the same would be verified by the auditor as a part of the annual audit. 

Valuation of securities by Portfolio Managers

Once the benchmarking is performed by the Portfolio Manager, then the valuation of securities plays a vital role. SEBI has entrusted APMI to prescribe standardized valuation norms for the Portfolio Managers corresponding to the norms applicable to the mutual funds. Concerning the valuation of the portfolio debt and money market securities by portfolio managers, the same is to be performed by these standardized valuation norms prescribed by APMI. Also, APMI to empanel valuation agencies to provide security level prices to the Portfolio Managers. 

Portfolio Managers shall mandatorily use the valuation services only from one or more empanelled valuation agencies for the valuation of debt and money market securities in portfolios. However, the ultimate responsibility for fair valuation lies with the Portfolio Manager. 

Reporting of Performance?

Performance of the portfolio is to be made based on the Time-weighted Rate of Return (TWRR), TWRR is to be used as the basis for measuring the performance of an IA. Accordingly, TWRR is to be presented along with the trailing return of the selected benchmark whenever the Portfolio Manager is either communicating or advertising or publishing, or mentioning the performance of the IA. Along with the TWRR, the Portfolio Manager shall present the Extended Internal Rate of Return (‘XIRR’) which shall be accompanied by the minimum, maximum, and median XIRR return generated across all the investors in each of the IA in which the investor has invested while reporting the performance to an investor.

Applicability?

The provisions of this circular are made applicable from 1st April 2023. Conditions mentioned in the Disclosures by the Portfolio Managers’ are applicable to any entity which is either reporting or publishing or advertising the performance of any IA of any Portfolio Manager. All other provisions apply to the Portfolio Manager.

Portfolio Managers shall not advertise or publish or mention to any entity the returns of the IAs other than those belonging to the investor category to which said IA is offered. However, the portfolio manager may include the assets managed in such IAs in their total AUM when communicating publicly as well as in regulatory reporting.

APMI and Portfolio managers are required to take the necessary steps for implementing the provisions as mentioned in the circular which also includes put in the required processes and systems in place to ensure compliance with the circular

Audit & Submission of reports 

All the above-mentioned performance statistics shall be carried out in the annual audit performed under the portfolio Manager Regulations. 

Also, the Portfolio Managers submit the monthly reports to APMI in addition to SEBI within 7 working days from the end of each month. APMI through its website shall make available the monthly reports of the Portfolio Managers in an intuitive and user-friendly manner facilitating ease of comparison to provide access to the portfolio level, investment approach level, portfolio manager level, and industry level information to all the stakeholders. 

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

Disclosure by Portfolio Managers?

SEBI has specified what has to be disclosed and shall not be disclosed by the Portfolio Manager as mentioned below:

  • While disclosing the performance of the IA, the following disclaimer must accompany the disclosure: 

“Please note that the performance of your portfolio may vary from that of other investors and that generated by the Investment Approach 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.” 

  • The relative performance of IA has to be disclosed in all the marketing material where the performance of the concerned investment approach is being presented by the Portfolio Manager. Such disclosure of relative performance shall, at minimum, include the following:
  • Performance relative to the selected benchmark
  • Performance relative to other Portfolio Managers within the selected Strategy 

The following shall not be mentioned or implied in performance reporting or in any other communication in any form by the Portfolio Managers:

  • Any other categorization/ classification of IAs, except for the Strategy that they are tagged to.
  • Model Portfolio returns
  • The performance of one or more cherry-picked investor(s) 

However, the aggregated performance statistics of all investors in an IA may be used by a Portfolio Manager for aggregated performance reporting.

Disclaimer: The views, comments, and opinions expressed herein are my personal views and opinions and do not necessarily reflect the official policy and position of any other agency, organization, employer, or company. Assumptions made in the analysis are not of the position of any entity apart from me. I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information and will not be liable for any errors, omissions, or damages arising from its use. It is the reader’s responsibility to verify their facts.

Author Name:

Pratik & Sudhindra LLP

Chartered Accountants

Contact: 99163 54360

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