Performance Benchmarking and Reporting by Portfolio Managers: SEBI

Nikhil Mogha

28 May, 2024

The Portfolio Managers (PM) are professionals who make investment decisions and perform investment functions on behalf of vested individuals and institutions. They devise and implement investment strategies and processes to meet client goals and constraints. While carrying on the investment activity, the portfolio managers, in addition to the investment approach, are now required to take an additional layer of broadly defined investment themes as per the circular “Performance Benchmarking and Reporting of Performance by Portfolio Managers“, dated 16^th December 2022. The SEBI has issued the said circular to help the investor assess the Portfolio Manager’s performance. The present article will enumerate the revision provisions brought by SEBI under the circular.

Performance Benchmarking Technique

The Portfolio Managers generally use the investment approach for investment purposes. An Investment Approach or IA is the documented investment philosophy the Portfolio Managers adopt when managing the client’s funds to achieve the client’s objectives. However, with the issue of the current circular, the SEBI has mandated that in addition to the IA, the portfolio managers are required to adopt a new investment theme called “Strategies”. These strategies shall include Debt, Equity, Multi-Asset and Hybrid. The other performance benchmarking measures introduced by the SEBI under the said circular are:

• Each investment approach shall be tagged to only one strategy, which shall depend on the portfolio manager’s discretion. The portfolio manager can tag more than one IA to a strategy, but each IA can be tagged only to one strategy.
• The Association of Portfolio Managers in India (APMI) is required to specify a maximum 3 performance Benchmarks for each strategy which will reflect the core philosophy of the strategy. The Portfolio Manager must reflect at the time of tagging IA to a particular strategy the benchmark selected from the prescribed strategy to enable the investor to evaluate the relative performance of the PM.
• The Board of Portfolio Managers will be held responsible for selecting the appropriate strategy and performance benchmarking for each investment approach.
• The tagging could be changed only after giving the subscriber to the IA an option to exit without any exit load once an IA is tagged to strategy or performance benchmark. Further, the portfolio managers shall only use such performance track records after the change for performance reporting. Also, the reporting will be verified through an annual audit under Regulation 30 of SEBI (PM) Regulations 2020.
• Any performance benchmarking or strategy changes must be recorded with proper justification.

Valuation of Securities by Portfolio Managers

The SEBI, under the circular for performance benchmarking and reporting, requires the Association of Portfolio Managers or APMI to prescribe the same corresponding valuation norms for Portfolio Managers as applicable to Mutual Funds. The portfolio manager is required to valuate the portfolio debt and money market securities by PM as per the standardised norms specified by the APMI.

Moreover, the APMI forms valuation agencies for providing security prices to Portfolio managers. In return, the portfolio managers are required to use such valuation services only from the formed valuation agencies for valuating the debt and money market securities managed by them. Also, the end responsibility of fair valuation shall be of the Portfolio Manager.

Performance Reporting

The SEBI, in addition to the performance benchmarking, has also reviewed the performance reporting requirements by the portfolio managers, which shall be taken according to the following:

• The PM is required to present the Time-weighted rate of Return of the IA along with the trailing return of the selected benchmark at the time of communicating or advertising or publishing or mentioning the performance of the investment approach.
• The PM is required to present the extended trade of return for each IA when reporting its performance to an investor. This return shall be generated for all investors in each IA the investor invest.
• The Time-weighted rate of return of the IA and the trailing return of the selected benchmark must be presented separately.
• The portfolio managers shall not include or imply in performance reporting the followings:
• Any other categorisation or classification of IA except for the strategy they are tagged to 
• Model Portfolio Returns
• Performance of one or the most beneficial investor.

However, the portfolio manager may use the aggregated performance of statistics of all investors for the aggregated reporting of performance.

• The portfolio managers must disclose the relative performance of their IA in all the marketing material where the performance of such IA is presented. It is also required that such performance shall also include the minimum requirements:
• Relative performance of the selected performance benchmark
• Relative performance of the other portfolio managers within the selected strategy

Verification of Reporting: The verification of the performance statistics shall be carried out in the annual audit as per regulation 30 of the SEBI (PM) Regulations.

Submission of Reports: The portfolio managers must submit monthly reports to the APMI and SEBI within 7 days from the end of every month. After which, the APMI shall publish their reports on its website in a user friendly manner for facilitating the comparison by providing access of reports to all the stakeholders at the portfolio level, investment approach level, portfolio manager level and industry level information level. The APMI shall also provide the relative performance of each investment approach within the strategy to the concerned portfolio manager and disclose the same on its website.

Applicability of provisions of Performances Benchmarking and Reporting Requirements

The provision for the circular on performance benchmarking and reporting shall apply to any entity publishing or reporting or advertising the performance of any IA of any portfolio managers.

Investors Not Governed Under the Circular

The circular explicitly provided that the following portfolio of investors or clients of portfolio managers which will not be covered by the provisions of the said circular:

• Investors are governed by separate statutes such as Employee’s Provident Fund Organization, coal Mines provident fund organisation, Exempted provident Fund trusts, Postal lifer Insurance Employee state Insurance Corporation etc.
• The non-individual investors are regulated by RBI, PFRDA and IRDA, for which the concerned regulators specify specific valuation or performance benchmarking norms.

No Advertisement or Publishment of Return to Other Entity

The circular has made it mandatory that the portfolio manager shall not advertise or publish or mention to any other equity the reruns of the IAs. However, the PM can include assets managed in such IAs when communicating publicly or at the time of regulatory requirements.

Conclusion

The performance benchmarking will act as a measure to ascertain a portfolio manager’s performance. It will determine the ability of the portfolio manager to meet the client’s objective at the required time. The SEBI^[1] in furtherance of this objective has issued the current circular so that the investors can assess the performance of PM. The SEBI has now made it mandatory the IA shall be tagged with the strategy and the APMI has to frame a maximum of 3 performance benchmarks, which will be used by the PM while assessing. Henceforth, the increase in the reporting requirement has scrutinise the actions of the Portfolio managers for the protecting the interests of the investors.

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