Sebi issues performance benchmarking guidelines for PMS industry

The Securities and Exchange Board of India (Sebi) has introduced performance benchmarking and categorisation for the portfolio management services (PMS) industry, akin to the current norms in mutual funds. The move will help investors assess and compare the performance of service providers.

In a circular issued on Friday, the capital market regulator directed portfolio managers to adopt an additional layer of broadly defined investment strategies categorised as equity, debt, hybrid, and multi-asset. The move will come into effect from April 1, 2023.

Portfolio managers will be able to tag each investment approach to only one of the strategies while more than one can be tagged to a specific strategy.

Sebi has asked the Association of Portfolio Managers in India (APMI) to prescribe a maximum of three benchmarks for each strategy. The portfolio managers will be able to change the tagging only after offering an option to subscribers to leave without any exit load.

These strategies will be on the present investment approach, which documents the investment philosophy, noted Sebi.

“This helps in reflecting the true performance of the strategy,” said Siddharth Vora, head of investment strategy and fund manager, PMS, Prabhudas Lilladher. 

Vora added: “For example, a multi-asset or hybrid strategy that is compared to equity benchmarks might grossly outperform in bear market and underperform in a bull market, therefore misrepresenting the strategy performance. Having relevant benchmarks helps in fair evaluation of the strategy.”

Investor first

• Portfolio managers to adopt an additional layer of broadly defined investment strategies while managing clients' funds
• These broad strategies would be equity, debt, hybrid and multi-asset
• This is in addition to the investment approach (IA) — the documented investment philosophy — adopted by portfolio managers
• The new framework will come into effect from April 1, 2023

Currently, the mutual fund industry follows a similar structure where each fund is categorised according to the asset class and is benchmarked against an index, facilitating the comparison of the fund’s performance with that of the index.

The association has also been asked to prescribe standardised valuation norms similar to those applicable on mutual funds. For this, portfolio managers will have to stick to services from a list of empanelled valuation agencies issued by the APMI.

“Valuation of the portfolio debt and money market securities by portfolio managers shall be carried out in accordance with these standardised valuation norms prescribed by APMI,” said Sebi.

The new guidelines also require portfolio managers to present performance relative to the selected benchmark, along with that of other portfolio managers within the selected strategy in all marketing communications for investors. The verification of the performance statistics will be carried out in an annual audit.

With the reviewed framework, the regulator has also mandated submission of monthly reports by portfolio managers to APMI and Sebi within seven working days from the month-end. This report will be disclosed on APMI website in an investor-friendly manner. Portfolio managers have also been asked to provide necessary disclaimers.