Setting standards

New guidelines will increase transparency in PMS

In a recent circular, the Securities and Exchange Board of India (Sebi) has set tighter definitions and guidelines for performance benchmarking and investment approach for the portfolio management services (PMS) segment. The new guidelines, which will come into force in April next year, would give investors a clearer picture of what strategy a PMS is targeting, and also a clearer idea of returns with detailed comparisons and timeliness. The investment approach (IA) is the documented philosophy adopted by a given portfolio manager. Now this IA is to be fleshed out by disclosure of an additional broad layer of strategy, defined as “hybrid”, “equity”, “debt” and “multi-asset”. Each IA can be tied to only one specific strategy, though a manager could adopt and declare several IAs. This tagging is based on the judgement of the manager concerned.

The tagging of an IA to a strategy or a benchmark may be changed only after offering an option to subscribers to the IA, to exit without any exit load. Further to this, the performance track record prior to the change would not be used by the portfolio manager for performance reporting after the tagging changes. Any changes in strategy and benchmark would be recorded with the logic justifying the change, and this would be verified as part of the annual audit of the PMS. The Association of Portfolio Managers in India (APMI) could prescribe a maximum of three benchmarks to compare for each strategy. These benchmarks would then reflect the core philosophy of the strategy. Further, the board of the portfolio managers would hold responsibility for ensuring the appropriate selection of strategy and the benchmark for each IA. The APMI must set standardised valuation norms for portfolio managers, similar to the corresponding benchmarks applicable to mutual funds. The valuation of debt and money market securities by portfolio managers would have to be in line with the valuation norms set by the APMI.
 

The APMI would empanel valuation agencies for providing security-level prices to portfolio managers and the managers would have to mandatorily use services from empanelled agents for the valuation of debt and money-market securities in their portfolios. The managers would also have to present the time-weighted rate of return (TWRR) of the IA alongside the return of the selected benchmark, and the returns of other PMS running under the same strategy, when publicly disclosing the performance of an IA. Such returns and comparisons must also be disclosed while advertising. Further, portfolio managers would have to submit monthly reports to the APMI within seven working days of the end of each month. The APMI would then have to make available the monthly reports on its website in a user-friendly manner facilitating “ease of comparison to provide access to portfolio level, investment approach level, portfolio manager level and industry level information”.

This would clearly lead to improved transparency in the PMS segment, which caters to high net-worth individuals. These multiple layers of additional disclosures and the detailed benchmarking of returns would allow investors to gauge relative performances better versus acceptable public benchmarks, along with other portfolio managers operating under similar IA. This information would also allow investors to make more informed choices in the selection of a new scheme. The one area of concern is that it could add to the costs of PMS, thus reducing the actual corpus available for investment in these schemes.