SEBI has introduced a comprehensive benchmarking framework for portfolio managers to enable investors to evaluate relative performance. This article explains how the right benchmark is chosen and the regulatory requirements.
The Benchmarking Framework
Investment Approach
An Investment Approach (IA) is the documented investment philosophy adopted by the portfolio manager while managing the client funds in order to achieve client's investment objectives.
Strategies
In addition to IA, an additional layer of broadly defined investment themes called "Strategies" shall be adopted by portfolio managers. These broad Strategies shall be:
- Equity
- Debt
- Hybrid
- Multi Asset
IA Tagging
Each IA shall be tagged to one and only one Strategy. This tagging shall be at the discretion of the concerned portfolio manager. A portfolio manager may tag more than one IA to a Strategy, but each IA must be tagged to only one Strategy.
Benchmark Selection
APMI Prescribed Benchmarks
APMI shall prescribe a maximum of three benchmarks for each Strategy. These benchmarks shall reflect the core philosophy of the Strategy.
Selection by Portfolio Manager
While tagging an IA to a particular Strategy, the portfolio manager shall select one benchmark from those prescribed for that Strategy to enable the investor to evaluate relative performance of the portfolio managers.
Board Responsibility
The Board of the portfolio managers shall be responsible for ensuring appropriate selection of Strategy and benchmark for each IA.
Importance of Correct Benchmarking
Fair Evaluation
Having relevant benchmarks helps in fair evaluation of the strategy. For example, a multi-asset or 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.
True Performance
A hybrid fund manager's true performance can be best observed by comparing it to a hybrid benchmark.
Transparency
SEBI evolving its reporting norms for PMS is a step in the right direction. The framework creates distinct categories of products and more transparency for clients by selecting appropriate benchmarks.
Change in Benchmark
Exit Option Requirement
Once an IA is tagged to a Strategy and/or to a benchmark, the tagging shall be changed only after offering an option to subscribers to the IA to exit without any exit load.
Performance Track Record Restriction
The performance track record of the specific IA whose tagging with Strategy/benchmark was changed prior to the change shall not be used by the portfolio manager for performance reporting.
Audit Verification
The changes in Strategy and/or benchmark shall be recorded with proper justification and shall be verified as part of the annual audit under Regulation 30.
Performance Reporting
TWRR with Benchmark
Portfolio Manager shall present the TWRR of the IA along with the trailing return of the selected benchmark when communicating, advertising, publishing, or mentioning performance of an Investment Approach.
Relative Performance
Portfolio managers shall disclose relative performance of its investment approach in all marketing material where performance is presented, including performance relative to the selected benchmark and performance relative to other portfolio managers within the selected Strategy.
Monthly Reports
Portfolio managers must submit monthly reports to APMI in addition to SEBI within 7 working days from the end of each month.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on PMS benchmarking compliance. Our securities law experts help portfolio managers select appropriate benchmarks, tag investment approaches correctly, and ensure regulatory compliance. Contact us for guidance on benchmarking and other regulatory matters.