Performance reporting is one of the most scrutinized areas in portfolio management compliance. This article identifies the common errors auditors flag most frequently and how to avoid them.
TWRR Calculation Errors
Failure to Include All Holdings
All cash holdings and investments in liquid funds must be mandatorily included in TWRR calculation. Excluding these holdings is a common error that auditors flag.
Annualization Errors
Returns less than one year should not be annualized. Auditors frequently flag improper annualization of short-term returns.
Calculation Methodology
TWRR can be computed using market value or unitized method. Using incorrect methodology or inconsistent application across periods is a common issue.
Failure to Eliminate Timing Effects
TWRR eliminates the effect of both timing and amount of money at work. Failure to properly eliminate these effects is a frequent error.
Investment Approach Tagging Errors
Incorrect IA Tagging
Each IA shall be tagged to one and only one Strategy. Tagging an IA to multiple strategies or incorrect strategies is a common error.
Strategy Misclassification
The broad Strategies shall be Equity, Debt, Hybrid and Multi Asset. Misclassifying an IA under the wrong strategy is frequently flagged.
Failure to Document Changes
Changes in Strategy and/or benchmark shall be recorded with proper justification. Failure to document changes is a common audit finding.
Benchmark Selection Errors
Incorrect Benchmark Selection
Portfolio managers shall select one benchmark from those prescribed for that Strategy. Selecting an inappropriate benchmark is frequently flagged.
Failure to Update Benchmark
Once an IA is tagged to a benchmark, the tagging can be changed only after offering an exit option. Failure to properly manage benchmark changes is a common error.
Performance Track Record Issues
The performance track record prior to benchmark change shall not be used for performance reporting. Using pre-change performance data is a frequent audit finding.
Performance Reporting Errors
Firm-Level vs IA-Level Confusion
Investment performance is to be reported at investment approach level too. Confusing firm-level and IA-level reporting is a common error.
Failure to Report Net of Fees
Performance has to be reported net of all fees, all expenses and taxes. Reporting gross performance is frequently flagged.
Inconsistent Reporting
Performance reported in marketing material and website must be the same as that reported to SEBI. Inconsistency across reporting channels is a common issue.
XIRR Calculation Errors
Failure to Include All Investors
When reporting XIRR, portfolio managers must include the minimum, maximum and median XIRR return generated across all investors. Excluding certain investors or cherry-picking is a frequent audit finding.
Incorrect Disclaimer
The disclaimer must accompany performance disclosure: "Please note that performance of your portfolio may vary from that of other investors..." Omitting or modifying the disclaimer is a common error.
Client Reporting Errors
Missing Information
Quarterly reports to clients must include portfolio holdings, asset allocation, performance, transactions, and other important information. Omitting required information is frequently flagged.
Delayed Reporting
Quarterly statements must be sent within 10 days from the end of the quarter. Delayed reporting is a common compliance issue.
Marketing and Advertising Errors
Unsubstantiated Claims
SEBI has directed PMS players to remove all misleading and exaggerated advertisements. Unsubstantiated performance claims are frequently flagged.
Superlative Terms
Using superlative or unsubstantiated advertisements and claims about past performance and returns is prohibited.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on PMS performance reporting compliance. Our securities law experts help portfolio managers avoid common reporting errors, implement robust reporting processes, and ensure regulatory compliance. Contact us for guidance on performance reporting and other regulatory matters.