In a circular dated December 16, the Securities and Exchange Board of India (Sebi) specified performance benchmarks for portfolio managers and how they should be reported. The regulation will come into effect on April 1, 2023.

Portfolio managers document their investment philosophy in an investment approach (“IA”) to achieve clients’ investment objectives. The market watchdog’s notice said, “Now, in addition to IA, portfolio managers should employ another layer of broadly defined investment themes called ‘strategies’. These broad strategies should be ‘equity’, ‘debt’, ‘hybrid’ and ‘multiple’ assets.”

Each IA can only flag one of these four strategies, and the portfolio manager can choose the strategy. Managers can tag multiple IAs as one strategy but cannot tag one IA as various strategies.

The circular said that the Association of Portfolio Managers of India (APMI) should prescribe up to three benchmarks for each strategy. “These benchmarks should reflect the core philosophy of the strategy. When labelling IA as a particular strategy, the portfolio manager should choose one of the benchmarks specified for the strategy to enable investors to assess the relative performance of the portfolio manager,” it added. The board of portfolio managers should ensure that appropriate strategies and benchmarks are selected for each IA.

According to the circular, once a strategy and/or benchmark is assigned to an IA, it can only be changed if the IA’s subscribers are given the opt-out option and do not have any opt-out payload. Additionally, Portfolio Managers cannot use IA performance track records before this change for performance reporting. It should be verified under Regulation 30 of the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“PM Regulations”) as part of the annual audit.

It added that changes to the strategy and/or benchmark should be documented and verified adequately as part of the annual audit under Regulation 30 of the PM Regulation.

Portfolio managers should value portfolio debt and money market securities by these standardised valuation practices prescribed by APMI. The association will develop valuation norms, much like the corresponding norms established by mutual funds.

“APMI shall commission valuation agencies to provide portfolio managers with prices for security grades. Portfolio managers shall make it mandatory to value debt and money market securities using valuation services obtained only from one or more designated valuation agencies. The ultimate responsibility for a fair valuation should rest with the portfolio manager,” it added.

When promoting or communicating an IA’s performance, portfolio managers must demonstrate the IA’s time-weighted return (‘TWRR’) and the tracked return of the chosen benchmark.

When reporting performance to investors, the portfolio manager must provide an Extended Internal Rate of Return (“XIRR”) for each IA the investor invests in. All investors must accompany the report in each IA that the region generated the lowest, highest and median XIRR return investors invested in. “TWRR for each IA and tracked returns for selected benchmarks should also be presented separately,” the notice added.

In addition to this disclosure, a general disclaimer must be added explaining why the investor’s return differs from other investors who put money into a similar IA.

When reporting performance, Portfolio Managers must refrain from using any classification or categorisation of IA, except for strategies marked by IA. They must refrain from using any model portfolio returns or the performance of one or more carefully selected investors.

“However, portfolio managers may use aggregate performance statistics for all investors in the IA for aggregate performance reporting,” it added.

Portfolio managers should disclose the relevant performance of the IA in all the IA’s marketing materials. However, such disclosures must include performance relative to the selected benchmark and relative to other portfolio managers in the chosen strategy.

“All the above performance statistics shall be verified in the annual audit under Regulation 30 of the PM Regulations,” the circular added.

Portfolio managers must submit monthly reports to APMI and submit reports to Sebi within seven working days of the end of each month. “APMI shall make monthly reports of portfolio managers available on the APMI website in an intuitive and user-friendly manner for easy comparison, providing portfolio level, investment method level, portfolio manager level and industry level information to all investors. Interest Related parties. APMI shall also provide relevant portfolio managers with the relative performance of each investment approach in the strategy and disclose it on its website,” it added.

All provisions related to reporting performance shall apply to any IA of any portfolio manager of any entity reporting/publishing/advertising performance.

If the investor is covered by a provident fund (Employees Provident Fund, Coal Mines Provident Fund, Exempted Provident Fund Trust), Employee State Insurance Corporation, Postal Life Insurance, etc.