The new framework, aimed at helping investors in assessing the performance of portfolio managers, would be applicable from April 1, 2023.
“In addition to the investment approach IA, an additional layer of broadly defined investment themes called ‘strategies’ shall be adopted by portfolio managers,” the Securities and Exchange Board of India said in a circular.
These broad strategies would be equity, debt, hybrid and multi-asset. “This is a great move by SEBI to create clear distinct categories of products and more transparency for clients by selecting appropriate benchmarks. This helps in reflecting the true performance of the strategy,” said Siddharth Vora – Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher.
Explaining further, he said 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 a fair evaluation of the strategy. A hybrid fund manager’s true performance can be best observed by comparing it to a hybrid benchmark,” he added.
Under the guidelines, SEBI said that each IA will be tagged to only one strategy from the specified strategies and this tagging would be at the discretion of the concerned portfolio manager.
The Association of Portfolio Managers in India (APMI) would prescribe a maximum of three benchmarks for each strategy. These benchmarks would reflect the core philosophy of the strategy.
“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 the relative performance of the portfolio managers,” SEBI said.
Further, the board of the portfolio managers would be responsible for ensuring appropriate selection of strategy and benchmark for each IA. Once an IA is tagged to a strategy or a benchmark, the tagging can be changed only after offering an option to subscribers to the IA to exit without any exit load. The performance track record prior to the change would not be used by the portfolio manager for performance reporting. The changes in strategy and benchmark would be recorded with proper justification and would be verified as part of the annual audit.