If you are an investor who has entrusted your funds to a portfolio manager, you may be wondering how to evaluate their performance and compare it with other portfolio managers. In this blog post, we will explain what bench marking and performance reporting are, and how they can help you make informed decisions about your investments.
Bench marking is the process of selecting a standard or reference point to measure and compare the performance of a portfolio manager. A benchmark is usually an index or a group of securities that represents the market or a segment of the market that the portfolio manager invests in. For example, if the portfolio manager invests in Indian equities, a possible benchmark could be the Nifty 50 index, which tracks the performance of 50 large-cap stocks listed on the National Stock Exchange of India.
Performance reporting is the process of disclosing and communicating the performance of a portfolio manager to their clients and regulators. Performance reporting includes information such as returns, risk, fees, portfolio composition, investment approach, strategy, and benchmark. Performance reporting helps investors to assess how well the portfolio manager has achieved their objectives and expectations, and how they have performed relative to their peers and the market.
The Securities and Exchange Board of India (SEBI), which is the regulator for portfolio managers in India, has recently issued a circular on performance bench marking and reporting of performance by portfolio managers. The circular aims to standardize and improve the quality and transparency of performance bench marking and reporting by portfolio managers, and to help investors make better comparisons and choices.
According to the circular, portfolio managers have to tag each investment approach (IA) they offer to their clients to one of four strategies: debt, equity, multi-asset, or hybrid. An IA is the documented investment philosophy that the portfolio manager adopts when managing the client’s funds. A strategy is a broad investment theme that reflects the core philosophy of the IA. For example, if the IA is to invest in high-quality companies with strong growth potential, the strategy could be equity.
The circular also requires portfolio managers to select one of three performance benchmarks for each strategy, as prescribed by the Association of Portfolio Managers in India (APMI). A performance benchmark is a specific index or a group of securities that represents the strategy. For example, if the strategy is debt, one of the performance benchmarks could be the CRISIL Composite Bond Fund Index, which tracks the performance of debt mutual funds in India.
The circular further requires portfolio managers to follow the same valuation norms for debt and money market securities as applicable to mutual funds, as prescribed by APMI. Valuation norms are the rules and methods for determining the fair value of securities in a portfolio. Valuation norms ensure consistency and accuracy in calculating returns and risk.
The circular also mandates portfolio managers to disclose and report their performance on a monthly basis on their website and on a quarterly basis to SEBI. The performance report should include information such as returns (absolute and relative to benchmark), risk (standard deviation and beta), fees (management fee and exit load), portfolio composition (asset allocation and sector allocation), investment approach, strategy, benchmark, and any changes in tagging or bench marking.
The circular is expected to bring more uniformity and clarity in performance bench marking and reporting by portfolio managers, and to enhance investor awareness and protection. As an investor, you can use this information to evaluate your portfolio manager’s performance more objectively and comprehensively, and to compare it with other portfolio managers offering similar strategies and benchmarks. This can help you make better investment decisions and achieve your financial goals.