The stock market regulator, Securities and Exchange Board of India (SEBI) has been trying to streamline operations of portfolio management services (PMS) of late and its latest circular is yet another move aimed at this objective. The guidelines deal with the selection of benchmarks, standardising the reporting of fund performance and valuation of assets held. There is no disputing that the market regulator needs to ensure that the interests of all investors have to be protected, whether they are high networth individuals investing in PMS schemes or small retail investors putting their money in mutual funds.
But using the same yardstick to frame rules for both may not always be correct. The minimum ticket size for investing in PMS is ₹50 lakh and HNIs use this vehicle to get customised investment solutions which earns them higher returns while taking higher risk. While ethical reporting practices are welcome, their investment decisions should not be hindered by excessive regulations. Portfolio managers adopt more innovative strategies compared with mutual funds to get returns which exceed the hurdle rate (returns earned beyond the hurdle-rate are shared with the portfolio manager). These funds are more nimble, more return-oriented and also invest in riskier assets.
Asking these funds to be categorised into buckets such as equity, debt, hybrid and multi-asset, similar to mutual funds, and asking them to benchmark their performance against standard indices diminishes the value of the premium services provided by the portfolio managers. Besides, some of these funds follow absolute return strategies where benchmarks are irrelevant, and some strategies may not have a suitable benchmark available. Similarly, standardising the way the performance is disclosed helps investors understand the returns better, but the regulator cannot lay down straitjacketed rules for PMS return disclosures. Subscribers to PMS schemes are more sophisticated than mutual fund investors; portfolio managers should be allowed the freedom to disclose the performance of their funds using other metrics.
A couple of changes made by SEBI are, however, welcome. The stipulation that a change in fund strategy can be carried out only after informing the subscribers and giving them an option to exit without an exit load, will stop fund managers from changing investment styles frequently. SEBI has laid out that proper justifications need to be given for change in strategy or benchmark and this justification needs to be part of the annual audit mandate. SEBI’s move to standardise valuation of securities held in the PMS fund is also a good move. Asking PMS funds to use the same valuation norms as mutual funds is the right approach as the rules for valuing mutual fund assets are quite watertight now. If portfolio managers use valuation agencies empanelled by the APMI for valuing debt, money market securities, unlisted shares and other exotic products held by them, it will ensure that the portfolio is disclosed at the right valuation, reflecting the notional losses incurred.