The Securities and Exchange Board of India (Sebi) is deliberating on setting up an industry body to draw up best practices for portfolio managers and introducing a standard template to bring uniformity in the way they market their schemes. The discussions are preliminary.

At present, PMS providers file an offer document for filing with Sebi and release quarterly statements to existing clients mandatorily. However, there is no standardised document for marketing to potential customers and detail investment objectives, past performance and fund strategies. Performance could be depicted by weighted average returns, rolling returns or back-tested returns for newer schemes. Non-discretionary and advisory performance is often clubbed with the performance for discretionary portfolios, not reflecting true returns.

“The way the returns are communicated is mostly wrong. At the portfolio level, returns showcased are those of model portfolios which could be off the mark as investors enter the schemes at different points in time. The returns put up on the Sebi website are weighted average returns of each portfolio and give a misleading picture as well,” said a person who is part of the PMS industry.

PMS schemes typically mirror model portfolios although individual portfolios differ from investor to investor.

The performance of portfolio managers put up on its website is not approved or recommended by the regulator nor does it certify the accuracy or adequacy of the monthly report, the Sebi website says. The regulator further cautions that since no pooling is allowed or units issued as in the case of MFs, the performance of one portfolio manager may not be comparable with the performance of another. The monthly reporting is as per a regulatory circular dated October 8, 2010.

“Sebi is doing its bit to ensure the PMS providers adhere to data sanctity. However, unlike mutual funds, the marketing material for PMS schemes is not in a standard format and most providers use ad hoc data for representational purposes,” said a second person, requesting anonymity.

Mutual funds, on the other hand, detail scheme returns and features by way of an offer document consisting of scheme information document (SID) and statement of additional information. MFs also provide a key information document that comes with application forms and are a concise version of SIDs.

PMS assets have nearly doubled in the past five years to Rs 14,795 billion. A large portion of this money is in discretionary schemes, wherein the portfolio manager manages the funds of each client according to the client’s needs.

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PMS run a more concentrated portfolio of 15-20 stocks, compared with equity schemes of mutual funds (MFs), which generally invest in 40-60 stocks. A concentrated portfolio increases the potential of higher returns but adds to the risks.

In 2007, several PMS schemes compromised on quality to generate alpha by investing in mid- and small-cap stocks. This caused the PMS portfolios to go into a tailspin after the market crashed in 2008 and it became difficult for portfolio managers to exit some of these stocks because of poor liquidity and the quantum of holding. A lot of PMS outfits shut shop between 2008 and 2013 after seeing years of continuous net outflows.

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This upheaval had forced the market regulator to tighten PMS regulations. In 2008, it banned the pooling of PMS assets, wherein fund managers pool investments from clients and invest on behalf of the whole group. In 2010, the regulator mandated that profit-sharing or performance-related fees should be charged on the basis of a ‘high watermark principle’ over the life of the investment. This means if the portfolio value declines and then recovers, the manager does not earn fees till all the losses have been made up. In 2012, Sebi raised the minimum ticket size.