Model portfolios by RAs must be performance validated, benchmarked to an index: SEBI

Model portfolio should be ‘true to label’ and should be named in a manner which clearly states the type of portfolio being created along with a oneline description of the theme, said the SEBI circular.

Model portfolios by research analysts (RAs) will need their performance validated by an agency specified by the regulator and benchmarked to an appropriate index, said a new set of guidelines issued by SEBI on Webnesday.

The market regulator issued the guidelines for recommendation of model portfolios by Research Analysts on January 8.

In a circular, the Securities and Exchange Board of India (SEBI) issued the over guidelines for RAs including ones on how to recommend model portfolios to clients.

The circular said, "A ‘model portfolio’ shall mean a basket of securities for which a research report is issued by a RA recommending the relevant weightages for one or more securities mentioned therein.

Explanation: If the research report does not ascribe weightages to the components of basket of securities, then merely a summary or consolidated presentation of securities recommended shall not be regarded as a “model portfolio”."

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The guidelines says that the portfolio should include a factsheet on the basic information on the portfolio including disclosures, rationale, methodology, launch date, update date and type of model portfolio contained therein.

The other constituents of the framework include the following:Model portfolio report shall define and discuss the framework including underlying universe for stock selection and shall be labelled to indicate the type of underlying universe of securities (such as large caps, mid-caps, multi caps, etc.) or an underlying theme (such as Make in India, Defence, etc.) or a sector (such as Auto, Textile, etc.). Model portfolio report shall define and discuss in detail the methodology for selection of constituent securities in the model portfolio such as fundamental analysis, technical analysis etc. and the parameters therein

Labelling: Model portfolio should be ‘true to label’ and should be named in a manner which clearly states the type of portfolio being created along with a oneline description of the theme or investment objective of the model portfolio for ease of understanding for all clients.

Investment Horizon: Model portfolio report should specify the investment horizon of the model portfolio so that the investor can match that to their investment period.

Frequency of portfolio review and update: Whether the model portfolio would be updated and at what intervals must be predefined in the report. The rebalancing, if any, of the constituent securities in the model portfolio shall be done within the overall framework of the model portfolio and shall be communicated to the clients along with the underlying rationale.

Risk disclosures: Model portfolio risk should be clearly mentioned in model portfolio report

Benchmarking: Each model portfolio shall disclose performance duly validated by agency/body as specified by SEBI over different time periods, and should be benchmarked with appropriate and relevant index. For example, Model portfolio for auto stocks can be benchmarked with Nifty Auto Index, Mid cap model portfolio can be benchmarked with BSE Midcap Index, thematic portfolios with thematic indices, etc. Every model portfolio report shall contain disclosure on the benchmark index which should be clearly defined and should be used consistently.

.Audit Requirements: Compliance with audit requirement under regulation 25(3) of the RA Regulations shall also cover compliance with obligations set out under the model portfolio guidelines.