Managers universe analysis

A market index tells an investor how their portfolio did against the broad market. It does not tell them how their portfolio manager did against other portfolio managers running a similar strategy. A fund could beat the NIFTY 50 and still be a middling performer against its true peer group.

Managers' universe analysis, also called peer group analysis, fills that gap. It compares a manager's portfolio against the median of other managers running a similar approach. It can also compare it against the whole spread of those managers, not just the median. Either way, the group used for comparison shares a similar investment approach and a similar risk-return profile.

The workbook: "Managers' universe analysis or peer group analysis is also a very popular way of conducting performance evaluation. The median portfolio or the universe of the portfolio managers with the similar investment approach and strategies can be taken as the yardstick to evaluate the performance of the portfolio... Portfolio tracking firms have developed databases to facilitate managers' universe analysis. They rank the portfolios with similar investment characteristics and risk-return profile on some risk-adjusted return measure."

The raw material for these peer databases is the periodic performance reporting SEBI's Portfolio Managers Regulations already require: a portfolio manager must furnish a report to each client at intervals not exceeding three months, disclosing the portfolio's composition, value and transactions, and must present the time-weighted rate of return of the investment approach alongside the trailing return of its benchmark. It is exactly this kind of standardised, regular reporting across many managers that tracking firms aggregate to build a comparable managers' universe.

Illustrative figures — the workbook gives no worked ranking. Meridian PMS runs a "large-cap growth" investment approach with Rs 200 crore under management, and reports a 16.8% time-weighted return for the year. A portfolio tracking firm's managers' universe database, built from the periodic performance reports of 40 comparable large-cap growth managers, shows a median return of 14.2% for the same period, with the top-quartile cutoff at roughly 16%.

Against the NIFTY 50, which returned, say, 13% over the same period, Meridian's 16.8% looks strong. Against its true peer group — other managers running the same kind of strategy, facing the same kind of opportunity set — Meridian sits comfortably in the top quartile rather than merely beating a broad index, which is the more demanding and more relevant comparison a sophisticated investor or the manager's own trustees would want to see.

Chapter 20 (Performance Measurement and Evaluation of Portfolio Managers), section 20.5.3, introduces managers' universe analysis immediately after customised benchmarks, as the second alternative to a plain market-index benchmark. Expect a question distinguishing the three approaches — market index, customised benchmark and managers' universe — and their respective drawbacks.

• Managers' universe analysis is not an investable benchmark — unlike a market index or a customised benchmark, the peer median is not something a manager could have simply bought instead; it is a comparison point, not an alternative portfolio.
• It depends on portfolio tracking firms' databases classifying managers correctly by strategy — comparing a large-cap growth manager against a mixed peer universe of value and growth managers together would understate or overstate performance depending on which style is in favour that year.
• The reporting frequency underlying these databases — not exceeding three months — comes from SEBI's Portfolio Managers Regulations reporting rule, not from the peer-database providers themselves.