Strategy

An Investment Approach is a portfolio manager's specific investment philosophy for a client. SEBI adds one more layer on top of it. This layer is called a Strategy.

Every portfolio manager must tag each Investment Approach to a Strategy. There are four broad strategies: equity, debt, hybrid and multi-asset. Each Investment Approach gets one and only one tag. The point is to let an investor compare like with like. An Investment Approach tagged "equity" is judged against equity benchmarks. It is never judged against a debt-strategy benchmark.

The tagging rule (Chapter 9, section 9.3.8, per the SEBI performance benchmarking circular of December 2022).

• Broad strategies: equity, debt, hybrid, multi-asset.
• Each Investment Approach is tagged to exactly one strategy, at the portfolio manager's discretion.
• APMI prescribes a maximum of three benchmarks for each strategy, reflecting that strategy's core philosophy.
• The portfolio manager selects one benchmark from those prescribed, for each Investment Approach tagged to that strategy.
• The Board of the Portfolio Manager is responsible for the appropriate selection of strategy and benchmark for each Investment Approach.

Changing the tag has a cost. Once an Investment Approach is tagged to a strategy or benchmark, the tagging can be changed only after offering subscribers to that Investment Approach an option to exit without any exit load. The prior performance track record cannot be carried over and used for reporting after the change; it must instead be verified as part of the annual audit under Regulation 30 of the SEBI (Portfolio Managers) Regulations, 2020.

Deccan Portfolio Managers Ltd offers four Investment Approaches: Focused Growth Equity, Corporate Bond Income, Balanced Advantage and Multi-Asset Opportunities. Under the tagging rule:

For Focused Growth Equity, Deccan's board picks one benchmark from up to three that APMI has prescribed for the equity strategy, say a large-cap total return index.

Eighteen months later, Deccan's board decides Balanced Advantage should instead be tagged as an equity strategy, reflecting a shift in the approach's actual asset mix. Before making the change, Deccan must offer existing subscribers an exit option with no exit load. After the change, Deccan cannot use the approach's pre-change performance, measured under the old hybrid benchmark, to market its new equity-tagged track record; this is verified at the next annual audit under Regulation 30.

Chapter 9 (Portfolio Management Process), section 9.3.8 (Performance Benchmarking), introduces the strategy layer as an addition on top of the Investment Approach. Expect a recall question on the four strategy names and the "one and only one" tagging rule, and a question on what must happen before a strategy or benchmark tag is changed.

• An Investment Approach is tagged to exactly one strategy. The workbook's text also contains a puzzling line about tagging more than one investment strategy, but the operative rule stated twice is one strategy per Investment Approach.
• A maximum of three benchmarks per strategy are prescribed by APMI; the portfolio manager then selects just one of them for reporting.
• Changing a strategy or benchmark tag requires a no-exit-load exit option for subscribers first. This is not a routine administrative change.
• Pre-change performance cannot be carried forward for reporting after a strategy or benchmark change, and the change itself is checked at the Regulation 30 annual audit.