The post-Lehman Brothers drive for improved financial regulation and investor protection has brought about many new initiatives in the UK and across Europe.
But the one piece of legislation which has had a more tangible impact than any other is the key investor information document (Kiid).
Brought in by the fourth incarnation of the Ucits European fund laws, the two-page Kiids must be issued to all investors before the sale of an Ucits product, replacing the old simplified prospectus.
There is now a whole industry focused on the production of the documents, but it has so far had little positive impact on advisers and investors.
As each share class of each fund must have its own Kiid, the introduction of the documents was costly for fund managers.
Mario Mantrisi, chief strategist at Kneip, which collates and publishes Kiids for a range of clients, says the production, translation and distribution costs for each document amount to ¤300-¤400 (£240-£320) – as much as ¤280m across the industry.
The European Securities and Markets Authority (Esma), which helped draft the rules and set guidelines for implementation, is adamant the initiative will improve investor understanding.
A spokesperson said: “Compared with its predecessor, the Kiid improved the quality of disclosures for retail investors. By using easy-to-understand indicators and plain narrative text, the Kiid achieved [providing] retail investors with clearer and simpler product information.”
Advisers are less than impressed, however. Informed Choice managing director Martin Bamford summarises many views on the Kiid, saying: “The Kiid requirements are a logistical nightmare, adding little value to client understanding of the various funds we recommend.”
Arguably the most controversial area of the development of the Kiid is its risk rating system. The document contains a ‘synthetic risk-reward indicator’ (SRRI), a number between one and seven, indicating the fund’s estimated inherent risk level.
The figure is based on a fund’s weekly volatility of returns over five years, although for some funds this is combined with other factors.
However, many advisers are either unsure of how to use the SRRI or are dismissive of it. Sam Caunt, company secretary at Kingston PTM, says many advisers feel the indicator is “intuitively wrong”.
Mr Caunt gives the example of Neil Woodford’s £9.3bn Invesco Perpetual Income fund – “a fund with an excellent track record of producing income” – as one lower-volatility equity fund ranked in the second-highest SRRI risk band.
“Most equity-backed funds fall into the sixth or seventh categories,” he says. “Very few funds, if any, fall into the first or second classifications. Long-term investors need a high element of equity in their investment portfolios. So if this fund is a six, how do you use a scale of two to differentiate between equity-backed funds?”
When comparing within and across IMA sectors, funds will often share the same SRRI regardless of size and active or passive strategy.