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.”
The SRRI
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.
According to FE Analytics, Mr Woodford’s Income fund has a three-year volatility of 11.9 per cent over three years to December 7. This is significantly less than the IMA UK Equity Income sector average of 14 per cent.
However, the fund is still ranked in the SRRI’s sixth – and second-highest – band of risk, one it shares with most equity income funds and other very different funds, such as First State’s £2.8bn Global Emerging Markets Leaders fund and the £60.8m Schroder Japan Alpha Plus fund.
The FSA’s view of the SRRI is simple – it is not to be relied upon in isolation.
Nausicaa Delfas, head of conduct risk at the regulator, previously told Investment Adviser the risk-rating calculation was “not the be-all and end-all” and should be looked at alongside other measurements.
“You only have to look at the Lehman Brothers failure,” she said, “which was down to counterparty risk, or the Keydata failure to know that volatility alone would not have highlighted these issues.”
But this misses a crucial factor in the SRRI’s role. This risk figure is likely to be among the first pieces of information given to the investor, and it may come as a shock to a low-risk investor to see a fund with a high SRRI in their portfolio.
As Mr Caunt says: “Many of our clients are not sophisticated [investors], so giving them more information does not help the advice process. Why give them something you know is wrong, has not really helped you to create the client’s portfolio and detracts from the really important issues?”
Nick Reeve is senior news reporter at Investment Adviser
Ongoing charges. What it means
- The Kiid introduced the concept of an ‘ongoing charge’, which replaced the total expense ratio which itself was brought in by Ucits III. The charge is very similar to the total expense ratio and includes all payments made to the fund manager, administrators, lawyers, custodians, depositaries and other third parties.
- The ongoing charge has already been adopted by the IMA as part of its cost consultation on fee transparency. The Association of Investment Companies, the investment trust trade body, has also voiced its support for the Ucits move.
- However, the calculation also has its drawbacks. Although each share class has its own Kiid and therefore its own charge calculation, Informed Choice’s Martin Bamford points out that none take into account discounts which some advisers and platforms are able to negotiate. The charge is supposed to include distribution costs, but in the UK market – with several levels of intermediation and its move towards unbundled charging – it rarely gives the whole picture.
- In addition, in spite of support from the IMA, others are less than convinced by the charging calculation. SCM Private, which has been campaigning since the start of the year for trading costs to be included in a ‘total cost of investing’ figure, has expressed disappointment that the IMA opted for the ongoing charge as it does not include trading costs.
