Money managers under the microscope
KIIDs can help bridge the trust gap: Lipper
By Merieme Boutayeb. Research Analyst at Lipper. The views expressed are her own.
The European fund industry is getting a second chance this week to improve the way it communicates with investors when selling its products. While the first effort became mired in legalese and complexity, the Key Investor Information Document, or KIID, should offer a golden opportunity to recoup some more of the trust lost during and after the financial crisis. Firms would do well to look past their misgivings and not waste it.
The new requirements are part of the broader changes that come as part of UCITS IV regulations designed to further develop a single market in investment products. The KIID will replace the much-criticised Simplified Prospectus as the means to facilitate the understanding of neophyte investors.
Published by ESMA (the European Securities and Markets Authority, the final KIID layout will be divided into five principal sections: objectives and investment policy; risk and reward profile; charges; past performance; practical information.
A KIID will have to be prepared for each share class in a standardized two-page format. It is probable that the task will be arduous for those funds using deeply complex investment strategies which they are required to distil into simple terminology. But they will have to respect the rule (and might be afforded a bit of extra room) as regulators seek to ensure transparency and comparability between different funds.
The KIID will also have to be available in all the languages of the countries where the share class is registered for sale, a requirement which goes beyond the demands of the Simplified Prospectus and which will result in additional costs. According to Lipper data, there are about 50,000 UCITS share classes registered for sale in Europe. Taking into account the fact that every share class must have a KIID in each language of country of registration for sale, the number of documents to be produced would be more than 160,000 KIIDs by July 1, 2012. Share classes already in existence before July 1, 2011 have a deadline of one year to develop their KIID.
Professionals from the sector estimate that the cost of a KIID would vary between 50 and 125 euros, assuming the release of a single version in the year. That means the overall production of KIIDs would cost between 8 million and 20 million euros, without taking into consideration changes that may involve the production of an updated KIID.
In March, during a conference held by the Association of the Luxembourg Fund Industry, Schroders’ <SDR.L> managing director in Luxembourg, Noel Fessey, estimated that the KIID would cost twice as much as the simplified prospectus. According to industry publication FundWeb, he said that Schroders is planning to spend 1 million euros to produce a KIID for all its UCITS share classes, compared with 0.5 million euros spent on creating the simplified prospectus in 2005.
RISK AND REWARD
No fund manager likes to shell out cash, but the sums involved don’t appear that onerous in comparison to the costs spent annually by fund management companies to run their investment funds. However there are other factors around the KIID which will have an impact on the fund industry in Europe.
The new section on a fund’s “risk and reward profile” provided in the KIID has been the most controversial requirement. This will strive to give an estimate of the risk incurred by an investor via the calculation of a standardised indicator, the SRRI (Synthetic Risk and Reward Profile). This indicator could well turn out to be decisive in individuals’ investment choice by allowing an easier comparison based on their risk appetite.
It’s difficult to guess at the changes in purchasing behaviour that this might create, but fund management companies may well be led to develop their fund range through an appropriate breakdown of the different risk levels, in order to satisfy a wide range of investor profiles. The SRRI is also likely to make it easier to monitor the offerings of rival fund firms.
The introduction of the KIID may also contribute to the trend towards consolidation and streamlining of fund ranges, which would serve to reduce the costs associated the production of KIIDs. They are likely to act as a further disincentive to the creation of multiple mutual funds because of the cost of producing several KIIDs, while fund companies will have an additional incentive to use mergers and transfers of assets where they manage several funds with similar risk profiles and strategies.
At this week’s Fund Forum International in Monaco the organisers reported that one panel of experts believed fund management had overtaken banking as the most hated industry. A touch of paranoia there perhaps, but it is clear that despite much gnashing of teeth there remains a trust gap between fund companies and their clients. The KIID will clearly have a palpable impact for many groups in relation to cost, and uncertainties persist over how they manage complexity and what the eventual consequences might be. However, if done right, the KIID at least has the potential to help bridge that divide and firms should make sure it does just that.
(Editing by Joel Dimmock) ((firstname.lastname@example.org; Twitter: @reutersJoelD; +44 20 7542 3505))