While the concept is to give investors a summary of the detail of a fund, one of the consequences is for this wholesale replacement of current material presents to be an expensive and time-consuming challenge for the fund houses.
By and large the introduction of KIIDs’ concepts of simplicity and transparency have largely been welcomed across the industry although, even though they are now available, there are still plenty of caveats.
Difficult KIIDs
For example, Ian Dyble, chief operating officer at Cazenove Capital, says covering an absolute return fund using shorting or a strategic bond product holding credit default swaps will be a challenge, with 15 pages of risk warnings in the current prospectus. KIIDs demands no more than two pages of A4.
“Moving away from hundred-page simplified prospectuses is clearly positive but our concern is that KIIDs are pushing things too far,” he says.
“There is also a major focus on historic performance, whereas regulation has been strongly against extrapolating past returns.”
Early estimates of KIID production costs are high and with more than 55,000 Ucits registered across Europe, the scale and expense of this change becomes clear. This is backed up by a Kneip survey of European asset managers last year, showing most believe KIIDs will add costs and complexity.
Around 70% of respondents said producing the KIID will cost more than the simplified prospectus and almost 90% are considering outsourcing documentation.
Poor risk ratings
That said, the industry remains broadly supportive of the initiative according to the survey – around two-thirds of managers said it would bring increased comparability of products and greater ease of understanding, as well as better disclosure.
The IMA has also raised various specific concerns about its usability and fairness to investors, largely in regard to what it calls the ‘uninformative’ risk rating. Joint research by the IMA and Association of British Insurers reveals that using the recommended risk grades, half of UK-authorised funds would have the same rating [of between one and seven according to KIIDs guidelines].
This bunching will mean limited help for investors to distinguish between different funds, undermining one of the key objectives according to the association. Using recommended risk rankings, a third of asset classes and half of authorised funds fall into category six, and no asset class come out as either one or seven. Only a small number of funds are classed as two or three on this risk scale, mostly gilt offerings.
There is no turning back now as KIIDs now have to be made available for new Ucits fund launches so it will be interesting to see how many of the caveats, particularly around the more complex funds, will be ironed out between now and RDR.
