During the course of these developments, Key Investor Information Documents (KIIDs) have replaced Simplified Prospectuses to make it easier to compare all Ucits funds across the EU on a like-for-like basis.
Paper talk
One of the sections on a KIID is the Synthetic Risk Reward Indicator (SRRI), a measure of a fund’s volatility over the previous five years.
The financial turbulence in 2008 resulted in high volatility, which has been included as part of funds’ five-year historical performance for the purpose of calculating the SRRI.
As we approach 2014, the extreme volatility of 2008 and early 2009 will fall away to be replaced by the comparatively calmer markets that we have become used to once again. As this happens, the volatility measured in SRRIs is very likely to reduce.
Fund managers have to issue new KIIDs if material changes occur. By our calculations, around one in eight KIIDs will need to be re-issued early in 2014 to reflect the new, lower SRRI scores, and that number may well rise as 2014 progresses and volatility from the first quarter of 2009 drops out as well.
Volatility still high
Of course, since this change in volatility has affected funds across the spectrum, a well-informed investor will see the reduction of risk scores as largely cosmetic. Because most SRRIs will reduce around the same time, comparisons between funds should not be distorted.
But investors who do not understand the context of this change might mistakenly presume that funds, and investing overall, have become less risky.
Against a backdrop of ongoing fiscal uncertainty in the US, ongoing debt concerns across Europe and slowing economic growth worldwide, it would be a mistake to interpret lower SRRI scores across the board as a sign that everything in the investing garden is rosy.
Volatility since 2008 has settled at a higher level than before and if SRRIs had been around for years before then, it would be clear to all that investing these days has generally become more, not less, risky.
