Priips (Packaged Retail and Insurance-based Investment Products) requires the categorisation of products into one of four categories along with the publication of Key Information Documents (KID). The KID standardises the presentation of three key investment considerations: i) risk, summarised as a numerical score, ii) expected performance, estimated across four scenarios, and iii) fees.
However, some market participants suggest that KIDs inadvertently creates some confusion for investors.
This becomes most apparent when you analyse the KIDs produced by Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs). Most EIS rightly categorise themselves as Category One whilst VCTs have placed themselves alongside products that are priced on a regular basis; a choice open for debate as most VCTs, whilst themselves being listed, hold illiquid investments similar in nature to those within EIS products.
The misalignment in the Priips categorisation between EIS and VCTs, and the lack of adequate disclosures in the KIDs, creates a number of key issues detailed in our recent report on Priips disclosures
Risk categorisation
Perhaps the largest issue originating from categorisation is observed by comparing risk scores in the KIDs of VCTs and EIS products. In general VCTs receive a risk score of three or four, while EIS products receive a six.
In our opinion this is too large a gap between the two products; both should be regarded as high risk due to their lack of liquidity and focus on early-stage businesses.
We are concerned that a risk score of three places VCTs alongside products that are in fact far less risky such as some low-risk debt funds.
Past performance
Categorisation also directly impacts estimations of performance under the four scenarios.
A best estimates approach is required for category one products (those where the investor could lose more than the amount invested), whereas for all other categories a statistical approach, based on two to five years of return history, is required.
The recent bull market has meant that the statistical method produces very high performance estimates for VCTs, resulting in a large gap in performance estimates between EIS and VCTs. It’s hard to imagine that a truly unfavourable scenario for venture capital would still yield positive returns. However, our own survey of the data finds that 80% of VCTs estimate returns to be positive even in “unfavourable” market scenarios!
A more fundamental issue however is that there is no indication of the assumptions adopted in each scenario, providing no context for comparison.
Cost discrepancies
While less worrying than discrepancies across risk and performance figures, there is no neat way to categorise all costs of management.
The attempts to standardise fees has not been effective, as we observe a lack of consistency in the range of fees included in the KIDs across tax-advantaged products. For example some managers choose to exclude fees charged to the underlying investments in the product whilst others include this fee. As such, the current presentation of fees does not offer a good basis for comparison.
Disclaimers
Finally, as an unfortunate side-effect of the desire to keep documents short and simple, the KID leaves little room for the ability to highlight information that could be misleading: a fact highlighted by investment managers in our recent survey.
Investors making decisions require greater clarity over a product’s strategy, risks, and potential benefits. In our view, distilling these down to a few standardised measures across the entire universe of investments is unlikely to result in more clarity for investors.
There needs to be more flexibility provided to fund managers regarding how they apply the Priips requirements. Additionally, further disclosures are necessary particularly in the KIDs of tax-advantaged products as they often fall outside the comfort zone of investors.
It’s only then that we can truly say that the KIDs are alright.
