European funds industry readies itself for Kiid

The Ucits brand will take another major step forward within less than two months, with the Ucits IV Directive coming into force on 1st July. As part of the Ucits IV toolbox, the Key Investor Information Document probably represents the most visible innovation for the individual investor.

Should a simple two page document, now widely known through its acronym Kiid or Kid, be a major concern for the industry? Since most European countries adopted a “grandfathering” period (period of transition) to implement Kiid for all Ucits vehicles, many players have long considered the actual deadline to be July 2012. In addition, and notwithstanding the long-lasting technical discussions held in professional associations throughout Europe, the document was not considered to be particularly challenging. Both views have deeply changed in the last couple of months.

Kiid has now moved from being a legal constraint to become key marketing material, with most players now wanting to be ready as soon as July 1st 2011, especially for some products like ETFs (exchange traded funds). From pan-European firms to local boutiques, the players who prepared the jump well in advance have a competitive advantage, given that the document is not as easy to produce on a large scale as one might think.

Keep it simple

The Kiid was developed as a substitute to the Simplified Prospectus, which is unanimously seen as having failed in its objective to make Ucits comparable and understandable to the individual investor: too long, too much jargon, no standard.

Instead, the Ucits IV framework imposes a short, simple and highly standardised document. The Kiid should not exceed two or three pages, displaying different sections in a pre-defined order and gathering all Ucits-related key information: what am I investing in (investment policy), how risky is it (risk indicator), how much will I pay for it (ongoing charges), how did my fund perform and where can I find additional information?

In most areas, the European authorities issued clear guidelines to calculate and display the figures in the document. The risk indicator, for example, is shown under a very simple one to seven scale, based on a detailed calculation methodology.

Whatever the complexity of the underlying calculation, the resulting graphic scale will undoubtedly make it easier for the investor to understand and his ability to compare the risk level across different Ucits.

Aside from the figures, the written sections of the document have to be in plain language. Again, this approach is quite new compared to the technical jargon that tended to be used in the Simplified Prospectus, though it may prove hard to conform when it comes to translating thousands of Kiids in a very short time. From the investor’s perspective, the Kiid will provide the most accurate information in an easy-to-understand wording, all of it through a small-sized document.

Clarifications needed

Plain language may be subject to interpretation, with some questions sounding strange to professionals (should the word ‘equity’ be explained?). The once-envisaged “Glossary of Terms” has not yet been issued, which could lead to minor difficulties when comparing two different Ucits.

More important: the ongoing charges calculation is not fully clarified, and different approaches are emerging across Europe. While this information on fund expenses is essential to investors – and given that the former total expense ratios were not always easy to follow when comparing two Ucits – it will be prejudicial to the whole document if the calculation method for this number is not consistent for all Ucits.

Improved confidence ?

Easy, comparable: the main objectives of the Ucits IV Kiid are close and regions other than Europe are experimenting a similar approach (especially Asia) to bring the most important information to investors. Apart from some clarifications on the methodology which are still to come, the accuracy of the information displayed in the document will be key to gaining the investor’s confidence, requiring the industry to settle on the adequate production and control process.

Nicolas Gonzalez is head of product development at Société Générale Securities Services