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QuotedData’s guide to KIDs

QuotedData’s guide to KIDs

New EU regulations that came into force this year mean that investment companies are now publishing Key Information Documents (KIDs). You can now find these under the documents tab for each company (along with annual and interim reports and, for some funds factsheets).

But these KIDs have been criticised heavily by some commentators for being misleading and overly formulaic. We thought it might be useful to explain what is going on.

The reason for the move is to ensure that important information on all Packaged Retail and Insurance-based Investment Products (PRIIPs)  across the EU contain the same information.  The desire is to be short, clear and succinct. Therefore, an investor in Luxembourg can compare the same KID information as investors in London or Dublin. It also means that all UK investment companies can be compared on equal terms.

However, whilst the intention is good, an investor may not appreciate what is behind the numbers and short punchy statements.  Whilst the way many investment companies are run can be similar, there are many that are highly specialised. There may be more to how the investment company’s portfolio is managed to meet the objective than the KID might suggest.

For example, a company’s share price volatility may consistently have been between 30% and 40% but this sits in the same category of risk as a fund with a volatility of 80%.

Likewise, the regulation requires the KID to give various scenarios from favourable to stressed markets (see below). There is no explanation in the KID as to what these relate.  The maths behind the calculations is beyond the layperson and, without guidance from an adviser or explanation of how the portfolio works, may be misleading.

Therefore, the KID should be read with the prospectus, guidance from the investment company and any research notes, such as those found here on QuotedData. It may be best not to read a KID on its own.

Breaking down the document

The KID regulations specifies what must be in the document.  The template that all must follow specifies the order of disclosures and how any numbers must be calculated:

  • The purpose of the document
  • Information regarding the product and the investment company
    • How to contact the investment company
    • Who authorises the investment company, eg the Financial Conduct Authority (the FCA)
    • identifiers (ISIN no, CUSIP, etc.)
  • Any alerts that an investor should know
  • What is this product?
    • The type of product
    • The objective of the managers
    • What sort of investor is the fund intended for. An example of this might be that it is intended for a long term investor with a certain acceptance of risk
  • What are the risks and what could I get in return?
    • a graph showing where on a range of 1 to 7 the fund sits; with 7 being high risk (determined by the volatility of the share price). For example, where the share price volatility of an investment company is between 30% and 80% it is given a risk banding of 6
    • a brief explanation of what is in the portfolio and what they do to risk and return.
    • Four performance scenarios; one hundred scenarios (returns over one, three and five years) are calculated based the same volatility analysis used to calculate the risk range and the average return (including fees, charges, etc.). These are then ranked 1 (low) to 100 (high):
      • a favourable scenario; using the 90th scenario
      • a moderate scenario; using the 50th or mid scenario
      • an unfavourable scenario; using the 10th scenario
      • a stress scenario; the worst case scenario, but assuming the investment can “pay out”
    • One of the biggest criticisms of KIDs is that these risk and return numbers are based on historic numbers and, as we know, past performance is not necessarily a guide to future performance. A five-year measurement period may not be long enough to capture a market cycle and so, for instance, a high growth fund in a market that has been favouring high growth companies might look like it will deliver attractive, low risk returns even in an unfavourable scenario. Whereas, when market sentiment switches from growth to value, it might do quite badly.
    • All returns that you see for the NAV and, as a result share price are calculated after fees. Please see our guide to fees for more information on this topic  https://quoteddata.com/glossary-terms/investment-companies-basics/management-fees/
  • What happens if the investment company is unable to pay out?
    • An explanation of what may happen should an investment company fail. Generally, this states that, as shareholders of the company, investors would not be able to make a claim to the Financial Services Compensation Scheme about the company in the event that the Company is unable to pay out. In practice this is highly unlikely unless the investment company had excessive levels of borrowings (gearing)
  • What are the costs?
    • The regulation requires a higher level of disclosure on fees than in the past
    • Costs are reported based on various time periods but generally on one, three and five years, based on an initial investment of £10,000
    • The impact of charges as a percentage (a Reduction in Yield or RiY) over the same time periods
    • The impact of other costs including buy and sell, trading costs on the portfolio incurred by the managers, gearing costs, performance fees, custody, legal and audit fees are all quoted as percentages (gearing costs and performance fees aren’t included in the ongoing charges ratio)
  • How long should I hold it and can I take money out early?
    • the period of time that is most quoted is 5 years, although many commentators would argue that this is too prescriptive and even too short in many cases
  • How can I complain?
    • This directs the reader of the KID to direct complaints to the Financial Ombudsman Service (FOS) or the company itself and gives details of how to do it
  • Other relevant information

 

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