How KIDs are creating an uneven playing field for investors
28 December 2017
Key Information Documents are meant to help investors research and compare investments. But with with some investments still able to exclude transaction costs, not all KIDS are the same and that could confuse and disappoint investors, argues Ian Sayers, chief executive of the Association of Investment Companies (AIC).
When KIDs (Key Information Documents) were proposed about five years ago, it would have been hard to argue against the idea of having a standard document which presents comparable information on what you will be investing in, performance, risk and costs.
Fast forward to today, and things don’t seem quite so clear. Firstly, the gestation period for these rules has coincided with a strong and consistent bull market. This means that the mandatory performance figures will, in some cases, be suggesting too favourable a view of likely future performance. Secondly, the single-figure risk indicator will potentially be understating the risks.
I must be one of the few chief executives of a trade association who has been inundated by complaints from his members that a regulator is forcing them to overstate their performance and understate their risks! But it is one of the happy features of the investment company sector that independent directors are more interested in presenting a fair picture than simply complying with rules. Unfortunately, there is little that members can do, as the rules are prescriptive and do not allow for much individual judgement to be exercised.
Another worrying issue is that UCITS funds will not be required to provide a KID on this basis for another two years. They will still be producing a KID (as they have done for some years) but this will differ in terms of how it presents performance, risks and costs. As KIDs are meant to be about comparability, this decision defies explanation.
To give just one example, an investment company KID issued next year will include underlying transaction costs. I know many commentators who have been pushing for the inclusion of transaction costs and will no doubt support this. However, the equivalent UCITS KID will not include these costs.
One of the advantages of the closed-ended structure is that fund managers do not have to trade the portfolio when people buy and sell investment company shares, as opposed to an open-ended fund manager who has to buy/sell investments as investors move in/out of the fund. So, all things being equal, the investment company’s transaction costs should be lower. Yet, in their respective KIDs, the investment company costs will look higher, as UCITS can continue to exclude transaction costs.
Though there is little we can do about this unsatisfactory situation, we have asked the Financial Conduct Authority to help inform consumers about the significant differences between these two types of KID. But experience shows that consumers are unlikely to appreciate these differences and, as these two very different documents are called the same thing, consumers are likely to assume they are calculated on the same basis and therefore comparable. And you can hardly blame them.
Hopefully, of course, investors will take a broader view, and use all the information available to them to make an informed choice.
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