There was an interesting article published by Citywire yesterday on the subject of Hargreaves Lansdown removing 96 investment trusts from its trading platform. Such trusts as Dunedin Enterprise, Blue Planet and Oryx International Growth have been suspended. The reason is because they have not yet made available a “KID” (Key Investment Document) which is required by the new PRIIPS regulation and mandated by the FCA/EU from the start of this year (see https://www.fca.org.uk/firms/priips-disclosure-key-information-documents for more information).
At present investment trusts are mainly affected. Unit trusts and OEICs that are UCITS have another two years to comply.
The Citywire article quoted Annabel Brodie-Smith and Ian Sayers of the AIC (trade body for investment companies) as saying it was only a transitional problem but that the mandatory performance figures in the KID “will in some cases, be suggesting too favourable a view of likely future performance” and the “single-figure risk indicator will potentially be understating the risks”. Mr Sayers has also criticised the fact that open-ended funds will not need to disclose underlying transaction costs when investment companies will need to do so, thus making comparisons difficult.
Investment Trusts are of course a peculiarly British investment platform whereas most of Europe use open-ended funds, and hence the legislation was focused more on the needs of the rest of Eurupe rather than the UK. The UK already had quite extensive disclosure of fund information, particularly for investment trusts which was published in such documents as a “Monthly Factsheet” with performance date readily available from the AIC web site, Trustnet and other sources.
I posted a comment on the Citywire article which said: “The regulations impacting investment trusts are a typical example of EU laws written by folks who do not understand the UK market environment, and are also generally ignorant of the financial world. The sooner we depart the better. Expensive and incompetent bureaucracy in more ways than one.”
That immediately prompted the usual abusive comments from EU lovers – anonymously of course. A vigorous debate then followed. So what is the truth? Are KIDs going to be useful? Were some trusts deficient in being up to speed on making KIDs available? Is the additional expense of producing a KID worthwhile?
Now it is undoubtedly the case that some investment trusts might have been tardy in meeting the regulations (although I believe Dunedin Enterprise Trust is winding down so they might have not put a high priority on it). But as it will prevent purchases but not sales, this needs to be rectified as soon as possible otherwise prices might be distorted.
But are KIDs useful? You can see one for JPMorgan Euro Smaller Companies Trust (a trust I hold) here: https://documents.financialexpress.net/Literature/83197092.pdf ). The risk rating is simplistic and the “performance scenarios” are likewise. It shows that over 5 years a holding in this trust might generate a negative return of 18.62% per annum, but in a “favourable scenario” you might make 36% per year. Does that help you? Not a lot.
That is particularly so as those figures are forecasts, not the real historic data. In comparison the information on the AIC web site or the company’s web site, including in the company “Factsheet” is much more comprehensive and more helpful. For example, it tells you about the historic price performance versus the net asset value performance (and over several time periods), the discount levels, the performance against a benchmark and lots more data.
The KID does have some useful information on costs, as it includes transaction costs. As a result it gives the “Impact on Return” due to costs of 2.81% per year whereas the AIC reports an “On-going” charge of 1.13% for this company because they don’t include transaction costs. This is a company that does not have a performance fee though which would complicate reporting on other trusts.
The objective of the KID to standardise the reporting of basic information on investment funds, and provide consistent and accurate “all-in” cost data was laudatory. But the implementation is a dog’s breakfast with the result that investors are hardly likely to spend a long time looking at these documents even if they are forced to do so.
On the latter point, the Share Centre now require you to tick a box to say you have read the KID before buying the shares, but other platforms such as AJ Bell YouInvest don’t seem to require that. I suspect folks will soon learn to tick the box regardless simply because most investors will have done some research on the fund, or already hold it (perhaps on another platform).
In summary, KIDs are designed to meet the needs of unsophisticated pan-European investors where little information might have been available to them previously. Whereas in the UK we are awash with information on trusts and open-ended funds to the point that a lot of investors are suffering from information overload. The KID just adds to it.
The information provided in the KID can be grossly misleading about the risks and returns that investors might expect. The document is the end result of the complex bureaucratic processes in the EU for devising new financial regulations, where those developing them seem to have little understanding of financial markets or investment and the end result is often a compromise between different national interests. The process is also heavily influenced by the large financial institutions such as banks that dominate the retail investment scene in much of Europe.
Financial regulation in the UK is not perfect of course, and we have the same difficulties that they are often written not for the benefit of investors but for market operators and intermediaries. We might just be able to do better. But we also need to push for improvements to the content of KIDs because we may still need to produce them to enable trading of investment trusts and funds across Europe.
It is though unfortunate that the cost of producing a KID will be significant and will be passed on to investors. Likewise the MIFID regulations brought in on the same date have resulted in major costs for stockbrokers. More regulation costs money and investors do not always benefit from it. One particularly disadvantage is that it deters new entrants into the investment world, i.e. protects the interests of the big boys from more competition. Financial regulations when devised need to be simple and low cost to implement and enforce. That is a long way from being the case at present. The PRIIPS regulations are a good example of how not to do it.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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