ALFI UCITS IV implementation project – KID Q&A Document

Art 7(1)(b)Q. Information on the investor's ability to redeem units on demand seems to belong more to the sectionPractical Information than to the section Objectives and Investment Policy. Can I move it to the sectionPractical Information?A. No. You must put information in the sections strictly in accordance with the EU Regulation 583/2010. This isintended to ensure the comparability of KIDs issued by different promoters.Q. May the statement on redemption possibilities be moved to the Practical Information section?A. No. Art 7(1) is clear that the information must be provided in the section Objectives and Investment Policy.Art 7(1)(d)Q. May a benchmark be disclosed in this section for the sole purpose of showing it alongside the pastperformance?A. No. This is not a simple question and it is useful to examine various ways in which benchmarks are used by theindustry and how they should be presented in the KID.If the fund is an index-tracker, the benchmark must be included in the KID (Art 7(1)(d), "where the UCITS hasan index-tracking objective, this shall be stated [in the objectives and investment policy section]" and Art 18(1),"where the objectives and investment policy section makes reference to a benchmark, a bar showing theperformance of that benchmark shall be included in the chart [of past performance]".If the benchmark is implied (for example, if the name and a tracking error are stated in the marketing material orif the investment manager's internal design documents say that the portfolio is constructed and managed withrespect to a benchmark) it must be included in the KID – see Art 7(1)(d), "includes or implies a reference to abenchmark" and Art 7(1), "even if these features do not form part of the description of objectives and investmentpolicy in the prospectus".ESMA/2012/592 elaborated on these provisions, and concluded(1) that it is necessary to show the performance of a benchmark index in the past performance section, where aUCITS refers to an index in its investment objectives and policies as a benchmark and will measure theperformance against this but does not intend to track that index. In addition, it should be made clear in thepast performance section that the performance is not tracking the index.This means that if the fund is not an index-tracker but wishes to measure its performance against an index(including in marketing material), it must include the index on its chart of past performance and it mustdeclare next to the chart that the fund is not a tracker.(2) by deviating from the wording of Art 18 that it is not necessary to refer to the index in the past performancesection, where a UCITS refers to an index in its investment objectives and policies, but does not intend tomeasure performance against that index.Accordingly, we think that if the fund is not an index-tracker and does not wish to measure its performanceagainst an index but uses the index in the portfolio construction process, it must mention that fact in itsinvestment objectives and policies, but is not obliged (although it may choose) to show the index on its chartof past performance.If the portfolio is constructed and managed without reference to a benchmark and yet a benchmark is includedon marketing material or in the fund's factsheet simply because it provides general market context (this doeshappen) there should be no implication within the meaning of Art 7(1)(d). A benchmark which is used in this waymust not be included in the KID, which should contain only information about the "essential features of theUCITS" (Art 7(1)). However, even if the portfolio is constructed without reference to a benchmark, the latter maybecome essential as part of the presentation to the investor (e.g. LIBOR on an absolute return fund).If the portfolio is constructed and managed without reference to a benchmark and yet a benchmark is used tocalculate a performance fee, the benchmark must be included in the charges section of the KID (Arts 10(2)(3)and 12(3)) but there should be no implication within the meaning of Art 7(1)(d).In summary, with particular regard to the chart of past performance:If the benchmark is described in the objectives and investment policy section of the KID it must be shown onthe chart of past performance.ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 13