ALFI UCITS IV implementation project – KID Q&A Document

Art 19(1)(a) of EU Regulation 583/2010 says, "a new share class of an existing UCITS or investment compartmentmay simulate its performance by taking the performance of another class, provided the two classes do not differmaterially in the extent of their participation in the assets of the UCITS."We see two ways to do this. The first is by substitution, in which the new share class takes exactly the performance ofthe other share class, provided that the charging structures are not materially different (≥5%, see CESR/09-949, Box7, Para 2) and that there are no complications to mislead the investor, such as currency difference. The second is bysynthesis, in which the new share class takes the performance of the other share class, adjusted for the cumulativeeffect of differences in their charging structures. The French and German texts of the regulation are consistent in thisrespect: translated, they say that simulation may be made "on the basis of" the performance of another share class. Inall cases, the simulation must be "fair, clear and not misleading" (Art 19(1)) and free from complications such ascurrency difference, and it must be prominently disclosed on the past performance chart (Art 19(2)).Q. In cases where there is insufficient performance history (e.g. new funds and funds in which the investmentpolicy changes) and the SRRI calculation is based on a representative model portfolio, does this need to bedisclosed in the KID?A. Strictly speaking, no. Neither Art 8 nor CESR/10-673 requires such a disclosure. However, Art 8(4)(a) requires theKID to include a statement that historical data may not be a reliable indication of the future risk profile of the UCITS.That would be an appropriate place to say that the risk indicator is based upon a simulation of the UCITS performanceusing historical market data. For example, the following statement might be made: "The risk category was calculatedusing [simulated] historical performance data and it may not be a reliable indicator of the fund's future risk profile."Q. How often does the promoter have to calculate the synthetic risk and reward indicator (SRRI)?A. The published SRRI must be updated (1) "when changes to the risk and reward section of the KID are the result ofa decision by the management company regarding the investment policy or strategy of the fund", and (2) "if therelevant volatility of the UCITS has fallen outside the bucket corresponding to its previous risk category on eachweekly or monthly data reference point over the preceding 4 months". This last test is a "sliding window" test, whichmeans that the SRRI must be calculated weekly if weekly return data are available and monthly otherwise and inpractice all calculations in respect of a month are made only after that month has passed.The quotations above are from CESR/10-673 dated 1 July 2010 – the CESR guidelines on the methodology for thecalculation of the SRRI for the KID – see Box 3 on page 8. The EU Regulation 583/2010 says in Recital 6 that "inapplying the rules on the synthetic indicator account should be taken of the methodology developed by competentauthorities working within the Committee of European Securities Regulators".Q. By how much and for how long must the computed SRRI differ from the published SRRI to trigger therevision of the KID during a year?A. The KID must be revised if the SRRI computed in respect of every weekly or monthly reference point in the mostrecent contiguous performance period of 4 months is different to the published SRRI, in which event the new SRRI willbe the most frequently observed result (i.e., the mode result) (see CSER/10-673, Page 8, Box 3, Para 3). Examples:Currently published SRRI value: 5Is every result observed in the contiguous 4 month period different to the currently published value?: NoSRRI value to be published in the next version of the KID: 5Month M-4 Month M-3 Month M-2 Month M-15 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5Week 1 Week 5 Week 1 Week 4 Week 1 Week 5 Week 1 Week 4Currently published SRRI value: 5Is every result observed in the contiguous 4 month period different to the currently published value?: NoSRRI value to be published in the next version of the KID: 5Month M-4 Month M-3 Month M-2 Month M-15 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6Week 1 Week 5 Week 1 Week 4 Week 1 Week 5 Week 1 Week 4ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 16