ALFI UCITS IV implementation project – KID Q&A Document

Q. In the event that a fund converts from being managed with a benchmark and a tracking error budget tobeing managed in an unconstrained manner, how should the chart of past performance be displayed for theperiod preceding the change?A. The benchmark should be shown for the periods in which the fund was managed with respect to the benchmarkand should not be shown for the periods in which it ceased to be relevant. The chart of past performance should beannotated to say when the fund converted from relative to unconstrained management.Art 19Q. If a UCITS launches a new share class and uses Art 19(1)(a) to simulate past performance (say 10 years'performance) on a KID published for that share class alone, may the simulation be continued until thesimulated history is replaced by actual history? In our example, after 3 years is it permitted to display 3 years'actual performance and 7 years' simulated performance or is it only permitted to show only actualperformance?A. We may consider 3 scenarios for the presentation of past performance after a share class has at least one year ofits own actual performance:(1) Use a combination of actual and simulated performance. This scenario would continue to claim the right touse simulated performance under Art 19(1)(a) but would seek to be clear, fair and not misleading by showingactual performance where it is available. The performance chart would be clearly marked to ensure that theboundary between simulated and actual data was obvious to the reader. We think that this complies with the EURegulation 583/2010 and would be permitted by regulators.(2) Use up to 10 years simulated performance during the first year of the share class's existence and issue thenext KID with actual performance only (i.e., 1 year's performance). This scenario would cease to rely upon Art19(1)(c) and would instead comply fully with Art 15. It is permitted but it has the disadvantage the the launchedition of the KID may show up to 10 years' simulated performance and the second year edition of the sameKID will show only one year's actual performance.(3) Continue to use simulated performance only. This scenario would appear to be in breach of Art 19, whichsays, "a simulated performance record for the period before data was available shall only be permitted in thefollowing cases". Simulated data may not be used in periods for which actual data are available.There is of course another possibility, which is to treat the new share class as having no performance history,and show no past performance until it has existed for a full calendar year.Q. If a UCITS uses Art 19(1)(a) to create a KID with several years' simulated performance history andsubsequently liquidates the share class upon which the simulation was made, is it permissible for the newshare class to continue to use the simulated history?A. Yes. If the simulation initially satisfied the conditions of being fair, clear and not misleading then it may continue.Simulations under Art 19(1)(a) are permissible because the share classes are based upon the same portfolio ofinvestments, which will continue to exist even as share classes are liquidated.Q. When performance has been simulated, shall the prominent disclosure indicating that the performance wassimulated be printed on top of the performance chart?A. Yes. CESR/10-949 says at Page 37, Box 14, Para 3, "in all cases, following MiFID standards, there shall beprominent disclosure in the performance bar chart itself that this performance has been simulated" and the EURegulation 583/2010 says at Art 19(2) that "in all cases where performance has been simulated […] there shall beprominent disclosure on the bar chart …".Q. If a share class has a history of dormancy (i.e., it is launched and subsequently liquidated and thenlaunched again under the same ISIN, perhaps several times), how should its past performance chart bedisplayed?A. We see two possibilities:(1) Show actual past performance for each complete calendar year that exists and show no performance for each yearwhere there is no complete calendar year of performance, with an explanatory note on the chart.(2) Show actual past performance for each complete calendar year that exists and use simulated past performanceunder Art 19 of the EU Regulation 583/2010 to complete the missing history, with an explanatory note on the chart.ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 28