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French AMF adds to information that UCITS managers should give investors

Chris Hamblin, Editor, London, 24 October 2019

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In March the European Securities and Markets Authority made some pronouncements on the information to be included in the Key Investor Information Documents (KIIDs) of Undertakings for the Collective Investment in Transferable Securities to do with the tracking of benchmark indices. The French Autorité des Marchés Financiers has finally taken stock.

ESMA updated its list of questions and answers (actually guidelines) in March to describe the information that each UCITS should give to investors in the KIID in question so as not to reclassify certain funds as pseudo-active funds. The supra-national regulator also aimed "to increase the transparency concerning funds which have management constraints compared with their benchmark index and which could have similar performances to those indices."

For example, ESMA was clearer than ever before about the obligation on each UCITS fund manager to declare itself as "active" or "passive" in accordance with precise definitions (Q&A 8a) and its obligation to describe the UCITS' degree of freedom relative to its benchmark indicator, giving priority to a descriptive approach to the portfolio composition method and the measurement of risk or performance (Q&A 8c). ESMA also clarified its definition of the concept of management "in reference to a benchmark index" (Q&A 8b).

Constrained funds

In response, the AMF thinks that the KIID should contain specific information in various cases. On the subject of information to be included for constrained funds, it believes that managers should distinguish between constrained funds and index funds. Certain active management funds have management limits which restrict the extent to which they may deviate from their benchmarks. ESMA says that each UCITS' KIID should describe them in intelligible terms. The AMF writes: "Regarding this, an indication such as 'active risk' to designate the tracking error may be considered as not easily intelligible and should be banned. Moreover, in order to ensure that the information circulated is clear, accurate and non-misleading, these UCITS should not indicate in their regulatory documents that the selection and weighting of stocks in the UCITS are 'unconstrained' when such limits are imposed on fund management.

Systematic investment funds

'Systematic' investment UCITS have especially marked management constraints. The allocation of these UCITS is generally determined by a constrained optimisation algorithm which may include limits relative to the index (tracking error, weighting deviations, etc.). Although there may be discretionary leeway for the fund manager relative to the allocation proposed by these algorithms, these funds can be close to their benchmark by nature.

For this reason, the AMF already recommends that the information appearing in the KIIDs for these funds should indicate to investors the existence of a systematic investment strategy. It is now going further by suggesting that each manager should tell the investors about the the main management constraints that it takes into account for constrained allocation (e.g. ex-ante target tracking error, weighting deviations).

Multi-management funds

When UCITS invest in a diversified manner in active management UCITS that all refer to the same benchmark, or when several fund managers share among themselves various pockets of a given UCITS by making their own specific bets, the KIIDs of these UCITS should indicate clearly and precisely the extent to which the fund manager(s) may invest differently from the index.

The AMF recommends (but does not insist) that funds should send clients information (charts in particular) that allow them to work out the closeness with which the funds track their benchmarks. This, it suggests (but does not dictate), should occur in reports which include at least:

  • the comparative performances (compared in charts and tables),
  • the portfolios volatility compared with the volatility of the indices, and
  • the annualised standard deviation of each fund's performances relative to its benchmark index (or tracking error).

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