UCITS – 29 March 2019 ESMA Q&A has been saved
UCITS – 29 March 2019 ESMA Q&A
16 April 2019
Regulatory News Alert
On March 29, 2019, the European Securities and Markets Authority (ESMA) released a new version of its Q&A on the application of the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS Directive). This update includes new questions and clarifications on the disclosure of the benchmark index in the UCITS key investor information document (KIID).
UCITS management companies should make appropriate changes to the KIID in order to incorporate this additional guidance as soon as possible, or by the next KIID update following the publication of this Q&A.
Background & Analysis
In accordance with Article 18(1) of Commission Regulation (EU) No 583/2010, where the ‘Objectives and investment policy’ section of the KIID makes reference to a benchmark, a bar showing the performance of that benchmark shall be included in the chart alongside each bar showing the UCITS’ past performance.
Furthermore, active UCITS which are managed in reference to an index must provide additional disclosure on the use of the benchmark index (Article 7(1)(d)) and indicate the degree of freedom from the benchmark.
In its Q&A, ESMA clarifies that the requirement to show the performance of the benchmark index in the past performance section of the KIID applies to all UCITS, including:
- actively managed UCITS only referring to an index as a benchmark;
- total/absolute return UCITS;
- cases where the comparator is not named a ‘benchmark’, but the objectives and investment policy make it clear that it is a comparator the UCITS aims to outperform;
- UCITS targeting outperformance of the benchmark index over a period of time, for example ‘X% per annum over four years’.
In a newly included Q&A, ESMA clarifies that such performance disclosed in the KIID regarding a benchmark index should be consistent with performance disclosure in other investor communications, such as offering documents and marketing material (including the prospectus), across all distribution channels and investor types.
In the objectives and investment policy section of the KIID, a clear indication of whether the UCITS is actively or passively managed should be provided. Explicitly using the terms ‘active/passive’ or ‘actively/passively managed’ is recommended practice in order to assist investor understanding, and the management company should consider providing additional wording to ensure the meaning of the these terms are clear.
Finally, ESMA provided clarification of the Article 7(1)(d) of Commission Regulation (EU) No 583/2010 prescribing the obligation for UCITS to disclose in the KIID whether the UCITS includes or implies a reference to a particular benchmark (and if so, which one) and the degree of freedom available in relation to this benchmark.
Whether the UCITS is managed in reference to a benchmark will depend on, for example:
- definition of the portfolio’s composition (if the UCITS uses a benchmark index as a universe from which to select securities, the UCITS portfolio holdings are based upon the holdings of the benchmark index, or the UCITS invests in units of other funds in order to achieve similar performance to a benchmark index) or
- The UCITS’ performance measures (performance fees are calculated based on performance against a reference benchmark index, the UCITS has an internal or external target to outperform a benchmark index, marketing issued to investors or potential investors shows the performance of the fund compared with a benchmark index etc.).
Additionally, investors should be provided with an indication of how actively managed the UCITS is, compared to its reference benchmark index. On this basis, following elements should be taken into account when indicating the degree of freedom from the benchmark index:
- the description of the underlying investment universe of the UCITS should indicate to what extent the target investments are part of the benchmark index or not;
- the description of the degree or level of deviation of the UCITS in regards to the benchmark index, thereby considering, where applicable, the quantitative and/or qualitative deviation limitations underlying the investment approach (e.g. risk limits defined by reference to the benchmark index such as tracking error) as well as the narrowness of the investment universe. In this context UCITS may, when necessary for investor understanding, also disclose quantitative metrics (e.g. precise internal limits on tracking error etc.).
For illustrative purposes, ESMA provided some examples of wording that is likely to be acceptable when indicating the degree of freedom from the benchmark index in the KIID.