Key differences between UCITS and PRIIPs performance disclosure

PRIIPs performance scenarios methodology for investment funds

Under the UCITS regulation, investors were privy to the past performance disclosure, along with the disclaimer that it does not guarantee the future performance. PRIIPs regulation introduces a forward-looking approach similar to the compilation of the Market Risk Measure (MRM) and based on historical data. For category 2 PRIIPs, this means applying the Cornish-Fisher VaR expansion.

Comparison of UCITS historical annual performance and PRIIPs performance scenarios

Please see below a comparison of approaches for an illustrative fund:

Historical annual performance

PRIIPs performance scenarios

We can notice that while past performance allows the reader to observe one negative year and four good years, the forward looking approach blends historical data and displays positive average returns over five years even in the unfavourable scenario.

Furthermore, in the PRIIPs KID the investor sees an ex-ante projection with no consideration of the recent market trends, while in the UCITS KIID benchmarked funds are displaying historical performance alongside benchmark performance.

Going further, the blending PRIIPs methodology for calculating performance scenarios can lead to the same or very close results for funds with different historical behaviour. It is possible that the perception of risk may be influenced by other factors than PRIIPs statistics, such as for instance the maximum drawdown of a fund. The two illustrative funds below display identical PRIIPs performance scenarios but one shows a larger drawdown than the other.

Historical annual performance

PRIIPs performance scenarios

Category 1 PRIIPs

For category 1 PRIIPs, the regulation is less prescriptive, and requires only “a reasonable and conservative best estimate”. The performance scenarios take into account the actual returns and investment strategy, as opposed to general market conditions. For instance, if an investment fund’s strategy is betting against the market, the favourable scenario for this fund corresponds to the globally unfavourable conditions.

PRIIPs performance scenarios in key figures

Performance scenario methodology sometimes results in counterintuitive results

At times, performance scenarios are not aligned to what we intuitively expect. For example, one should anticipate that in unfavourable market conditions the investor might experience losses if no capital guarantee scheme is applied. Similarly, one should expect to fare better in the unfavourable scenario than in the stressed scenario, aimed at representing significantly unfavourable conditions.

An in-depth analysis of PRIIPs performance scenarios based on a representative sample of more than 2,000 share classes, covering all investment strategies, lead to sometimes surprising results:

Source: Deloitte analysis

In particular, 41% of share classes tested display a positive return in the unfavourable scenario.

Performance scenarios shortcomings

Methodological issues with the performance scenario compilation identified across the fund industry

For many investment funds, the bullish market conditions in the recent years may result in overly optimistic future projections today. Recent trends may be further exaggerated in case they are projected over long investment horizons, as very positive past performance assumed to continue indefinitely and potential cyclical nature of the markets is not taken into account.

Identified shortfalls & inconsistencies

• Displaying the forward-looking performance scenarios might suggest to the retail investors that a certain return is guaranteed
• Narratives accompanying the performance disclosure are fixed, hence not allowing the PRIIP manufacturer to add further context
• Regardless of the recommended investment horizon, the performances are always calculated on the same historical time period (5Y)
• The bullish market conditions in the last 5Y may result in overly optimistic projections continuing in perpetuity
• Benchmarked funds’ performance is not displayed alongside with the performance of the benchmark, presenting a loss of information from KIID to KID
• Using proxies in order to complete the time series for performance scenario calculation is not disclosed to the investors
• In some cases, disclosed performances are so diverse that their meaningfulness for retail investor can be questioned (e.g. stress scenario @ -75%, favourable scenario @ +65%)

To illustrate how the recently favourable market conditions may affect the projections, the chart below applies the PRIIPs performance scenario methodology to a global equity index based on the last five years (actual data is used up to December 2017), assuming 0,50% of ongoing costs.

Investing €10.000 today in a global equity tracking fund in moderate conditions would result in the following PRIIPs moderate scenarios displayed in an hypothetical PRIIPs KID, net of costs:

Annual returns of the global equity index used for calculations
 

The tables in this page are only displayed to illustrate the PRIIPs performance scenarios calculation methodologies and should not be relied on or used for any other purpose.

Regulatory changes and migration to new PRIIPs RTS live in Jan 2023

In response to the industry consultation in 2019 and 2020, the European Commission published in September 2021 a few amendments to the methodologies for risk, reward and cost compilation.

The overview of all the upcoming changes and how to prepare to the successful migration to the new RTS can be found in the article here. Changes will apply as from the 1st of January 2023, however it is expected that new data points will be required as soon as from the second half of 2022 in order to prepare the new KIDs.

Our team is standing by to help you understand how these changes may affect you and to help ease the transition to the new PRIIPs RTS before they go live in January 2023.