In this new paper, we examine key aspects of the European Union’s new regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs), particularly the methodologies for calculating risk and the performance scenarios required for the new Key Information Document (KID).[1]
PRIIPs are designed to be sold to retail investors in the EU. They include investment funds, exchange-traded funds (ETFs), structured products and insurance-based investment products.
The regulation sets out rules for the production, approval and distribution of PRIIPs. The aim is to standardise pre-contractual information that asset managers, investment banks and insurers offer to retail investors, and so improve the disclosure of information and protection of retail investors.
In our paper, we compare the calculation of risk under the PRIIP regulation and under the UCITS (Undertakings for Collective Investment in Transferable Securities) regulation. It appears that the PRIIP’s classification tends to shrink the risk scale of funds relative to UCITS.
Analysing performance scenarios, we find that performance scenario returns are poor indicators of future performance; they just tend to be higher after a good historical performance and lower after a poor performance.
Disclaimer
[1] The KID provides retail investors with key information about the product including the risks and costs associated with investing in it. Standardisation should improve the transparency and comparability of PRIIPs, making it easier for retail investors to understand the risks and potential returns associated with these products and compare the different options available to them. The distribution of KID documents for all UCITS and non-UCITS PRIIPs distributed to retail investors went live in January 2023.
- Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This material does not constitute investment advice.
- Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
- Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
