On the 29th March 2019, the European Securities and Markets Authority (ESMA) published an updated version of the Questions and Answers (Q&As) on the application of the UCITS directive. The updated Q&As clarify the UCITS KIID benchmark and past performance obligations as follows:
ESMA Confirms in question 4b that whenever a UCITS refers to a benchmark in its investment objectives, and policies and measures the performance against that benchmark although it does not track it, the performance of the benchmark must be shown in the KIID. ESMA further clarifies that this also applies:
- To total return/absolute return UCITS;
- Even if but the comparator is not named “benchmark” but the investment policy makes it clear that the fund aims to outperform the comparator.
Question 4cbis is added concerning the requirement for consistency between the performance disclosed in the KIID regarding a benchmark index and the performance disclosure in other investor communications, including marketing documents. In this respect, ESMA confirms that consistency is required, not only across documents but also across distribution channels (KIID in line with information on distribution media) and across investor types.
Elaborating on Article 7(1) (d) of Commission Delegated Regulation 583/2010 that requires UCITS to disclose in the objectives and investment policy section of the KIID that they have either an index tracking objective or allows for discretionary choices, ESMA recommends the following in question 8a:
- For index-tracking UCITS, use the terminology “passive” or “passively managed” in addition to “index-tracking” to ensure correct investor understanding.
- For funds where the manager has discretion over the composition of the portfolio, use the terminology “active” or “actively managed.”
Commission Regulation 583/2010 requires disclosure in the investment policy and objectives of the KIID whether the UCITS allows for discretionary choices in regards to the particular investments that are to be made, and whether this approach includes or implies a reference to a benchmark and if so, which one. ESMA clarifies that it is considered that a UCITS is managed about a benchmark where the benchmark plays a role in the definition of the portfolio composition or performance objectives and measures.
ESMA further highlights that it is the management company responsibility to identify whether the UCITS is in practice managed in reference to a benchmark and provides examples of instances where a UCITS will be deemed to be managed in reference to an index and of the related disclosure requirements.
Ultimately question 8c deals with the requirement of indicating the degree of freedom from the benchmark. In this respect the management company should at least consider the following:
- The description of the investment universe of the fund should include an indication of the extent to which target investments will be part of the benchmark;
- The KIID should describe the level of deviation of the UCITS to the benchmark taking into consideration the deviation limits embedded in the investment approach (internal limits, tracking errors,..)
Examples of wording are also provided.
UCITS management companies should adapt the KIID to include this guideline as soon as practicable but no later than the next KIID update.
ESMA also reminds that the UCITS investment objective as described in the prospectuses must be in line with the UCITS KIID.
The full text of the questions and answers can be obtained using the following link
https://www.esma.europa.eu/sites/default/files/library/esma34_43_392_qa_on_application_
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