‘PRIIPS seriously inconsistent with MiFID 2’
Asset News: Has Better Finance plans to increase the amount of data analysed in its studies like that on retail fees and fund performance?
Guillaume Prache: This year we used the largest database ever for our research on retail fees and fund performance. That encompassed the all 1,886 active equity UCITS and AIF funds domiciled in Luxembourg, France and Belgium with sufficient track record and a benchmark and fees indicated in their prospectuses. It is the biggest amount of data mined so far on this fund market research issue given the three-country scope. The higher the fees the less likely excess returns. Ideally, the next step for us is to look at data from German, Irish and British markets. Notwithstanding I believe it will not change fundamentally the overall results.
The fund industry is ever more implementing ESG criteria or socially responsible investment policies in portfolios. Do you look at including this component as well?
Better Finance monitors all aspects of sustainable finance for savings products. Retail SRI funds are not always labelled hence it makes harder to compare funds in that space. We are the only retail investor organisation to take part to the workshops on the EU Ecolabel. The EU Ecolabel for financial products represents a unique opportunity for asset managers to bring savers confidence back in investing. If the fund industry messes this up, that will be over.
Will the Ecolabel set a standard within the European fund industry at the expense of existing local labels?
We hope it will harmonise all existing label initiatives in Europe and build cohesion in the SRI space as well. That said, the Ecolabel’s standard must rely on scientific climate change impact measurement, not on criteria that are too emotional or ideological. Transparency is crucial in SRI products to avoid greenwashing.
In a response to an ESMA’s survey on short-term pressure from the financial sector on corporations, Better Finance asked for a clear definition of long-term investment and short-termism, what is yours?
Ten years plus seems a good definition of long-term investment. Individual investors are mostly by nature long term oriented because their time horizon is mostly long term: retirement, wealth transmission, children education, housing, etc. This is mostly not the case of so-called “institutional investors” who are for the larger part not end-investors but merely managing “other people’s money”, with management incentives not adequately aligned to the long term goals of their clients.
Even the EU Supervisors are struggling to assess the actual past performance and costs of the investment products they supervise.
Closet-tracker funds are another focus of Better Finance. With local regulators in Europe taking action, do you see the offering improving?
Regulators are working but we do not notice significant improvement though in the product offering as many active funds still have a tracking error below 1. And too many active funds still do not disclose their benchmark performance alongside the performance of the fund. Any active portfolio manager has an investment objective, therefore a benchmark to beat, a target goal. Being invested in European equities is the perimeter, not the objective.
Speaking of transparency, last June, you said the implementation of MiFiD 2 would not change significantly next year’s results of your study on retail fund fees and performance. Why?
The only reliable, standardised and legally required disclosures on past performance and costs for retail investment products is provided by the UCITS Key Investor Information Document created by the EU Authorities in 2010. The “PRIIPS” Regulation enforced last year most unfortunately plans to eliminate this precious document by 2021 (and all information about actual performances) and is seriously inconsistent with MiFID II on performance and costs disclosure requirements.
What do you think should be the top key priorities of the European commission regarding retail investors?
Simpler, more transparent and more comparable retail investment products, in particular on actual long-term performances relative to their managers’ investment objectives, and on actual full costs. Even the EU Supervisors are struggling to assess the actual past performance and costs of the investment products they supervise. It is high time they get independent investment product databases like in Norway.
Are regulators robust enough to prevent flagship funds to invest in illiquid positions beyond the regulatory ceilings ?
What do you expect from the PEPP? Do you feel the fund industry ready for it?
PEPP is a great and badly needed project. However, the voted PEPP Regulation no longer meets the initial goal of a simple, safe and efficient personal pension product, and Member States’ engagement seems very unfortunately lukewarm at best. EIOPA - in charge of drafting the delegated acts – still has an opportunity to make it simpler and more efficient and performing. It should not miss it.
The Woodford and H2O cases sparked debate around illiquid investments this summer. What is your take on the matter?
It reveals a mismatch issue between liquidity requirements set by the financial authorities for UCITS funds and investments made by the manager. Are regulators robust enough to prevent flagship funds to invest in illiquid positions beyond the regulatory ceilings? These cases must be a signal for regulators.