Most UCITS fund prospectuses remain sub-optimal as tools, with even seasoned professionals often finding them difficult to understand, says a recent report by More Carrot, a company specialising in document optimisation and outsourcing for asset managers.
Of the 44 prospectuses evaluated, only six were in the top quartile for usability. The top three prospectuses were Nordea 1, T Rowe Price Funds and M&G (Lux) Investment Funds 1, SICAVs, all of which gained a usability score of around 90 per cent.
Luxembourg prospectuses fill the top 10 positions, states the report. However, they also occupy seven of the bottom 10 positions. The highest-ranked Irish fund prospectus is 19th from top (with a score of 54 per cent). The average score was 53 per cent, but scores were as low as 11 per cent.
Yet the report found that, despite all this, prospectuses are very heavily used across the industry. “This came as a surprise to us,” says Bernard Lambeau, managing director, More Carrot. “Our research has found that 54 per cent of respondents – and this does not include those who prepare the prospectuses – consult or work with a prospectus at least once a week, and 18 per cent consult them daily.”
According to the study, half of the 108 professionals surveyed were involved in drafting or maintaining prospectuses, while the other half only used them in their work. A total of 30 per cent of users (including those who draft or maintain) reported spending more than an hour a day using prospectuses, mostly for reference.
“Traditionally, a fund prospectus has tended not to be used as a communication tool to end clients. This explains why for so many years these documents have not really got the attention and effort that they deserve,” says Lambeau.
Increased expectations from regulators in terms of transparency and the introduction of a large number of new regulations have meant that prospectuses have needed to be clearer, explains Lambeau. “Essentially, because there is more information, they are more complex documents, and the disclosure is getting more complex too,” adds Lambeau.
He gives the recent example that occurred in April 2019 with the issue of the ESMA’s response to closet tracker funds. “In order to better inform investors, asset managers must now state clearly in the KIID what usage they make of benchmarks they are using, which are complicated messages to get across to non-expert investors”.
“With further regulatory ESG initiatives coming in the near future, this is going to increase the information in prospectuses, and asset managers will have to be more precise in their documents about how they integrate ESG considerations in their portfolio management,” he says.
Lambeau also believes, however, that there can be too much disclosure. The longest risk section had over 53,000 words. “This is absolutely counterproductive and discourages anyone who wants to get some sense of a product’s risks,” he says, adding: “Even if the study reveals that the length of a prospectus is not the only thing that matters, it’s important to keep the length of the disclosure concise to motivate readership and to reduce time waste across this industry.”
