PERSONAL ACCOUNT

Are EU kidding? Beware of these worse-than-useless data sheets on investments

Iam not making this up. The EU has imposed a set of rules for investment communications so boneheaded, so riddled with flaws and so counterproductive that it is hard to believe even the bureaucratic tar pit of Brussels could have yielded such a monster. And if you aren’t careful, your money could be at risk.

The offspring of the new rules, in place since January, is known as a KID (Key Information Document). Intended to be accessible even to those with low financial literacy, KIDs are required for investments classified as PRIIPs (Packaged Retail and Insurance-based Investment Products). For example, investment trusts fall into this category.

A KID must be produced according to strict rules and provides a brief, standardised summary of an investment’s risk level, information on charges and its likely performance under different market scenarios.

If that sounds handy, don’t be fooled. The result is so misleading that investors are better off filing it under “bin”. If they believe the ludicrous numbers KIDs contain, they could lose life-changing sums.

That’s because the regulators who bolted the KID together ignored conventional investing wisdom. KIDs take past performance as the best gauge of future returns. As a result, after a few years of strong market returns, the projections are likely to be misleadingly bullish; after a sustained market correction, when shares could be cheap, the KID will only warn of more lean times ahead.

When KID projections under moderate conditions are compared with actual returns after five years, they fare no better than a coin toss, pointing in completely the wrong direction half of the time. For one investment company, the KID’s projected return would have been the opposite of the actual outcome 11 times out of 22: predicting a loss instead of a gain, or vice versa.

Another example shows how crazed the figures can be. KIDs (which are all prepared to the same exacting formula) suggest that 45pc of investment companies that hold shares can expect 10pc-20pc returns in moderate market conditions, if held for five years or more. By contrast, a widely accepted yardstick for stock market returns is only 5pc-7pc a year. Even worse, for more than one in 10 of those investment trusts, their KIDs anticipate 10pc20pc returns even in unfavourable markets.

These figures come from a devastating report published this week by the Association of Investment Companies (AIC), titled

You know things are bad when an industry lobby group calls for KIDs to be suspended because they are making its members’ products look too attractive. And the AIC is right to be worried. This act of regulatory folly risks leaving those forced to abide by the rules open to accusations of mis-selling when investors, inevitably, don’t receive the 20pc returns talked up in their KIDs.

The City watchdog, the Financial

The new KID format can produce misleadingly bullish projections