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Warning over misleading Priips document for investment trusts

Business-Document-Technology-Growth-700x450.jpgAdvisers must use common sense when selecting investment trusts through the new Priips’ Key Information Document as it could be misleading for investors.

That is the view of analyst Numis Securities, which has published a report about the KID and investment trusts.

Priips, which will apply to a wide range of firms including banks, insurers, and investment managers, aims to extend Mifid II standards on consumer protection to insurance-based investment products.

From 1 January, under Priips, all investment companies have to produce a KID in order for their shares to be made available to retail investors.

But Numis says there are a number of flaws with the KID when applied to investment trusts that could mislead investors.

FCA offers more flexibility over Priips reporting

The firm says the performance scenarios in the KID that look at potential share price returns over five years tend to make scenarios highly optimistic because the market performed well.

On cost data, Numis says there is a lack of consistency in the way costs are calculated in the sector as some trusts include stamp duty, some have excluded finance costs, performance fees and others have “huge differences” in the estimates of transaction costs.

Multi-managers are required to use the KID when calculating their own costs.
Private wealth managers are also expected to use the cost data in the KID when illustrating their costs to clients under MifidII.

Numis notes some wealth managers have already expressed a potential reluctance to buy investment companies that show high costs in the KID.

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It says: “We would hope that advisers and discretionary mangers will have sufficient common sense to treat the performance scenarios with a ‘pinch of salt’, but we believe retail investors are likely to be disappointed if they believe the numbers in the KIDs.”

This month Hargreaves Lansdown removed 300 investment trusts due to no KID being available.

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