SRRI, the KIID new star indicator
The synthetic risk and reward indicator will enable investors to compare all European funds using the same calculation methodology.
Another acronym is set to become part of the investment landscape: SRRI, i.e. synthetic risk and reward indicator. This indicator, based on a volatility calculation, has to be included in the key investor information document (KIID) for investors with effect from 1st July 2011. This ratio is a whole number between 1, for the lowest risk funds, and 7, for the most volatile ones. The objective is to enable investors to compare all market products on the same scale of risk, irrespective of the fund’s country of origin. This indicator is intended above all for retail investors since institutional investors have other technical tools to assess the degree of risk of a given product.
Based on volatility
The regulation includes a precise definition of the SRRI calculation method for market funds, which represent the vast majority of the market, as opposed to structured, total return or absolute return funds, which have specific rules. Thus, the SRRI is based on volatility calculated for a 5 year period based on weekly performances and then annualised. "When the fund has not existed for 5 years, the history is completed using the returns of a ‘proxy’, which may be either the fund’s benchmark index or a comparable portfolio", notes Xavier Gadek, Head of Performance and GIPS at Natixis Asset Management.
For more atypical funds, such as structured products or absolute return funds, the calculation method is different. In some cases it integrates the Value-at-Risk (VaR). "For these products, several specific cases suppose an in-depth analysis of the SRRI calculation to ensure overall consistency, notes Nicolas Calcoen, Head of Strategy and Development at Amundi, which has been working since autumn 2010 on KIID development and the SRRI calculation. This new regulation has a significant impact on information systems in order to automate data processing in the new formats defined and to integrate the permanent monitoring required."
The major asset management companies are putting in place the necessary means to calculate and monitor this SRRI in-house. That is the case of Natixis AM: "We have our own risk indicator on a scale of 1 to 10, adds Xavier Gadek. We need to adjust and adapt it to the widespread application of SRRI calculations." The asset management company initiated its SRRI calculations in mid-February, in order to be able to produce a KIID for 100 to 200 funds out of a total of 800 UCITS concerned, from 1st July 2011.
Asset management companies can also outsource the SRRI calculations to their fund administrator, as part of the KIID production for investors. "The complexity lies more in the quality of the data used to calculate the SRRI than in the calculation of the SRRI itself, explains Laurent Vidal, Head of Business Development at State Street Global Services. In addition to recovering the data, one also needs to control it and then ensure its integrity and consistency. Fund administrators that are used to handling masses of data are particularly well placed to ensure the efficiency of this calculation process."
The SRRI complexity also lies in the need to monitor data: it is not enough to calculate the SRRI once a year to update the KIID. An asset management company must track changes in this indicator on a weekly basis. If it detects a significant change which persists for sixteen consecutive weeks, the company must publish a new KIID. But this phenomenon should remain marginal: « As the volatility used for the SRRI calculation is based on a five year period, the base effect may be important, notes Xavier Gadek. In addition, the volatility intervals for triggering migrations across risk classes are broad. The SRRI of a fund should therefore remain stable over time, unless there is a change in the management process or in market volatility. »