Migration to the PRIIPs framework: what impact on the European risk indicator of UCITS funds ?

Herr, Donovan Clausse, Emilien Vrins, Frédéric [UCL]

Since 2011, managers of European UCITS funds are required to publish a risk indicator, called SRRI, in order to communicate the risk of their investment fund to retail investors in an understandable way. However, as of mid-2022, the implementation of the new PRIIPs regulation will lead to a completereview of the calculation methodology employed to determine this risk indicator. The latter, formerly based on a traditional measure of standard deviation, will now be determined from a more sophisticated tail-risk measure, namely Value-at-Risk (or, more precisely, the modified VaR, which is an approximation based on the first four moments of the fund returns). Additional changes deal with the data frequency and history used in the estimation procedure. In this article, we break down the changes brought by the regulation and analyze them through an empirical study in order to take a critical look on the new PRIIPs methodology, that will impact a substantial portion of the 4 500 asset management companies active in Europe1 . Our results, built from a random selection of 200 funds, show that the impact of the change in the risk measure is not as significant as expected. By contrast, the impact resulting from the changes in the chosen frequency and length of returns history seems material. Secondly, the redefinition of volatility buckets used to map the risk measure to the risk indicator has a side effect : a loss of granularity for non-extreme funds, which are now crowded in classes 2 to 4.