LUXEMBOURG, 4 NOVEMBER 2019 - Document optimisation company More Carrot has completed what is believed to be the industry’s first study of UCITS prospectuses. The findings shed light on a range of issues, including who uses prospectuses, the main purposes of use, what types of information they look for and how easy it is to find and understand that information. The study looked at the top 50 cross-border asset managers, with the prospectus of each company’s flagship UCITS selected for analysis and testing.
“Since launching European operations in 2012, More Carrot has worked with a number of these firms and has accumulated a fair amount of anecdotal information about usage and usability,” said Bernard Lambeau, who has led the firm’s European operations since the launch. “But we didn’t have anything more formal, and were unable to find any studies done by others.”
A multi-part study directed by an independent committee
The study involved five main activities: interviews with asset managers and regulators, an entity-level survey of the asset managers whose prospectuses were studied, a survey of over 100 industry professionals, usability evaluations of each prospectus by a panel, and quantitative data such as word counts for various sections.
To ensure a strong degree of objectivity, the study was shaped and overseen by an expert committee consisting of three representatives from large asset managers, two independent directors, and one financial translation expert, with the “non-voting” participation of two representatives from More Carrot. A separate team of six evaluators, including the two independent directors, performed the usability tests, which involved finding and understanding the same types of information in different prospectuses.
Prospectus usage: surprisingly heavy, notably difficult
Half of the 108 professionals surveyed were involved in drafting or maintaining prospectuses, while the other half only used them in their work. “This was where we found our first surprise,” says Lambeau. “Even among users who aren’t involved in drafting or maintenance, over half report using a prospectus at least once a week, with 18% using them daily.” A total of 30% of users (including those who draft or maintain) reported spending more than an hour per day using prospectuses, mostly for reference.
How much of that time is highly productive is another question. Of the 44 prospectuses evaluated (some were excluded because they were for ETFs), only 6 were in the top quartile for usability. The bulk fell into the middle: a total of 36, evenly divided between the second and third quartiles. Only 3 ranked in the bottom quartile. This was confirmed by the two-thirds of the 108 professionals in the industry survey who said it was hard or somewhat hard to find the information they were looking for, and three-quarters said it was hard or somewhat hard to understand the information once they found it.
“We’ve long questioned the myth that professional users aren’t slowed down by prospectus complexity,” said Josiah Fisk, the head of More Carrot’s US operations and the company’s founder. “Now we have a bit of evidence. People tend to think of document optimisation as something to help investors — which it does — but the main beneficiaries are users at the asset manager or distributor level. In a way it’s not surprising. They spend the most time using the documents, so they also can save the most time.”
Unexpectedly wide ranges in usability, word counts.
Study results ranged widely in several areas. In usability, scores ranged from almost perfect — 97% — all the way down to 11%. The average was 53%. The top three prospectuses were for the Nordea 1, T. Rowe Price Funds and M&G (Lux) Investment Funds 1 SICAVs.
The quantitative part of study found widely differing answers to the question of how much information is the right amount. Looking only at subfund-specific content, the shortest prospectus was able to describe a subfund in just 165 words, on average. The longest averaged 5,786 words per subfund, enough for the most efficient prospectus to describe 35 subfunds. The average for all prospectuses was 1,331.
Risk disclosure was another area where opinions varied widely as to what was adequate. The shortest risk section had 3,585 words, the longest 53,212 — more than 14 times longer. Both sections covered roughly the same risks. The average risk section for all prospectuses studied was 14,225.
In conclusion: there’s room for improvement, and it would make a difference.
“I see this study as providing confirmation that, overall, the industry is spending an enormous amount of time in preparing, reviewing and consulting prospectuses,” said Lambeau. “However, only a few players so far have made the effort to transform these prospectuses from sub-optimal tools into documents that function well for both internal and external users.”
Out of the 44 prospectuses studied, only 9 are in the asset manager’s brand, only 6 feature plain language, and only 5 are structured so that the prospectus contains “marketing grade language” that can be exported to other documents such as KIIDs and fact sheets. All plain language examples are from Luxembourg domiciled UCITS.
“I find it a bit remarkable that in 2019 many funds with tens of billions of euros under management are still using low-production-value prospectuses,” says Lambeau. “Half of the asset managers we surveyed do not believe their current prospectuses are adding business value. But there is starting to be an awareness that there are good reasons to change that.”
The full study report can be downloaded free of charge at morecarrot.com.