Morningstar UK Launches Synthetic Risk Reward Indicator Calculation for UCITS Funds
Morningstar UK, a subsidiary of Chicago-based Morningstar, Inc, a leading provider of independent investment research, has launched its calculation of the Synthetic Risk Reward Indicator (SRRI) for UCITS funds. The launch follows the European Union’s introduction of the UCITS IV regulations on 1st July that require all UCITS funds to provide a SRRI score as
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Editorial Team
- July 28, 2011
- 3 minutes
Morningstar UK, a subsidiary of Chicago-based Morningstar, Inc, a leading provider of independent investment research, has launched its calculation of the Synthetic Risk Reward Indicator (SRRI) for UCITS funds. The launch follows the European Union’s introduction of the UCITS IV regulations on 1st July that require all UCITS funds to provide a SRRI score as an integral component of the incoming Key Investor Information Document (KIID), which becomes obligatory between now and 1st July 2012.
The Morningstar calculation offers an independently produced SRRI that is calculated in accordance with the general methodology defined by the European Securities and Markets Authority (ESMA) and applied consistently across UCITS funds. The calculation is produced on Morningstar’s KIID Production Platform and made available to institutional clients through Morningstar® Integrated Web ToolsTM and Morningstar® Licensed Data feeds.
“Producing our own SRRI calculation provides an independent and consistently applied interpretation of the UCITS IV directive across all applicable fund company investment products”, said Andy Pettit, director of pan-European data and research strategy for Morningstar. “The prescribed SRRI specification from ESMA leaves considerable room for interpretation in how funds are mapped into the ESMA fund types and in how performance is back-filled for funds less than five years old. The specification also gives fund companies the freedom to choose any start point for their official SRRI calculation of between 1st July 2011 and 30th June 2012. These variables are likely to cause inconsistency in SRRI calculations across the industry, despite the best intentions of the SRRI to be a meaningful figure that is universally comparable. Our new calculation shows a continually up-to-date position from the outset of UCITS IV and reveals the weekly SRRI values that would otherwise be invisible. We believe this offers the market greater granularity in the analysis of the official numbers.”
The Morningstar SRRI calculation uses the annualised trailing five-year volatility of a fund’s return. As prescribed by the ESMA directive, Morningstar will calculate its SRRI for all UCITS funds on a weekly basis, and on a monthly basis where weekly prices are not available. Funds with less than five years of performance history will have a back-history simulated using the fund’s Morningstar Category benchmark index.
Morningstar is currently studying ways to determine how the current SRRI methodology as defined by ESMA, and deployed in its own SRRI calculation, can be improved to provide a more useful risk metric for comparing risk levels within and across different investment strategies.
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