What is the meaning of indicating ‘the degree of freedom from the benchmark’ in Article 2a(d) of the Delegated Regulation?

To satisfy the requirements of this element of the Article, investors should be provided with an indication of how actively managed the UCITS or AIF is, compared to its reference benchmark index. The KID should strike a balance between providing the level of detail required to sufficiently disclose a UCITS or AIF’s degree of freedom from a benchmark index, and the obligation to do so in clear language understandable to a retail investor. On this basis, the UCITS management company or AIF managers should at least take into account the following elements when indicating in the KID the degree of freedom from the benchmark index for actively managed UCITS or AIFs whose investment approach includes or implies a reference to a benchmark index: a) The description of the underlying investment universe of the UCITS or AIF should indicate to what extent the target investments are part of the benchmark index or not. b) The KID should describe the degree or level of deviation of the UCITS or AIF in regards to the benchmark index, thereby considering, where applicable, the quantitative and/or qualitative deviation limitations underlying the investment approach (e.g. risk limits defined by reference to the benchmark index such as tracking error) as well as the narrowness of the investment universe. In this context UCITS or AIFs may, when necessary for investor understanding, also disclose quantitative metrics (e.g. precise internal limits on tracking error etc.). Unless stricter requirements specific to a Member State apply, UCITS or AIFs which are actively managed in reference to a benchmark index are not required to numerically quantify the degree of freedom by outlining for instance expected tracking error, active share, or other metrics in order to provide a quantitative indication. However, where the UCITS management company or AIF manager believes such information will assist investor understanding, it may do so by providing explanations in language sufficiently comprehensible to retail investors. Some examples of wording that is likely to be acceptable when indicating the degree of freedom from the benchmark index in the KID can be found below. These examples are for illustrative purposes only and are non-exhaustive: 1. Regarding point a) above: “The majority of the Sub-Fund’s equity securities will be components of and have similar weightings to the Benchmark. The Investment Manager may use its discretion to invest in companies or sectors not included in the Benchmark in order to take advantage of specific investment opportunities.” 2. Regarding point b) above: “The investment strategy will restrict the extent to which the portfolio holdings may deviate from the ABCD index. This deviation may be [limited]/[material]/[significant]. This is likely to limit the extent to which the Sub-Fund can outperform the ABCD Index. Deviations from the ABCD index are limited by a target tracking error of [X] [accompanied by a clear, concise description of the quantitative indicator’s meaning]”. Where a UCITS or AIF has a defined strategy to vary the risk it will take against an index, this should be disclosed. For example, where a UCITS or AIF is structured in order to be managed in alignment with an index during periods of market volatility, it should disclose this. This does not imply that the KID should be updated to reflect very short-term / one-off variations in the investment strategy during a UCITS or AIF lifecycle, as long as the capacity for such variations has been previously disclosed. For additional clarity on disclosure of benchmarks, see the graphic in Q&A 1 of this section above. To ensure fair, clear and not misleading communications, the information disclosed on past performance should be consistent with the UCITS or AIF’s Investment Objectives in the legal and regulatory documents of the fund.