PRIIPs performance scenarios
The four amounts, stress, unfavorable, moderate and favorable, that a PRIIP's key information document must show for 10,000 euros invested, computed since January 1, 2023 from returns actually observed.
The section "What are the risks and what could I get in return?" of the KID shows what 10,000 euros would become under four scenarios: stress, unfavorable, moderate, favorable. The method is set by Annex IV of Delegated Regulation (EU) 2017/653, rewritten by Delegated Regulation (EU) 2021/2268 of September 6, 2021. The latter was due to apply on July 1, 2022; Delegated Regulation (EU) 2022/975 pushed the date back to January 1, 2023. The 2017 version projected, for a category 2 product, the 10th, 50th and 90th percentiles of a distribution adjusted by Cornish-Fisher on five years of history. After a decade of rising equity markets, KIDs promised returns nobody would sign up to, and the favorable scenario read like advertising. The 2021 text starts again from observed paths. The history, which must cover at least ten years, or the recommended holding period plus five years if that is longer, is cut into rolling windows the length of the recommended holding period; the unfavorable scenario takes the worst, the moderate the median, the favorable the best. Where data are missing, a benchmark or a proxy fills the gap. The stress scenario keeps a parametric formula, on a stressed volatility, and cannot show a better outcome than the unfavorable one. The amounts are read at one year and at the recommended holding period, plus at the halfway point when that period is ten years or more, with the average annual return stated. The method softens the 2017 flaw: a ten-year window that holds neither 2008 nor 2022 still yields a flattering unfavorable scenario, and two identical funds launched on different dates do not show the same figures. Category 3 products, the structured ones, stay on a simulation.
An equity fund has a recommended holding period of five years and fifteen years of monthly history. There are 10 × 12 + 1 = 121 rolling five-year windows. Ranked, the worst returns −12%, the 61st, the median, +15%, the best +44%. For 10,000 euros, the KID shows 8,800 euros as unfavorable, that is 0.88^(1/5) − 1 = −2.52% a year; 11,500 euros as moderate, that is 1.15^(1/5) − 1 = 2.83% a year; 14,400 euros as favorable, that is 1.44^(1/5) − 1 = 7.57% a year. If the stress formula gives 9,100 euros, better than the unfavorable figure, the stress amount is brought down to 8,800 euros.
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