| UCITS III 101 |
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| 06/11/2005 | |
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Mary Blair, Head of product development at Threadneedle, answers this week's 101 on UCITS III 1- What is a UCITS? Is UCITS III something brand new? UCITS, which stands for "Undertakings for Collective Investment In Transferable Securities", is the name of a European Directive first enacted in 1985 by the European Commission. Its latest version, called UCITS III, was put forth in 2002 to cover financial instruments now commonly included in current investment funds. The single most important feature of UCITS is that it enables funds to be "passported" to other EU countries and sold with minimum intervention by national regulators and host states. Funds that fall under any version of UCITS have to meet a number of criteria regarding their eligible assets. UCITS I and its subsequent versions are widely credited with the tremendous development of Luxembourg and Ireland as European asset management centres. 2-What are the main improvements of UCITS III compared to the previous UCITS Directive? The main problem with the old UCITS Directive was that it restricted eligible assets to equities and bonds. The latest version of the directive provides increased investment flexibility by expanding the categories of investments in which a fund can take positions. Eligible assets now include derivatives for investment purposes (and not only for hedging, which was allowed under the old directive), bank deposits and cash, as well as investment in underlying investment funds. Investments in derivatives will lead to more efficient portfolio management. While under the old UCITS regime managers could only use derivatives for hedging their positions, they are now allowed to use them for investment purposes. There are many cases where an investor can take a much more efficient position by investing in derivative products such as futures, swaps, options, or even credit default swaps, instead of investing directly in the underlying security. Derivatives could also allow investors in UCITS III to get exposure in other asset classes that are still not allowed by the directive, such as property. While UCITS III funds cannot directly include property assets in their portfolio, a derivative instrument such as an option on a property index could achieve the same objective. The use of cash in a fund helps protect investors in a falling market and should facilitate the creation of more defensive products, which usually include cash in their strategic asset allocation. Some funds could even theoretically invest up to 100% of their assets in cash since UCITS III does not limit cash investments. Moreover, funds of funds can also receive the UCITS III label since it allows for investments in underlying collective investment schemes. In the end, UCITS III gives asset managers the ability to develop a wider range of sophisticated products to be distributed throughout Europe. All funds have to become UCITS III funds by February 2007. However, this is a largely theoretical obligation. Not all managers will implement changes to their asset allocation so as to include the new eligible assets in their funds. In fact, most fund managers won't implement any changes in the wake of the conversion of their fund to UCITS III. A simple notification to investors specifying that the fund in which they invested will be legally considered as a UCITS III fund is deemed enough. 3-What could be improved in the current UCITS III Directive? From an investment perspective, there could be a UCITS IV Directive widening the scope of eligible assets. Furthermore, the current directive does not distinguish between different groups of consumers, and that too could be improved by establishing separate retail and institutional categories with different investment rules. Also, from a back-office perspective, most fund managers complain that it still takes too much time to register funds in certain countries due to the obligation to complete regulatory forms under a new format. The use of "feeder funds" could also be allowed along fund mergers across jurisdictions. However, there is clearly no rush in implementing a UCITS IV Directive since the current version works well. Any changes made to the current document are likely to take a long time and could lead to confusion and uncertainty, which should be avoided. |
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Articles of the same Serie : 101 |
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