David Kingsley of Man Investments explains the main features and characteristics of UCITS structures, and the pros and cons of these types of funds.
Date: Nov 2010
According to David Kingsley in an interview, UCITS is a framework first formed in 1995 in Luxembourg to offer a common, regulated format of open-ended investment schemes which can be “passported” across Europe – and are also recognised globally.
They are important for investors all over the world, he said, because of their common standards of disclosure and their consistent level of investment guidelines for the funds – such as what securities they can invest in, how much, and the maximum use of leverage.
This is especially important for retail investors, he explained.
The language is also understandable by jurisdictions around the world, added Kingsley, ensuring a greater degree of harmonisation among regulators.
Yet investors tend to think UCITS funds are purely a European offering and don’t apply to other markets.
This is wrong, explained Kingsley, as they are structured in a way which is also relevant to investors in Asia.
Appropriate strategies for UCITS structures
According to Kingsley, a common misconception with the UCITS framework is that it will be a panacea to address investors’ concerns across all types of investment strategies.
However, while some strategies are suitable for UCITS, in other cases the inherent risks of the securities traded by a strategy, or the counterparties involved, are not suitable for a UCITS format, he explained.
In general, he said, a UCITS structure will constrain investors to an extent in terms of their choice of investments, but because it is a retail format, the types of strategy able to fit within the UCITS requirements and rules are highly liquid and transparent, offering daily and weekly pricing.
Managed futures are therefore a strong candidate to fit within a UCITS framework, said Kingsley.
On the other hand, he added, a UCITS framework does reduce to some degree the flexibility with which investment managers can trade across markets and the amount of leverage they can employ.
This can therefore lead to some tracking error between the underlying reference fund in the original strategy and that delivered through the UCITS framework.
Differentiating UCITS providers
Kingsley said investors and advisers can differentiate providers of UCITS funds based on several key points: first, track record – with investors wanting to see a certain repeatability of performance and stability of the organisation; secondly, price – with investors wanting to ensure the funds are accessing products in an efficient way; and thirdly, the level of client service and transparency they can deliver – not just meeting the basic requirements of the UCITS framework, but ensuring that investors are comfortable about the risks and returns they are delivering.