European Commission report on the Investment Policies of UCITS
14/02/2008

The European Commission has published a research report on the investment policies of UCITS and their use of derivatives etc. under UCITS III. The report, "Investment funds in the European Union: Comparative analysis of use of investment powers, investment outcomes and related risk features in both UCITS and non-harmonised markets," analyses how the introduction of the UCITS III Directives has impacted the UCITS product and associated risk/risk management. The report charts the main UCITS developments over a five-year period and compares UCITS with non-UCITS funds to see if there is a clear delineation between these, particularly with regard to investment risk etc. The conclusions drawn will assist the Commission's consideration on non-harmonised investment funds, this consideration is expected to be published in autumn 2008.

The report confirms the increasing use of the wider powers by UCITS III Managers and also finds that fund managers develop strong risk management procedures before launching new, more complex products and consider the suitability of their funds for retail investors as well as the risk management process before launching such funds. The report provides analysis under a number of headings including: the risks associated with the enhanced investment powers (i.e. leverage risk, valuation risk, liquidity risk, etc.); formal risk management processes; and the changes in portfolio compositions with the expanded range of UCITS eligible assets. Also included, in Chapter 6 is a comparative analysis of the regulatory environments in the different jurisdictions, including a discussion on the levels of flexibility amongst the Member States with regard to the 10% that can be used to invest in transferable securities and money market instruments other than those referred article 19 (1) of the Directive, which is referred to in the paper as the “trash ratio”. The report also considers the ability to short sell transferable securities; and the impact of the management companies “with substance” requirement.

Link to the Report on UCITS

Annex