Quotas forcing thousands of fish, which happened to be in the wrong place at the wrong time, to be destroyed and dumped out at sea rank amongst the European Union’s worst policy disasters.
But feeding the public’s demand for regulated, safety-stamped financial products with the Ucits directive is undoubtedly one of the biggest successes for the on-going European project. The 1985 directive in Ucits (Undertakings for Collective Investments in Transferable Securities) was initially introduced to make sure standardised investment products manufactured and developed in one EU member state could be readily distributed into neighbouring countries. The third instalment, introduced in 2002, hugely broadened the powers of investment that could be used to include derivatives, which totally transformed the product sets available to mass market investors, introducing a range of sophisticated techniques previously available only to a small coterie of high powered institutions.
A fourth update will be introduced in 2012, concentrating on informing and empowering the consumer, with some easier to follow simplified introductory documents.
“The main achievement of Ucits funds has been to focus on what products should be doing to properly protect themselves from risks,” suggests Charles Fox, a solicitor and regulatory specialist at Laven Legal Services in London. “Ucits may have been designed to make investments more democratically available, all across Europe, but one of the results is that it has led to higher standards of product design. There is no other product so highly regulated within the financial industry.”
Products, particularly those regulated by the groundbreaking Ucits III directive, are generally more expensive to build and run than similar investment strategies housed under offshore wrappers in less regulated jurisdictions, says Mr Fox. “But they are seen by investors as having a higher standard of operation and regulatory focus to protect them from potential blow-ups.”
Immediately after Ucits III was enacted, Luxembourg’s regulators were challenged by a spate of applications from predominantly fixed income managers, keen to utilise newly permissible option and currency strategies. Although some of the wilder proposals were dismissed, fund managers such as Pimco and Goldman Sachs Asset Management received approval for new and innovative product sets. These radically transformed fixed income from a soporific buy-and-hold asset class to a fast-trading alpha-grabbing sector of the industry.
“Fixed income managers picked it up and ran with it first. Equity managers were slower to take advantage,” confirms Kate Hollis, lead analyst at Standard & Poor’s Fund Services. “Every fixed income fund out there uses a hedge fund lite strategy. Ucits III was not set up for fixed income, but fixed income managers needed more flexibility. Yield curve trading is much easier to do using derivatives.”
The asset management arm of Goldman Sachs, one of the pioneers of heavy promotion of Luxembourg-registered Ucits-linked product ranges for distribution across Europe, has developed a range of absolute return-oriented strategies in Ucits. This includes macro fixed income strategies, active currency, equity long-short, commodity strategies and a fund of Ucits absolute return funds.
More recently there has been a second wave of Ucits under the so-called ‘Newcits’ banner, where hedge fund strategies are being adapted for onshore customers and wrapped in a Ucits compliant structure.
But manufacturing companies as well as distributors are divided on how important these funds will be in investors’ portfolios. “The ‘Newcits’ banner isn't one we think is particularly applicable considering there is nothing new about being able to develop absolute return oriented strategies,” says Shoqat Bunglawala, head of international product strategy and development at Goldman Sachs Asset Management.
“Much of this has been possible since the introduction of Ucits III in 2002 whilst Ucits hedge fund index products have been possible since the CESR guidance of 2007.”
The vast bulk of existing Ucits and the majority of new products being devised are firmly in the traditional asset class bracket, says Mr Bunglawala, with a focus on long only equity, fixed income, balanced and money market asset classes.
There is also continued development of absolute return strategies in Ucits, as investors seek to diversify their portfolios. Along with some other major investment houses such as Credit Suisse, Goldman has for several years been busy building its reputation in running multi-asset global allocation strategies, for investors seeking to outsource the overall management of their assets.
GSAM is also able to offer products with a focus on growth and emerging markets in both the equity and the fixed income space, confirms Mr Bunglawala. “In some cases, more recently, we have been able to blend a mixture of equity and fixed income instruments.”
But not everyone shares GSAM’s vision. Some commentators talk about inappropriate demeaning of Ucits powers and Laven’s Mr Fox refers to “in the worst case scenario, a shoe-horning of hedge fund strategies into the wrapper of a Ucits product”. Sub-categories of more complex alternative products are being created in the name of what should be harmonised product templates, accessible to retail investors, he says. “This is not the tenet or the spirit of what Ucits was all about.”
