The European Fund and Asset Management Association (EFAMA) has published a report on the evolving investment strategies of UCITS.
The universe and strategies of UCITS are evolving due to investor demand for risk reduction and return enhancement, which is a global trend, says the group.
Traditionally, UCITS funds have been regarded worldwide as plain vanilla investment funds which only employ traditional investment strategies, says Peter De Proft, Director General of EFAMA. However, as allowed by the UCITS III Directive of 2001, there are nowadays more and more UCITS funds that use a wider range of techniques and instruments with the aim of managing the trade-off between risk and return.
EFAMA says that one of the main examples is using derivative techniques to generate absolute returns to the investors.
The investor demand for these types of products has significantly increased since the financial markets crisis. In particular, there is clear investor desire to achieve yield uplift relative to the low returns on deposit accounts. At the same time there is a demand from investors for capital security.
The group claim that the media has made this a topic of attention and coined the label Newcits.
The Newcits label was coined by the media and should not be adopted by the industry or regulators, says De Proft. We do not believe that it is necessary or beneficial to have a specific label for these funds. The universe of UCITS is evolving but this is encompassed by the UCITS regulatory framework. Moreover, the regulatory requirements and supervisory tools are being developed, especially under the UCITS IV framework, which enters into force on 1 July 2011.
Some regulators have expressed reservations as to the nature of this type of UCITS product. Many of these reservations relate to the extent of derivative use and the sophistication of investment strategies employed. Conscious of the importance of protecting the integrity of the UCITS brand worldwide, a working group was convened by EFAMA to examine the nature of those reservations and concerns.
This work has shown that the current UCITS legislation provides a robust framework with strong retail investor protection and is about to be enhanced with the UCITS IV requirements. The so-called Newcits are neither new products nor a new category of funds. Newcits are UCITS that can be described as aiming actively to manage the risk-return trade-off. They are subject to and are managed in compliance with the UCITS framework. As such they offer the same level of investor protection as other UCITS.
EFAMA strongly welcomes the creation of ESMA and has full confidence that ESMA and the national regulators will continue to enforce the UCITS requirements to all UCITS managers in an adequate manner and thereby maintain a level playing field for all managers to operate and to develop products that suit their customers needs while at the same time providing a high level of investor protection, says De Proft. EFAMA is willing and able to play its part in the ongoing evolution of the UCITS regulatory framework.
(LB)