What Are UCITS Funds?

UCITS, or Undertakings for Collective Investment in Transferable Securities, refers to a set of guidelines that allow pooled securities, similar to mutual funds, to be traded across borders within the European Union.

As such, UCITS is essentially a framework or directive that governs the composition and trading of UCITS funds.

UCITS funds are registered in individual EU countries and must comply with European Commission rules. Investors in the U.S. may also access these funds via authorized brokers. UCITS may be available in other regions, like Asia, as well.

What Is a UCITS Fund?

UCITS funds are a type of mutual fund that complies with European Union regulations. These securities can be traded across the borders of EU member states.

The EU launched UCITS for two primary reasons:

1.    To structure a type of security under the EU umbrella that allowed for the cross-border sale of mutual funds throughout the EU, and across other markets.

2.    To better regulate investment asset transactions among all EU member countries, giving investors inside and outside of the EU access to more tightly regulated investment funds.

Fundamentally, UCITS rules give EU regulators a powerful tool to centralize key financial services issues like types of investments allowed, asset liquidity, investment disclosures, and investor safeguards. By rolling the new rules and regulations into UCITS, EU regulators sought to make efficient and secure investment funds available to a broad swath of investors.

For investors, UCITS funds offer flexibility and security. Not only are the funds widely viewed as safe and secure owing to the level of regulation, but UCITS funds offer a diversified fund option to investors who might otherwise have to depend on single public companies for the bulk of their investment portfolios.

A Brief History of UCITS

The genesis of UCITS funds dates back to the mid-1980’s, with the rollout of the European Directive legislation, which set a new blueprint for financial markets across the continent. The new law introduced UCITS funds on an incremental basis and has been used as a way to regulate financial markets with regular updates and revisions over the past three decades.

In 2002, the EU issued a pair of new directives related to mutual fund sales — Directives 2001/107/EC and 2001/108/EC, which expanded the market for UCITS across the EU and loosened regulations on the sale of index funds in the region.

The fund initiative accelerated in 2009 and 2010, when the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 clarified the use of UCITS in European investment markets, especially in coordination of all laws, regulations, and administrative oversight. The next year, the European Union reclassified UCITS w as investment funds regulated under Part 1 of the Law of 17 December 2010.

In recent years, “Alt UCITS” or alternative UCITS funds have grown in popularity, along with other types of alternative investments.

How Does a UCIT Fund Work?

Structurally, UCITS are built like mutual funds, with many of the same features, regulatory requirements, and marketing models.

Individual and institutional investors, who form a collective group of unit holders, put their money into a UCIT, which, in turn, owns investment securities (mostly stocks and bonds) and cash. For investors, the primary goal is to invest their money into the fund to capitalize on specific market conditions that favor the stocks or bonds that form the UCITS.

UCITS funds may provide one way for American investors to get more international diversification within their portfolios.

A professional money manager, or group of managers, run the fund, and they are singularly responsible for choosing the securities that make up the fund. The UCITS investor understands this agreement before investing in the fund, thus allowing the fund managers to choose investments on their behalf.

An investor may leave the fund at any point in time, and do so by liquidating their shares of the fund on the open market. American investors should know that the Internal Revenue Service may classify UCITS as passive foreign investment companies, which could trigger more onerous tax treatments, especially when compared to domestic mutual funds.


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UCITS Rules and Regulations

UCITS do have some firm regulatory and operational requirements to abide by in the European Union, as follows:

•   The fund and its management team are usually based on a tax-neutral EU country (Ireland would be a good example).

•   A UCITS fund operates under the laws mandated by the member state of its headquarters. After the fund is licensed in the EU state of origin, it can then be marketed to other EU states, and to investors around the world. The fund must provide proper legal notification to the state or nation where it wants to do business before being allowed to market the fund to investors.

•   A UCITS fund must provide proper notice to investors in the form of a Key Investor Information Document, usually located on the fund’s website. The fund must also be approved.

•   A UCITS fund must also provide a fund prospectus to investors (also normally found on the fund’s web site) and must file both annual and semiannual reports.

•   Any time a UCITS company issues, sells, or redeems fund shares, it must make pricing notification available to investors.

The Takeaway

Undertakings for Collective Investment in Transferable Securities (UCITS) is a category of investment funds primarily available in the EU, but investors in the U.S. may access these funds through authorized brokers.

UCITS may be an interesting type of investment for U.S. investors looking to diversify their portfolios. As with any investment, investors must conduct thorough due diligence on a UCITS security, which should include a review of fund holdings, past performance, management stability, fees, and tax consequences.

FAQ

What is UCITS in simple terms?

UCITS is a set of guidelines governing a type of mutual fund in the EU. It stands for: “undertaking for collective investment in transferable securities.” This means it’s a type of pooled investment, similar to a U.S. mutual fund, that invests in securities like stocks, bonds, short-term government bonds, and cash.

What is a non-UCITS fund?

A non-UCITS fund does not comply with UCITS guidelines. For example, a non-UCITS fund might not be open-ended or it might be illiquid — two primary UCITS requirements.

What are the disadvantages of UCITS?

UCITS funds may have higher costs, owing to the regulatory requirements governing securities in the EU. Also, because the UCITS standards can be restrictive, these funds may not be able to take advantage of certain market conditions. UCITS funds can also have higher tax consequences for U.S. investors.

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