UCITS Brand Of 'Little Value' In Face Of Illiquidity

Investor protection afforded by UCITS (Undertakings for the Collective Investment of Transferable Securities) is of “limited” value as growing illiquidity in capital markets threatens investors’ access to the exit, new research finds.

A report, published today by Cerulli Associates, states that UCITS is intended to provide professional safeguards for investors, including regular and speedy withdrawals. But as fears mount over liquidity, UCITS may not be able to prove much worth.

While exchange traded funds in Europe tend to be UCITS-certified and bought and sold easily on exchange, they have not escaped these fears of less liquid markets, especially within fixed income.

An example of an equity ETF shutting down was the Lyxor UCITS ETF FTSE Athex Large Cap (GRE), which closed its doors when the Athens Stock Exchange closed down between June and August. A similar scenario happened in China A-shares ETFs, when providers like db X-trackers hit their foreign access quota to invest in mainland Chinese markets. The db X-trackers Harvest CSI300 Index UCITS ETF (RQFI) was shut for a total of 72 business days last year due to soaring investor demand.

Hedge funds were pointed to as a culprit in the Cerulli report, with one hedge fund being speculated to take two years to unwind its equity positions after rapid inflows. At intervals last year, up to 40 percent of assets in onshore directional equities hedge funds were in portfolios that were closed to new business.

David Walker, European institutional research director at Cerulli, said: “[…] limiting subscriptions to a fund makes good sense overall for the manager and clients, if the manager's 'alpha' is threatened by fund size, or if shallow markets would stop significant withdrawals being met readily."

Meanwhile many European institutional investors have expressed concerns that fixed income instruments from low to high levels of credit worthiness could face illiquidity problems if investors rush to the exit.

“Institutions are faced with a conundrum,” said Barbara Wall, Europe research director at Cerulli. “Not only is the fixed-income complex they are most familiar with worthless as anything but a cushion or safe harbour. Now it threatens to turn illiquid.