The term “undertaking for collective investment in transferable securities” (UCITS) should not require much explanation, it speaks for itself: It is an undertaking for collective investment (or “investment fund”) which invests in securities, i.e. in stocks, bonds, stocks and bonds, short term treasury instruments and cash.
If we pay special attention to this type of fund, it is not for its investments in securities, but because “UCITS” is the name of an investment fund category that is strictly regulated in the European Union (EU).
Like any investment product intended for the general public, an investment fund must be authorized and is constantly monitored by the financial sector supervisory authorities of the country in which it is to be offered to investors. However, the legal provisions and regulations to be observed by investment funds in order to have this authorization used to be very different from one country to another, which often prevented savers from investing in a foreign UCI and investment funds from being sold abroad.
To remedy this situation, the European Commission drafted a Directive laying down a number of rules to be observed by the UCI. The aim was twofold:
- to create a true European single market for investment funds which allows a fund to offer its shares in all EU member countries and investors to freely invest in the fund of their choice, regardless of its country of origin;
- to offer a high level of investor protection.
This first European investment funds Directive entered into force in 1985. It was exclusively focused on the “undertakings for collective investment in transferable securities”, and especially on those that are offered to retail investors.
The Directive requires the fund
- as the name suggests, to exclusively invest in listed securities,
- to be an “open” fund (allowing investors at any time to withdraw their money and to leave the fund), and
- to distribute its investments across a large number of different securities in order to reduce the risks associated with the various investments.