UCITS is the acronym for Undertakings for Collective Investment in Transferable Securities. The term refers back to EU Directive 85/611/EC of 20 December, 1985, the objective of which was to create the legal framework for a single European market for retail investment funds, while at the same time ensuring a high level of investor protection.
The Directive exclusively targets collective investment schemes (UCI) that invest in securities (such as shares and bonds) quoted on a recognised stock exchange. Furthermore, UCITS must be open ended, so that the investor can redeem his holdings at any time. The investment policy must also respect a number of rules relating to risk diversification, asset liquidity and the use of hedging.
The expression UCITS (or "EU coordinated funds") is only used to describe collective investment schemes that fall within the scope of application of the Directive and comply with it.
A UCI is not obliged to respect the above rules. For instance, a sector fund investing in the biotechnology field might find itself unable to satisfy the risk diversification rules, having to limit its investment to a narrow range of companies. In this case, it no longer meets all the criteria for authorisation as a UCITS and cannot benefit from its principal advantage, the European passport.
The European passport allows a UCITS, once approved by its Home State regulatory authority, to be sold to all types of investors and registered for distribution in all EU Member States. The fact that a UCITS is no longer obliged to follow an authorisation process in each market has considerably accelerated the process of launching a UCITS and reduced related costs.
Luxembourg, as the first country to implement the UCITS Directive and to offer a European passport, attracted a large number of promoters of Swiss and American origin who continue to use Luxembourg as a gateway to the European market.
The strong regulation of UCITS and the resulting high level of investor protection have made them popular with supervisory authorities and retail investors all over the world. The UCITS brand and, particularly, Luxembourg UCITS have a large market share in a number of Asian and Latin American countries. For this reason, an increasing number of fund managers create UCITS for global distribution. The Luxembourg financial centre is the uncontested leader in this field.