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Understanding Investing 简体中文网页 Members section


Diversification is a vital means of reducing risk for investors of all kinds, from the biggest pension schemes to individuals putting their savings into funds. Different types of fund give investors access to asset classes and strategies whose performance may vary according to the market and economic conditions. The vast range of UCITS funds on the market offers investors diversification in terms of the assets in which funds invest, the economic or business sectors they cover, and the countries or regions where investments are located.

Since UCITS funds are designed to be suitable to the retail investors, their rules build in certain levels of diversification with the aim of reducing their vulnerability to the performance of a small number of assets. In general, the more different assets a fund holds, the less the risk to investors of losing a substantial portion of their portfolio if one particular asset falls in value.

The most commonly known restriction is the so-called 5/10/40 rule. This says that a maximum of 10 per cent of a fund’s net assets may be invested in securities from a single issuer, and that investments of more than 5 per cent with a single issuer may not make up more than 40 per cent of the whole portfolio.

There are some exceptions to this rule. For example, where the fund is replicating a stock market or other index, the maximum limit per issuer is 20 per cent of net assets (or 35 per cent in exceptional circumstances).

An individual investment in another fund must not exceed 20 per cent of assets, while no more than 30 per cent of the UCITS fund’s portfolio can be invested in non-UCITS funds. In addition, UCITS funds may not make an investment in another fund that amounts to more than 25 per cent of the other fund’s total assets.

In accordance with the principle of risk-spreading, the regulator of a UCITS may authorise it to invest up to 100 per cent of its assets in securities and money-market instruments issued or guaranteed by EU member states or local authorities. In this case the fund should hold securities from at least six different issuers, and securities from a single issuer should not account for more than 30 per cent of its total assets.

There are a range of further limits, all designed not to eliminate all risk but to keep it within bounds suitable for ordinary investors. These rules cover investment in assets that are not listed or traded on a recognised exchange, the use of derivative instruments such as futures and options, and counterparty risks (the risk of default by the other party to a fund’s transaction).

The UCITS fund’s prospectus should contain detailed information in the prospectus and indicate in which categories of assets the fund in question is authorised to invest. It should also mention whether transactions in financial derivative instruments are authorised. If so, the prospectus should state prominently whether the derivatives transactions are for the purpose of hedging, or to meet investment goals, and how the use of derivatives may affect the fund’s risk profile.

Updated on 12/03/12  
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