Industry choice: UCITS or NURS

Since February 2007, fund management groups have been obliged to convert their fund ranges to either UCITS III or Nurs.

This following the adoption of the UCITS III directive in the UK, the Financial Services Authority’s new sourcebook (COLL), and subsequent introduction of Non-UCITS Retail Schemes (NURS).

Both have wider investment powers than traditional unit trusts; UCITS also enables funds to be passported into European markets, while NURS gives access to an even wider range of asset classes including direct property, and has less stringent restrictions than UCITS on portfolio concentration.

Fund groups are split on which structure to adopt. Many multi-manager firms have gone for NURS due to the wider investment flexibility, although Insight Investment converted its Diversified Target Return fund from NURS to UCITS in September 2006. Ultimately much depends on the distribution strategy and whether accessing the European market is deemed important.

The CF Miton Arcturus fund has had NURS status since its launch in November 2006. Tom McGrath, manager of the fund, has diversified the portfolio across a range of asset classes including equities, bonds, property, structured products, resources, cash and alternatives, in which it has around 30%. McGrath says he chose NURS rather than UCITS due to the increased choice of investments.

BDO Stoy Hayward converted its Fitzwilliam fund-of-funds range to an OEIC under NURS regulations in December 2006. Stuart Clark, lead manager on the Balanced Income fund, is also keen to utilise the additional scope this offers. When UBS launched Tom Digenan’s 130/30 US equity fund, BDO sold its holding in the long only equivalent and took a position.

“We like to think we’re quite open minded to new products,” says Clark.

“We’ve got the flexibility to look at more esoteric funds. We’ve got a good relationship with Tom Digenan and we believed his process naturally lent itself to a 130/30 fund.”

It could be argued that the ability to invest directly in some previously inaccessible asset classes could potentially reduce total expense ratios (TERs) on funds. McGrath, though, is not convinced it makes much difference.

“There is an argument that it might go the other way. More esoteric funds might have higher charges, for example hedge funds. In theory the TER could be bumped up, but if you’re dealing in reasonable size you can get institutional rates.” He adds that he is a big believer in paying for performance.

A further interesting development will be the introduction of the Markets in Financial Instruments Directive (MiFID) in November 2007. MiFID widens the range of core investment services and activities that firms can passport, and aims to more clearly describe how to allocate responsibility between home state and host state. It is not yet clear how much impact MiFID will have on operators of UCITS, and there are likely to be some exemptions.

The new MiFID ‘Appropriateness test’ may affect intermediaries when they are proactively targeting retail clients to enter into non-advised transactions in UCITS. Although UCITS funds are classed as ‘non-complex’ instruments in MiFID, if a client responds to a personalised communication from a MiFID firm, the firm must establish whether the client has the knowledge and experience to understand the risks; otherwise the firm must warn the client.

1 September 2007