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Power play

Matt Goodburn looks at how the new freedoms of Ucits III are being used

The new investment powers available under the Ucits III directive mean that fund managers can now use a whole raft of techniques in running their funds.

But with power comes responsibility.

Many fund firms have yet to apply the new powers to their equity and bond funds but some are using a mix of shorting, swaps and credit derivatives.

At a Money Marketing multi-manager round table recently, Credit Suisse multi-manager co-head Gary Potter warned that some fund managers, particularly fixed- interest managers, are playing with these powers but do not really know what they are doing.

He believes there is a danger of investors and IFAs not being aware that the risk profiles of some funds may have changed dramatically.

Artemis product and commercial director Nick Wells considers that most bond fund managers will make a careful assessment before changing remits on funds. He says the issue is negotiated by the group’s robust risk processes and compliance team.

He says: “My experience of bond managers is that they are naturally cautious and I would be surprised if they had not done their homework before adopting certain techniques.

“The majority of the instruments used by our bond funds will be to gain exposure to markets in a cost-effective manner. We certainly use derivatives on our funds which are already Ucits III. We do the due diligence, which means that we can make them more effective without climbing up the risk scale.”

F&C head of communications Jason Hollands says the company is not using a lot of the new powers and that applying to use Ucits III is a lengthy process that requires the approval of unitholders.

He says: “We have not changed the powers on existing funds, as you would have to demonstrate to unitholders that you may be changing the investment vehicles they are in.

“It will only be an issue when launching new products and we would only launch them if we believed the fund manager understood the instruments they are using but we do have a lot of experience in using derivatives, so are in a good position.”

The firm’s head of fund of funds Richard Philbin says F&C was one of the first to adopt Ucits III powers, albeit on a limited number of portfolios, because it wanted to have access to direct bricks and mortar property funds. But he agrees with Potter’s comments that taking on more of the techniques could be an issue for some bond fund managers.

He says: “If you give some managers too much choice you could have a kid in a candy shop scenario. It can be quite scary for an investor because you have the potential to totally change what you have bought.

“Bond managers have had a good party for the last decade and do not want a hangover. They may want to change their investment remits so they can carry on partying.”

BlackRock MLIM head of UK retail Richard Royds believes the risks of bond fund managers playing with the new powers is less of an issue for big investment companies with strong compliance and risk assessment teams.

He says: “Like us, most of the bigger, more developed companies are better equipped to handle the changes. We have been running alternative investment products for about 15 years and particularly contracts for difference tools. They are less exotic and more straightforward to trade than some of the other newer products.”

Royds believes the role of trustees is crucial to ensure that remits are not unduly changed. He says BlackRock MLIM has effective checks and balances to make sure new products do not carry undue risks.

He says: “They have a very important role in representing the investors’ needs and demands and are tooled up aggressively to look at the risk side. We have fund managers, then a head of risk, then an investment director and finally the trustees to look at funds before they even come to market.”

Artemis strategic bond fund manager James Foster says that while it is not an issue for Artemis, the adoption of Ucits III has made some bond funds riskier propositions than a typical equity fund because of the ability to go short.

But Foster believes the real issue with Ucits III is that it is unlikely to be a massive driver of performance and investors who believe they may make big returns with increased risks could end up disappointed.

He says he does not believe that Ucits III gives bond managers enough scope to produce extra returns for investors and believes that only wealthy investors should be looking to access the more risky products.

“The structure under Ucits III makes it difficult to produce enough returns because you can only gear up to 100 per cent so would have to get it right consistently. You can gear more aggressively to get better returns but I do not think it would be appro- priate for Ucits III powers to be expanded,” he says.


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