Originally published in A Guide to UCITS in Ireland

(i) Permitted Asset Classes

Whilst dealt with in greater detail in the following Chapters, UCITS are in summary permitted to invest in:

  • transferable securities and money market instruments which are either admitted to official listing on a stock exchange in an EU Member State or non-EU Member State or which are dealt on a market which is regulated, operating regularly, recognised and open to the public;
  • recently issued transferable securities which will be admitted to official listing on a stock exchange or other market (as described above) within a year;
  • money market instruments, other than those dealt in on a regulated market provided that the issue or the issuer is itself regulated for the purpose of protecting investors and savings; units of UCITS and
  • units of non-UCITS collective investment schemes (CIS) (in certain cases);
  • deposits with credit institutions;
  • financial derivative instruments that meet certain criteria; and
  • transferable securities and money market instruments other than those referred to above (subject to a maximum aggregate limit of net asset value).

Given the increased investment opportunities granted under UCITS III and the subsequent clarification of the terms "transferable securities" and "money market instruments", UCITS provide for a very broad spectrum of fund types and exposures, from relatively plain vanilla equity and bond products through to UCITS taking exposures to hedge fund and commodities indices, with UCITS fund of funds, money market and cash funds and index replicators also provided for.

(ii) Investment and Borrowing Restrictions

The standard UCITS investment and borrowing restrictions are set out in Appendix B. In the following Chapters further detail is given with regard to the application of those investment and borrowing restrictions, taking account of how the Central Bank has interpreted and/or applies those restrictions, in the context of particular types of UCITS products.

In summary, however, it is important to note that:

  • the principal UCITS focus is on portfolio diversification and liquidity;
  • no more than 10% of a UCITS net assets may be invested in transferable securities or money market instruments issued by the same body, with a further aggregate limitation of 40% of net assets on exposures of greater than 5% to single issuers (otherwise known as the "5/10/40" rule);
  • there are exceptions to the above for investments issued or guaranteed by governments, local authorities or certain public international or supranational bodies;
  • index replicators can take exposures up to 20% of net assets to single issuers, with up to 35% to a single issuer in exceptional market conditions;
  • up to 100% of net assets can be invested in other collective investment schemes (CIS), provided no more than 20% invested in any one CIS, with an aggregate restriction of 30% of net assets applying to investment in non-UCITS CIS as well as strict rules applying to the nature of CIS in which a UCITS can invest, as well as limiting investment to a maximum of 25% of the units of the underlying CIS;
  • master-feeder structures are now permitted under UCITS IV and, accordingly, UCITS may invest by way of derogation from the above limits at least 85% of its assets in the units of another UCITS – see further the Chapter relating to Master-Feeder UCITS;
  • no more than 20% of net assets can be invested in cash deposits with any one credit institution as permitted by the Central Bank and up to 10% of net assets may be held for ancillary liquidity purposes with other credit institutions (which 10% limit is raised to 20% in the case of deposits made with the custodian/trustee);
  • investments in/through derivatives may be made/taken to assets in to which a UCITS can invest directly including financial instruments having one or several characteristics of those assets, and to financial indices, interest rates, FX rates and currencies; the maximum exposure to a single OTC derivative counterparty is 5%, increasing to 10% for certain credit institutions; various aggregations of the above restrictions apply (see Appendix B for further detail);
  • the maximum aggregate exposure to securities/instruments (other than CIS, derivatives and cash) not listed or traded on a recognised market is 10% of net assets;
  • additional general provisions apply including concentration limits, prohibitions on taking legal/management control of issuers, prohibitions on uncovered sales; and
  • borrowings are limited to 10% of net assets and can only be used for temporary purposes (for liquidity).

(iii) Efficient Portfolio Management Techniques and Instruments

UCITS are permitted to use techniques and instruments relating to transferable securities and money market instruments for efficient portfolio management (EPM) purposes which is taken to mean that they are economically appropriate and are entered into with the aim of reducing risk, reducing cost or generating additional capital or income (with a level of risk consistent with the UCITS risk profile).

Derivatives used for EPM purposes must comply with normal rules for investment in financial derivative instruments.

Repos/Reverse Repos and stocklending are expressly permitted with strict rules regarding collateral including acceptable forms of collateral, level provided, diversification of collateral, valuation of collateral and how and where held and maintained. There are also strict rules as to counterparty credit rating (A2 or equivalent or deemed implied rating of A2) or indemnification.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.