Unit trusts and OEICs
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19. Investment powers of fund managers: 'eligible investments'
Fund managers do not have complete freedom about what they invest in. They have to ensure that their investments fall within the 'eligibility criteria' laid down by the FSA:
- Securities listed on recognised exchanges in EU member states are automatically approved securities for unit trusts (e.g. shares, private and government bonds, cash, warrants and futures and options).
- Securities traded on non-EU markets are also eligible provided that the markets are liquid, officially recognised, regulated, operating regularly and open to the public. The onus is on the fund managers to ensure that their investments meet these criteria.
- Unit trusts can also invest in the units or shares of other collective funds (i.e. unit trusts and investment trusts) or construct 'portfolio trusts' made up of several unit trust holdings from their own stable of funds.
- OEIC investments are restricted to 'transferable securities' that comply with the European Union's Undertakings for Collective Investment in Transferable Securities (UCITS). OEICs can invest in investment trusts but not yet in unit trusts.
- Funds can hold cash for reasons of liquidity (pending the purchase of securities) and cash flow (e.g. to pay dividends).
Funds are not allowed to borrow to invest in securities. They may, however, borrow in anticipation of known cash outflows like dividend distributions.
