Important facts about your investment portfolio

What is a UCIS?

The term UCIS (Unregulated Collective Investment Scheme) is a UK-specific name for investments that are unable to follow rules required to allow them to be sold to the general public.  The term is used by the UK regulator the FCA (Financial Conduct Authority) and defined as schemes which “…. are unregulated because they are not subject to the same restrictions as a regulated scheme (e.g., in terms of their investment powers and how they are run)”.   

Most investment funds or schemes intended for recommendation to the public follow relatively strict rules and operate under the oversight of a well-established regulator.  Investment companies may also establish schemes based in other jurisdictions such as the British Virgin Islands, Cayman Islands, Bermuda or the British Channel Islands.  Schemes operated in these jurisdictions may be classified as a UCIS.  Investment companies may do this because such jurisdictions allow for wider investments options, which may help to meet the needs of specific groups of investors.  In general, these jurisdictions do regulate their investment schemes, but usually the level of supervision and investor protection is lower than that found in more established jurisdictions.

It is important to note that a UCIS may be a well-managed investment.  Indeed, some well-known and well-regulated fund management companies may establish a UCIS offshore simply to hold assets that cannot normally be held in regulated schemes.  Such assets may include physical land or property, life insurance policies, loans, derivatives or agricultural assets.  However, UCIS are almost always complicated and usually involve different and additional risks compared to regulated funds. 


What are the risks of UCIS?

All investments carry risk, but the additional flexibility available to UCIS may increase certain risks.

The more specific and concentrated the assets held by the UCIS, the more difficult it is for these schemes to find a buyer who will pay the expected price reflected in the fund’s unit or share price.  This is because there are fewer potential purchasers and purchasers may have differing views to the fund manager about the fund’s asset value.  The ability to sell (and buy) an asset quickly with little loss of value is known as liquidity.

Liquidity is relevant to all investments not just UCIS, but the nature of the assets which UCIS often hold, can make it more pertinent.

As an example, consider you have two investments: 

  • a landed investment property in an overseas tourist town; and
  • shares in an extremely large global bank whose shares trade on the New York Stock Exchange.   

At any time, you could easily sell your bank shares, you would incur very low transaction costs and you could get your money quickly.  These shares are highly liquid. 

Conversely, your property could take six months to sell, it might cost you a lot of money in agents fees and taxes and there may be a big difference between what you think the property is worth and what you receive.  This is an illiquid investment.

Please note, that liquidity gives no indication of which of these is the better investment.  The property may make you more money in the end, but it may not be a suitable investment if you need access to your money quickly.

There is a very specific problem with illiquid assets which are co-owned by many investors in what is called an open-ended fund structure.  Essentially, we often end up with hundreds or thousands of co-owners (all with different tolerance to liquidity risk) holding a relatively small number of illiquid assets.  This has caused investors in UCIS to experience problems in the past.

The importance of liquidity in investments has been brought into focus due to recent high-profile funds which have suffered liquidity problems, such as the Woodford Equity Income fund which has recently announced that it is to be wound up. . This means it will close and money will be returned to investors. Returning money takes place in instalments as the assets in the fund are sold.  However it must be noted that some of the fund’s assets are more difficult to sell which means it may take longer to sell them for a reasonable price.  Whilst the Woodford fund is not a UCIS, it held unlisted assets like those commonly held within UCIS.

This is just one possible risk of UCIS. Other risks include the concentration risk that comes from less diversification, the counterparty risk which comes from trading over the counter derivatives and valuation risk deriving from the flexibility that UCIS have in valuing their assets.  The specific risks depend upon the scheme, but you should be aware of all risks that your UCIS investment may present.


What has changed, or why did you recommend this UCIS to me previously?

Many financial companies have changed their rules regarding the use of UCIS. For example, many pension Trustees have sharply reduced the proportion of a client’s portfolio which may be invested into UCIS with some refusing any investment at all into UCIS.  This is based on the Trustee’s understanding of regulatory guidance as well as concerns that several UCIS have collapsed causing problems for investors. Similarly, international investment platforms have moved to reduce the number of new UCIS they allow their clients to purchase.

We believe these changes may create challenges for such schemes to continue operating as they have done historically.

AAM Advisory have always carried out individual due diligence on any fund that we have recommended.  All investments carry risk and all that due diligence does is provide an assessment at the time it is completed that, on balance, the risks are acceptable for the category of client to whom we expect to recommend the investment. Like all investments, regular reviews are required. We believe that changes in the industry’s view of these schemes may alter their suitability for certain clients.

It is also important to note that your investor profile may change over time and it is important that you review your portfolio allocation regularly in light of this.


How much UCIS is too much?

This is difficult to answer in general terms as it depends upon your personal investment profile and objectives.  If you are a sophisticated and knowledgeable investor you will fully understand the risks and be able to decide whether action is required.  If you have a large amount of money invested elsewhere, then you may decide that a high proportion of the money you have with AAM Advisory could be in UCIS, as overall, your UCIS exposure is a small proportion of your investments. 

AAM Advisory has a duty to fully review your circumstances before we can confidently state that we believe your holding is suitable.


Am I classed as a sophisticated investor?

Yes, you were when the UCIS was recommended to you, although your investor status may have changed since.

UCIS are usually only recommended for sophisticated or very knowledgeable investors.  You have been classified as an Accredited investor (using the definition of our Singapore regulator) which means you are assumed to have a good understanding of financial matters and investments. This allows us to recommend a wider range of investment solutions to you including UCIS.  The specific risks involved in these schemes depend upon their investment strategy and it is important (and expected) that you fully understand these.


What do other companies think?

AAM Advisory is not alone in re-assessing its approach.  Many trustees including pension trustees have also amended their rules on such schemes, and some have decided to stop accepting any further UCIS investments altogether.  This may impact on the sustainability of the business models of these schemes.  Please note that these other platforms and companies which have fiduciary responsibilities, may have stricter rules than AAM Advisory.


What will happen next?

We have identified that your portfolio has exposure to UCIS which exceeds our current guidelines.  We intend to review your portfolio based on your current circumstances and may provide additional advice recommending that you make changes.  It will then be up to you whether to follow our advice or not. 

In order to do this, we will need a completed fact find (what we call a Client Discovery Questionnaire – CDQ) dated within the last 12-months.  If we do not have this, we will be in touch shortly to request that you complete one. 


What if I don’t want to complete more forms?

If you decide not to complete a new fact find document or don’t engage with your AAM financial planner, we will not be able to offer new advice to you. 

All financial plans should be reviewed regularly to ensure that you are on-track to reach your financial goals, and so it is strongly recommended that you complete a new fact find regularly to allow us to review progress towards these goals.  You may, of course, choose not to provide us with any additional information and not complete a new fact find, being happy that you are well placed to take responsibility for these particular risks regarding the future outcome of your investment in UCIS. We will contact you again to highlight the specific risks involved in your holdings and ask you to acknowledge that you understand and accept these risks.

All investments involve risk.  We want to ensure that clients who choose to accept the additional risks inherent in UCIS are fully aware of them. 

The wellbeing of our clients is at the centre of everything we do and this exercise is about ensuring that you are fully aware of changes which may affect you, and any resulting specific risks that you may be taking with your current strategy to reach your financial goals.


What should I do if I don’t understand or if I have further questions?

As always you should speak to your AAM financial planner who will explain in more detail why we feel that you should consider adjusting your portfolio.  In some cases, there may be a fee for selling out of a UCIS and your AAM financial planner will highlight  any fees.

Even if you believe that you understand the risks of your investment portfolio and feel that your financial plans are appropriate for your future goals, we really encourage you to engage with your AAM financial planner, complete an up to date fact-find and allow us to provide our feedback.


This information has been supplied by AAM Advisory Management, to provide you with our views and an overview of the information we have relied upon in formulating them.  Whilst you should consult your AAM Financial Planner for any advice you require as a result of this information, AAM Advisory Management are available to answer any non-advice related questions you may have.