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06Mar2020

How UCITS Funds Protect Investors

One of the cornerstones of the European Union’s UCITS (Undertaking in Collective Investments in Transferable Securities) directives governing investment funds is the concept of investor protection. Built up by a series of laws that have come into effect between 1988 and July 2011, the UCITS regime aims to provide individuals with a secure environment for fund investing. It sets out universal rules on how these funds should be structured, managed and governed, and how their assets should be safeguarded. Funds that meet these criteria can be sold freely to the public in any EU country, provided that they meet the standard UCITS notification requirements. Arguably the UCITS standards of investor protection are the most important factor in their development over two decades into a trusted brand not just in Europe but worldwide. Therefore, it’s worth taking a closer look at various important aspects of investor protection contained in the UCITS framework: Eligible assets Diversification Liquidity Valuation Risk management and compliance Oversight and safekeeping Fund information Eligible assets UCITS funds are subject to rules on what kind of assets they are allowed to invest in (eligible assets), which you will find in the investment policy section of a fund’s prospectus. Generally, they must invest in transferable securities or in other liquid financial assets – for example, money-market instruments, bonds, shares and any other instruments offering the right to acquire these securities through subscription or exchange, as well as other funds and bank deposits. Under certain conditions they may also use financial derivative instruments, such as futures, options or swaps based on an eligible UCITS asset or an approved financial index – either for investment or hedging purposes (to reduce the risk of the portfolio). Since the UCITS directive defines eligible assets in general terms, European regulators have issued additional guidelines to ensure there is a common understanding of what kind of assets may be acquired by a UCITS fund. Diversification Diversification is a vital means of reducing risk for investors of all kinds, from the biggest pension schemes to individuals putting their savings into funds. Different types of fund give investors access to asset classes and strategies whose performance may vary according to the market and economic conditions. The vast range of UCITS funds on the market offers investors diversification in terms of the assets in which funds invest, the economic or business sectors they cover, and the countries or regions where investments are located. Since UCITS funds are designed to be suitable to the retail investors, their rules build in certain levels of diversification with the aim of reducing their vulnerability to the performance of a small number of assets. In general, the more different assets a fund holds, the less the risk to investors of losing a substantial portion of their portfolio if one particular asset falls in value. Liquidity One of the most important characteristics of UCITS is the ease of buying or selling a fund’s shares or units. This means that investors wishing to sell their holdings in a fund, whether because they believe the value may fall or for any other reason, can do so without delay. As a general rule, investors may buy or sell UCITS shares or units at least twice a month, subject to limited exceptions, but in fact the vast majority of UCITS funds offer daily liquidity. The sale or purchase price is determined by the Net Asset Value per share or NAV. NAV is equal to the net assets of the fund divided by the number of shares or units held by investors. In most cases sales and purchases are subject to fees and commission charges. Exchange-traded funds (ETFs) that are UCITS, which are themselves listed and traded on public markets, may enable investors to buy and sell shares at any time those markets are open. However, their ability to trade and the price offered will depend on the availability of other buyers or sellers. Valuation For investors to have confidence in a UCITS fund, they must be able to trust the valuations it uses for individual assets and for the NAV. Investors buy shares or units in a UCITS without knowing the exact price, which is only established after the deal has been placed. As a rule, the latest official market closing prices must be used to value publicly-traded securities, otherwise a ‘fair market value’ must be provided. This is designed to offer protection against late trading, market timing and other practices that can affect the value of a fund. There are also prescribed rules for valuing certain assets such as short-term commercial debt and OTC derivative instruments (short for over the counter) that are not listed or traded on public exchanges. The management company of a UCITS fund must put in place valuation procedures for derivatives that are appropriate to their level of complexity, and details of the process must be disclosed to investors. The manager may appoint an outside firm to carry out such valuations. If it does so in-house, the process must be independent of the portfolio management to avoid conflicts of interest. Risk management All investments involve at least some risk. What is important is that a UCITS fund adheres to the level of risk it has told investors it will take. Managers must have procedures to measure the risk of a fund’s investments at all times, and the risk management function must be independent of the portfolio management activity, to minimise the possibility of conflicts of interest. The manager may hire an outside firm to provide risk monitoring and measurement if necessary. The risk management procedure for a UCITS fund must be appropriate, fulfil specific requirements, be described in detail, and approved by the CSSF. Oversight and safekeeping There is broad range of supervision, checks and balances at different levels to ensure that the interests of investors are protected. First, management and investment companies of UCITS are responsible for the oversight of the fund’s activities and the safeguarding of investors’ interests. They must have
  • 6 Mar, 2020
  • NEBA Financial Solutions
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  • diversification, Eligible Assets, Funds, Liquidity,
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05Mar2020

Best Advice When You Make Mistakes With Money According to a Financial Planner

Let’s take a quick quiz. Count how many times you answer “yes” to the following questions: Have you ever… Overdrafted your checking account? Forgotten to pay a bill? Spent more than you earned? Acted on bad financial advice? Chosen to spend your money instead of save it? Ignored a financial problem instead of dealing with it? Procrastinated on an important task in your financial life until it was too late Now, add up the total. Is your score “1” or higher? Congratulations! You’re perfectly normal. Everyone makes mistakes with their money. The first thing you need to do when you make a money mistake is to understand that it’s not the end of the word, and you are not alone. Even financial professionals, money experts, and so called “gurus” of personal finance advice can make financial mistakes. Once you recognize that it happens to everyone, there are a few other steps you should take that can help you better deal with money mishaps. 1. Don’t beat yourself up Before you can move forward, you need to let go. What’s done is done — there is no use in beating yourself up over it. And the longer you wait to address the mistake or ask for help in fixing an error, the worse your situation will get. However, “don’t beat yourself up” doesn’t mean you should forget about the mistake — or blame someone else for it. 2. Take responsibility This is often the hardest part of dealing with a money mistake: acknowledging that you messed up. It can be easier to let go when you feel it is not your fault, but instead of pointing fingers, take ownership of the mistake. Let’s pretend for a moment you overdrafted your checking account or went into debt because someone hit your car and you didn’t have enough cash to cover the repair bill. Surely the other driver is at fault for your predicament, right? No. It might have been the other driver’s fault for causing the accident, but that driver did not force you to overdraw your checking account. You were the cause of the overdraft because you didn’t have an emergency fund available for these kinds of situations. Could you have predicted someone slamming into your car and the subsequent repair bill? No, but life is unpredictable and sometimes things go wrong. You can plan ahead, even if you don’t know what specifically might not go your way, and set aside some cash to use if an unexpected or emergency expense comes up that you can’t otherwise afford. In this instance, taking responsibility would mean saying, “I made a mistake. I didn’t have an emergency fund. But now I’m going to take action to build one.” You might find that taking responsibility actually leaves you feeling more empowered. Once you take responsibility, life is no longer something that just happens to you. Life becomes something in which you have power and agency, and then you’re more well-positioned not only to avoid future mistakes but also to be financially successful by making better choices. Which brings us to step number three: 3. Commit to making better choices If you made a mistake, acknowledged it, and took responsibility for yourself, the next step is to commit to learning from what happened and preventing yourself from making that same mistake again. It’s never too late to get back on track, or to start making progress toward the kind of financial success you want. Again, there’s no point in ruminating on the past. The only thing that matters is your commitment to taking the right steps, right now. 4. Turn your commitment into action As James Clear writes in his new book, Atomic Habits, “people think they lack motivation when what they really lack is clarity. It is not always obvious when and where to take action.” This is the main challenge you face now, as you prepare to move on from your money mistake and make better financial choices in the future. You might be very motivated to succeed — but without the clarity to know what to do, how to do it, or what to focus on, you may continue to make mistakes despite your best intentions. You need the following in place if you expect to start doing better with your money, and continue building good habits into the future: A way to track money coming in and money going out of your accounts each month (in other words, your cash flow). A method to prioritize both your needs and your financial goals. A system to get and stay organized as you work toward what you want. A guide who can help you check your blind spots and filter through all the information that’s out there so you only follow the best advice for you. An accountability partner to ensure you continue taking action (even when you don’t want to or lose motivation). Hiring a financial planner can you accomplish these things. But you don’t necessarily need to hire an expert to help you (although depending on the complexity of your financial situation, you should consider it). You can check these boxes by using apps and tools. You can read personal finance books and follow podcasts from experts in the field. You can join communities where you can share tips and get accountability from others who, like you, are committed to achieving success. The most important thing is that you take the first step — and that you take it now. Everyone makes money mistakes, but few people go through this process of learning from them and improving because of them. Be one of those few, and you’ll also be on your way to being one of the few who enjoys true financial success. Source: NEBA Wealth Visit www.nebafinancialsolutions.com to see our Structured Products and UCITS Funds
  • 5 Mar, 2020
  • NEBA Financial Solutions
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05Mar2020

Why is my Structured Note value down when the Assets are up?

Well, unlike Funds, any costs associated with setting up and clients buying into a Structured Note does need to come into consideration. These costs are normally factored into the first 6 months or so. This is unlike many Funds that have an exit penalty spread between 5 and 7 years. So this is only a factor early on in a Structured Note. So why then does the product not track for example, the underlying assets or at least the worst performing asset? Think about this from the Banks point of view for a minute: “What effect does someone selling have on us??” I have covered initial setup costs so not more needs to be said. However, I would like to point out that if you had spent a lot of money setting up an investment (Structured Product) and someone sold the next week, why should the Bank take a hit on this? Is that really fair? It would be like buying a new car, driving 10k then handing it back to the dealer expecting a full refund. Other factors to consider is the Banks balance sheet. A few years ago Commerzbank (a German Bank) had their investment rating downgraded. They launched an aggressive campaign to bring new assets to the Bank. A lot of this money was raised via Structured Notes. Their grade was improved after some time and they are happily A Grade again. If large amounts of people were to sell their investments at the same time, the Bank could once again have their credit rating looked at. So during chaotic global crisis (like COVID-19), the Banks can lower the value of a Structured Note to deter mass selling. Those that panic and still choose to sell essentially make the Bank a little more money. Money that is needed to keep their book of business in good standing with Moody’s and Fitch. Does the movement of assets have any sway on the pricing? Of course they do! But normally just on the downside. If the assets slide, the value of the Note will also slide. If the Assets are massively up e.g. 15% each above the start, unfortunately the value of the Note will not go higher than the value of the next Coupon payment i.e. if the next Coupon is 2% next month, the Note will unlikely be valued at more than 101% regardless of asset performance. In the case of an almost certain Autocall, the Bank may try to tempt you to sell by putting the value at 101.5% as this would save them having to pay out an extra 0.5% when the product Autocalls. At the end of the day, the Bank owns the product and can sell for what they like. However, if they didn’t give a fair enough value on the secondary market, I am pretty sure that people would be less likely to use these investments. The moral of the story is that if you need to sell early, you can. You will most likely get back slightly less than if you held the investment to term. The great thing about Structured Notes is that if you hold the product, the Bank have to honour the Terms at maturity. So don’t panic sell!! Just like a Fund or Stock, if you sell when Markets are down, you’ll get back less than you bought for. Unlike Funds or Stocks, if you hold a Structured Note when markets are down, then you still have 100% of your money unless the value has dropped below the Barrier. e.g. Example 1: You buy into the S&P 500 Index and it drops 15%. Direct investment you’d have lost 15%. With a Structured Note, you’d have lost nothing. Example 2: You buy into the S&P 500 Index and it drops 45%. Direct investment you’d have lost 45%. With a Structured Note, you’d have lost 45%. This is exactly the same but you’d at least be protected for a good chunk of the downside in a Structured Note, and a Fund would have to recover completely. A Note only has to get above the barrier to return 100%. These are general rules for the Value of a Structured Note. There will often be glitches and mistakes in pricing which is just normal human error. See a video here on how NEBA took advantage of one such Glitch with the potential to earn clients over 300% in 4 years: https://www.nebafinancialsolutions.com/wp-content/uploads/2017/10/Whiteboard-Animation_nebalex_New_Recovery_Video-revised-B-1.mp4 NEBA are happy to help put a balanced portfolio together to fit the clients attitude to investing. Visit www.nebafinancialsolutions.com to see our Structured Products and UCITS Funds 
  • 5 Mar, 2020
  • NEBA Financial Solutions
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