A Good Time to Review Fund Types and Locations
The economic uncertainty within the European Union that started with the "credit crunch" in 2008 entered a new phase with the EU referendum announcement by David Cameron on February 16th. In the event that the decision is made to exit from the EU, it is expected to take at least 2 years for a clear picture to emerge of the impact on the UK funds industry.
The "Brexit" decision on the 23rd June and the European Securities & Markets Authority (ESMA) decision on the Private Placement Regime (PPR) due in July are both likely to make this a busy summer for product strategists.
This article explores some other factors and trends which combine to create a landscape in which fund managers may find it beneficial to review the type and location of the fund vehicles they offer.
Availability of Tax Efficient Vehicles
In the past, the decision to launch a SiCAV, OIEC, Unit Trust or other type of open ended fund, tended to be based on the tax advantages that they offered to different investor pools. More options have since emerged for providing tax efficient funds that can be sold across multiple locations, such as the ability to "passport" AIFs under AIFMD, the launch of ICAVs in Dublin and ACS structures in the UK. Consequently, the decision as to which vehicle to use and where to locate can now be driven more directly by the distribution and marketing opportunities they offer.
Administration centres in Luxembourg and Ireland are still seen as the default European locations but as firms look for cost savings or a simpler establishment process it is possible that a new centre may emerge post the ESMA announcement on the PPR for Non-European AIFMs due on July 16th 2016. The decision for US firms as to where to locate their funds is likely to come down to the relative importance placed on dealing with an English speaking location versus the financial strength of the location.
Regulation that has affected the Funds Industry in recent years has created greater transparency but at a cost. The requirement for fee transparency demanded by the Retail Distribution Review (RDR), additional information to be gathered on investors required by the Foreign Account Tax Compliance Act (FATCA), the requirement under the Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITs V) for fund managers to take on liability for assets, have all made the operational landscape more complicated and expensive.
Trend from Unregulated to Regulated Funds
There are now around 35 thousand funds in Europe, and this number is growing steadily following a dip in 2008. A third of these funds are either UCITs or AIFMD authorised. The last four years has seen a growth in regulated funds, over a thousand per year. It is expected this trend will continue as the regulators push to ensure funds are authorised and provide investor protection.
HSBC recently advised that one European hedge fund manager, who had its first taste of fund regulation under AIFMD, is now launching UCITs funds as a response to increased investor demand for a "kitemark" assurance on investment products and the opportunity it affords to distribute its funds around Europe.
Other regulation such as Packaged Retail and Insurance-based Investment Products (PRIIPs) may increase the migration to AIFs and UCITs but through Master/Feeder structures. One such example is the use of ETFs being sold as a share class of UCITs. Given that European funds are generally 1/7th the size of their US equivalents there may also be consolidation, with sub-scale funds being closed.
Beyond Europe in the Pacific Basin many countries have introduced options to allow funds to be marketed, some of which are joint ventures. These options are not comprehensive across Asia making it difficult to establish fund distribution.
The "Brexit" decision and the ESMA PPR announcement will provide some much needed certainty regarding the environment in which the funds industry will operate in the near term. How fund managers respond is likely to be driven as much by the requirement to insulate funds against further regulatory and political changes as by the distribution opportunities afforded.
ISC are well placed to advise and support product reviews and fund changes. Please follow this link to the product delivery page that holds more information about the support we offer: Product Delivery Services