February 2010

AIFM: lessons from Ucits

"Ucits funds have set the global standard for retail investment funds, recognised for the high level of investor protection, transparency, regulation and oversight they provide." Gary Palmer of IFIA comments
gary_palmer.jpgWhile every new year brings with it hope and expectation, it also tends to bring a certain amount of anxiety and fear of the unknown. For those in the investment funds industry and particularly those following with interest the passage of the Alternative Investment Fund Managers Directive, it would be true to say that 2010 has started with equal measures of hope, expectation, anxiety and fear of the unknown. 2010 will be the year of the AIFM and while there has been, and will be, a significant amount of discussion, consideration and contemplation of the provisions of the directive, the whole process of preparing a directive got me thinking.

It got me thinking about the activity that might have taken place in 1984, in anticipation and preparation of the original Ucits directive. The worldwide success of the Ucits product has been remarkable. Ucits funds have set the global standard for retail investment funds, recognised for the high level of investor protection, transparency, regulation and oversight they provide. Latest figures from the European Fund and Asset Management Association (Efama) show that over €5 trillion worth of assets are held in Ucits funds. Today Ucits are sold in all corners of the globe and, according to some reports, sales of Ucits outside of the EU now account for over 40% of all Ucits sales. 

In 1984 few could have anticipated the success that Ucits would become and perhaps a lack of expectation allowed the architects and visionaries of the Ucits project the freedom to step back and ask themselves the question, ‘what do we want this to be?’ This unencumbered thinking provided the foundation upon which a framework for an investment fund product was established – a framework which has proven over 20 years to be scalable, resilient and stable, but with the flexibility to allow for structural modifications and significant product evolution. While Ucits funds were traditionally limited to ‘long only’ type strategies, changes under Ucits III in 2001 widened the scope of financial instruments and strategies that Ucits can use, albeit subject to the existence of a robust risk management framework and very clear risk measurement limits. Ucits III now presents opportunities to structure sophisticated alternative investment type strategies within the Ucits framework, providing product flexibility with the additional benefit of strong regulatory requirements and investor protection.

The development of the investment funds industry in Ireland is very closely associated with the Ucits framework. The transposition of the original Ucits directive, which enabled fund promoters to establish funds in one EU country and market them in another, provided the catalyst for Ireland to become a jurisdiction for internationally distributed investment funds. With 2,721 Ucits funds (including sub-funds), Ireland is a leading domicile for internationally distributed Ucits funds and a significant barometer of activity in the Ucits environment. Recent developments which have seen Ucits funds use financial derivative instruments such as total return swaps, futures/options, financial indices, etc, certainly confirm the evolutionary trend of the Ucits product. This new generation of Ucits funds seems to be manifesting itself in two ways: new funds being established as Ucits by non-traditional Ucits managers and funds already established outside the EU being redomiciled and seeking authorisation as Ucits funds. In a climate of strong investor demand for regulated product and reflecting the increased activity in fund redomiciliation, on 23 December 2009 Ireland signed into law the Companies (Miscellaneous Provisions) Act 2009, which introduces new provisions specifically for the efficient redomiciling of investment funds to Ireland. While redomiciliation of an investment fund to an EU-regulated jurisdiction was previously possible, procedural and administrative hurdles were encountered by fund promoters leading to delays and extra costs. The new legislation provides a clear framework designed to address and minimise the challenges currently experienced when redomiciling a fund.

What now for Ucits? Ucits IV, the next chapter in the Ucits story, is due to be effective mid-2011. In anticipation of the Ucits IV era, tax considerations are dominating the agenda and in this respect Ireland has already progressed to consideration of the tax issues as they relate to Ucits management companies, master feeder structures and fund mergers. In his budget speech on 19 December, finance minister Brian Lenihan highlighted the industry-led activity to prepare the tax environment for the new Ucits era to ensure that the rationalisation opportunities included in Ucits IV bring with them tax certainty and no adverse tax implications for the funds concerned and their underlying investors.

So, what has the evolutionary tale of Ucits together with the industry activity in Ireland to enhance the efficiencies of Ucits got to do with the AIFM directive? Simply to demonstrate how, when the fundamentals are correct, a firm foundation for a truly international investment fund structure can be established, which can evolve to reflect changing conditions and requirements and whose scale of operation will encourage the pursuit of operational efficiencies. A similar opportunity now exists in the non-Ucits space and if collectively we can prepare the architecture, the extent of the prize is known. However, should we fail to achieve or fall short in our efforts it will certainly be an opportunity missed.

Gary Palmer is the chief executive of the Irish Funds Industry Association

©2010 Funds Europe

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