Sébastien Danloy, head of Continental Europe and offshore, RBC Investor & Treasury Services, outlines the opportunities for the Ucits brand and its many investors.
As the funds industry prepares for the arrival of Ucits V, the gold-standard regulated vehicle is once again demonstrating its flexibility and resilience. Initially envisaged as a cross-border European investment vehicle, Ucits funds are now distributed in over 70 countries and are globally recognised as a trusted brand.
Ucits V comes into force on March 18, 2016 but it is unlikely its evolution will end there. It may not be long before Ucits VI is upon us, raising interesting possibilities for the next transformation. Will the Ucits brand be widely used by Asian promoters, alongside developing regional vehicles, to sell their products into Europe and other regions? Will distribution strategies fully leverage big data to pin point growth opportunities? Future opportunities exist but are they reachable?
One of the main strengths of Ucits has been its adaptability, which enables the vehicle to stay relevant in a shifting investment landscape. Ucits IV, for example, put a strong cross-border framework in place, with the advent of the management company passport and master-feeder structures. Under Ucits V further adaptations have been made to strengthen investor protection and align it with the prevailing regulatory environment following the introduction of the AIFMD. Both fund managers and service providers are assessing these developments closely as they have a big role to play in promoting the Ucits brand.
As often with new regulatory initiatives, there are challenges and opportunities. The majority of asset managers, according to our report, will await the final Level 2 measures to be published in autumn 2015 before deciding on what action they will take. This pause will inevitably make the early months of 2016 significantly busy for all concerned with ensuring the Ucits V deadline is met. However, market participants can call upon the valuable experience gained from the implementation of AIFMD to help them ensure a smooth transition. It is likely that a significant amount of re-papering will be required, such as depositary agreements and fund prospectuses. This has the potential to cause a bottleneck as the implementation date approaches, and a Ucits fund manager that has not had the experience of AIFMD implementation should assess how they will address the remuneration rules and discuss with their depositary how they will manage cash reconciliations.
Some may consider the implementation of additional regulatory requirements a burden on resources. But it is of paramount importance that investor confidence in Ucits funds remains strong, and addressing potential risk is necessary if the brand is to maintain its leading position. For example, Ucits has established its reputation and earned its appeal with retail investors because of its conservative approach to eligible assets. With the growing investor appetite for alternatives, consistency between the Ucits and AIFMD fund structures should be welcomed by fund houses to enable greater choice. Whether alternative investment funds ever reach the same heights of investor respect and protection as Ucits is debatable, but as demand for alternatives continues to rise, it is appropriate that both vehicles can complement each other to help mitigate further risk for the investor.
Once the implementation of Ucits V has been completed, Ucits VI may soon follow. Today it is unclear what the next phase of the Ucits evolution will look like as the legislative resolution has not yet been published. The consultation paper, first released in 2012, focused on eight topics that were raised by the European Commission (EC) but some have since been addressed in separate legislation, such as systemic risk associated with money market funds.
The remaining three items are:
1. Eligible assets
A review of the scope of assets and exposures deemed eligible for a Ucits.
2. Depositary European passport
Could Ucits fund depositaries be able to perform their duties without the need of having a registered office in the Ucits’ fund home member state?
3. Enhancing Ucits IV frameworks
Some specific areas of further enhancement including prescribing more detailed organisational rules for self-managed companies, changes to the mechanics for both operating master feeder structures and fund mergers and improvements to the cross-border notification procedures.
Some concerns have been raised about further changes to the Ucits regulation being proposed before Ucits V has even been finalised. Speaking at the Efama Investment Management Forum 2014, Steven Maijoor, Chair of the European Securities and Market Authority, expressed his view on the approach to Ucits VI, saying: “I would favour taking some time in the first instance to ensure that the Ucits framework, as amended most recently by Ucits V, is implemented correctly and that national regulators are applying it in a convergent manner.”
A decade from now, a larger Roman numeral may appear alongside the Ucits brand to further ensure the appropriate safeguards for investors as investment conditions evolve. By then, the Ucits story may be well firmly anchored in Asia alongside the developing regional vehicles. Some may ask whether the appeal of Ucits in Asia would weaken with three emerging programmes (the ASEAN Collective Investment Scheme, the Asia Region Fund Passport, and Hong Kong China Mutual Fund Recognition). However, with a heritage of more than 25 years and continued evolution in ensuring investor protection, it will be some time before emerging schemes will be able to compete on the same global platform. Most managers will welcome the opportunity to leverage a local scheme to attract further investment.
The long-term benefits deriving from connectivity to Asian markets should not be underestimated. In the coming years, Asia will need an effective funds management industry to support the challenges associated with an ageing population and contributing alternative sources of additional liquidity to the region’s capital markets. In addition, a new generation of wealthy entrepreneurs is emerging, which will fuel the investment industry over the coming decade.
According to the World Wealth Report 2014 by CapGemini and RBC Wealth Management, high net worth individuals became much more interested in investing outside their home markets, driving up their foreign investment allocations from 25% to 37%. This trend will help solidify the Ucits brand as the leading cross-border investment vehicle, while the Asian schemes will help provide investors with access to new local markets and diversification in an efficient way.
As the implementation of regulatory requirements will continue for some time, and the appetite for cross-border investment grows, an unintentional enabler of improving distribution strategies may exist. As regulators have striven to gain greater visibility into underlying fund investors, transfer agents have an opportunity to turn their investment to support regulatory requirements into providing meaningful intelligence to their clients. Those who process tens of millions of transactions per year are particularly well positioned to help turn the data associated with transactions into useful information that can help fuel fund sales strategies.
Just as Ucits has evolved into the global vehicle it is today, so too should service providers in providing much more purposeful information that helps their clients’.
The Ucits brand looks set to continue to be the gold standard of funds globally. With additional competition from Asia, and the growing wealth population across the world, asset managers and their providers need to evolve in adapting new technological advancements aimed at becoming efficient and smarter in understanding client needs. Since regulatory change is likely to be joined at the hip with future funds industry trends and evolutions,those that embrace and leverage the change will prosper.
©2015 funds europe