Consolidation is expected at both the fund and service provider levels. Existing funds are expected to metamorphose into ‘mega funds’ distributed cross-border, either directly or via feeders. A shake-out is also expected in the service provider space.
To support these changes master-feeder Ucits structures may be created. A master fund can be created in one domicile with investors from other European Member States investing in this fund via a locally domiciled Ucits feeder fund. This will facilitate the channeling of investments into a single mega master fund.
The industry has shown substantial interest in master-feeder structures. Mega Ucits funds in one domicile will likely be the master. The optimal domicile of the master Ucits fund will depend on factors such as the current and future core client base and tax efficiency. Feeders in other countries may further facilitate tax efficiency and better serve certain local distribution channels (eg, for cultural reasons).
A procedure for Ucits mergers is designed to facilitate the mergers of funds, particularly cross-border, to enable the creation of larger funds, which should be more competitive in terms of costs.
Before merging funds cross-border, the potential tax implications at the investor, fund and instruments/investments levels of the merger itself, need to be evaluated, aslong with the post-merger tax impact. Mergers may entail tax implications for both the merging funds and receiving fund, investors, and the management company of the merging funds.
In view of the uncertainty of taxation issues, many in the industry feel today that the existing customary process of closing down existing uneconomic funds, and offering investors another investment option, rather than following the procedures laid out in the Ucits Directive, will prevail.
In future, a ‘single’ management company domiciled in one country, such as Luxembourg, may manage several funds domiciled in different countries. This single management company may also provide its services through a Luxembourg branch. As a result of this provision, apart from the custodian, the management company will not be required to appoint service providers in the domicile of the Ucits.
There will be a number of key considerations when deciding where to domicile a management company, such as:
• The domiciles of the funds to be managed
• The impact of the reputation of the financial center on distribution channels, especially outside the EU
• Direct and indirect tax
• Operational costs (including set-up of new management company or transfer of existing one)
• The authorities
• Regulatory environment
• Expertise and cost competitiveness of locally based service providers
• Qualifications and knowledge of workforce (including languages)
Many of these considerations will also apply to the appointment of service providers.
There are a number of other improvements entailed by Ucits IV. For example, the notification procedure is simplified and accelerated. The new notification procedure will reduce time to market and the administrative burden for funds distributed cross-border, boosting cross-border distribution.
A new standardised key investor information (KII) document replaces the simplified prospectus. KII could be a real enhancement to the current regime provided that practical solutions are found to some outstanding issues.
So, how will Ucits IV transform the European investment fund industry?
Asset management groups will consider streamlining their product ranges to create funds with sufficient size to benefit from economies of scale. They may also consider consolidating funds from other promoters. At service provider level, asset management groups will reconsider their current service provider set-up with a view to determining the optimal structure.
Third-party service providers will need to attain critical size to be able to compete on quality of service and price. It is hoped that this consolidation will boost the industry’s competitiveness by lowering costs.
Overall, the real challenge for the investment management industry will be to identify the optimal operating model afforded to it by the new possibilities under Ucits IV, while at the same time refocusing on meeting the needs of investors.
• Michael Ferguson is a partner and leader of asset management in Ernst & Young, Luxembourg
©2009 Funds Europe