Benedicte Gravrand, Opalesque London: Europe’s very own travelling fund structure is explored here. Mr. Aymeric Lechartier, Business Development manager at the consultancy firm Carne, provided Opalesque with expert commentaries.
What is a UCITS III?
UCITS (Undertakings for Collective Investment in Transferable Securities), are investment funds established and authorised in conformity with the requirements of Directive 85/611/EEC.
The two main attributes of UCITS III funds are:
(1) Once a fund is approved as UCITS III by a European regulator (Ireland and Luxembourg being the main domiciles), the fund then obtains a European Union passport which allows the marketer to distribute the fund in various European jurisdictions, after registration. These funds can also be distributed outside the European Union, such as Asia or LatAm – except for the U.S. - depending on each jurisdiction.
“Passporting is a quicker and easier procedure,” said Aymeric Lechartier. “This is why European managers opt for the UCITS III alternative for cross boarder distribution.”
(2) UCITS III funds can invest in a greater variety of financial instruments, thus allowing mutual funds to extend their reach and expand their returns. UCITS III status can be applied to 130/30s funds and some hedge funds too.
“Before UCITS III there were a whole lot of alternative strategies you were not able to conduct in a UCITS,” Mr. Lechartier noted. “Since the use of leverage and derivatives is allowed, alternative managers are more open to the UCITS III structure.”
According to IMA, the Directive has been key to the successful development of the European market for investment funds. Today, UCITS funds manage assets amounting to €6,400 billion / US$10,140bln (i.e. about half of the EU GDP).
UCITS IV: coming up - but not just yet
But there are further developments on the scene: on 16 July 2008, IMA announced it welcomed the E.U.’s proposals for an improved legislative framework for UCITS funds, i.e. UCITS IV ( press release).
So what does the improved framework involve? According to PWC, “some activities, relating to shareholder register and NAV calculation, still had to be performed in the fund’s domicile, so as to allow proper supervision by the regulator…” (Source.) Luxembourg and Ireland’s regulators felt uneasy about supervising funds without any local substance and records.
So a proposed UCITS IV was put forward in February 2008 before the European commission. The EU Commission sent the new proposal to the European parliament last week.
According to EGovMonitor.com (Source), the new proposal will improve the efficiency of the UCITS framework as follows:
- remove administrative barriers to the cross-border distribution of UCITS funds,
- create an EU-framework for mergers and pooling of funds' assets,
- improve investor protection by making sure that retail investors receive clear, easily understandable and relevant information when they envisage to invest in UCITS,
- replace 10 existing directives with a single text.
The entry into force of the measures should come around mid 2011.
Launches this year
In the first quarter of 2008, UCITS funds saw net outflows of €31 billion (US$49bln), according to guardian.co.uk. This year alone, we have seen launches for UCITS III-compliant funds or managed accounts from Conservative Concept (Germany), Cogitam (France), Dalton Strategic Partnership, Pioneer Alternative Investments, GAM, Castlestone Management, GLG Partners, Polar Capital, Lyxor Asset Management, Proxima Alfa Investments (Spain), Crédit Agricole Asset Management, Salus Alpha (Switzerland), RWC Partners (formally MPC Investors), Advent Capital Management… and a restructuring from Informed Portfolio Management (Luxembourg).
“Large alternative managers are the ones that are seriously looking at the UCITS structures and we expect the momentum to pick up speed,” said Mr. Lechartier. “We have been and are doing a number of them for some of the top managers.”
A bit of history
The objective of the original UCITS directive, which was adopted in 1985, was to allow for open-ended funds investing in transferable securities to be subject to the same regulation in every Member State, according to Ernst & Young’s practical guide to UCITS III (here). The realit......................
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