Study: UCITS an Opportunity for North American Funds
September 22, 2008
Despite the directive's limitations, North American fund managers should capitalize on the European Union's Undertaking for Collective Investments in Transferable Securities (UCITS), says a report from London-based Create-Research.
According to the study, sponsored by RBC Dexia and issued earlier this month, fund managers who are registered under UCITS III--which offers a legal framework for cross-border distribution--have seen rapid product development and growing client bases. There are over 32,000 UCITS-registered funds in Europe, Asia and Latin America.
Create-Research surveyed 110 funds domiciled in 23 countries for the report. The most commonly cited reasons among North American fund managers for not registering were lack of familiarity with the directive, difficulty finding alliance partners and onerous regulatory demands.
Amin Rajan, CEO of Create-Research and author of the study, said that marketing efforts from trade associations and custodian banks such as RBC Dexia could counter such negative perceptions. "Fund managers need to be aware of business opportunities and hear case studies of firms which used UCITS as a springboard for growth outside their home market," said Rajan. RBC Dexia is hosting a series of seminars for fund managers in New York, Toronto and Boston in late October and November.
Although he called UCITS a success story, Rajan acknowledged that it still faces challenges including a bleak outlook for global credit markets, mounting competition from more lightly regulated structured products in Europe and restrictions on the usage of leverage, shorting and derivatives.
A fourth iteration of UCITS, expected to be implemented in mid-2011, is designed to increase efficiency by allowing managers to merge funds across EU national borders and pool multiple funds into a single entity, reducing management costs. Investors will also receive clearer information through a document that replaces the current simplified prospectus. "We're looking forward to UCITS IV accelerating the globalization of UCITS funds," said Tony Johnson, global head of sales and relationship management for RBC Dexia in London.
Administration Costs
European regulators have estimated that the average fund size in Europe is $340 million, compared to $1.9 billion in the U.S., yet European investors pay $3 billion to $9 billion more in annual fees than they would if economies of scale were fully exploited.
Under the current UCITS guidelines, all back-office work has to be done in an investment fund's home country. The European Commission sought to address the issue with a management company "passport" but tabled the proposal in the face of opposition from regulators in Ireland and Luxembourg. Because many operations offices are based in those countries, the regulators claimed that the proposed system would take business away from them. The partial passport--a potential compromise--would require a fund family to either operate in a jurisdiction where it had established a fund or maintain administrative offices in two locations. The EC has given the Committee of European Securities Regulators until Nov. 1 to make final recommendations on the matter.
While Johnson stated that the study was not pursued because of RBC Dexia's role as an administrator for UCITS-registered funds, the report notes that the emergence of such administrators has helped specialist and mid-market North American fund managers compete with larger players for global investments.
RBC Dexia, created in 2005 through the merger of Royal Bank of Canada and Belgium-based Dexia, administers $2.76 trillion in assets worldwide. About $800 billion of that is in Dublin- and Luxembourg-domiciled funds.
