With UCITS V, $9T Isn�t as Easy as It Used to Be
The world is one big pool of capital, split between different domiciles and different investment types. Most asset managers, regardless of size, have found that avenues for growth are fairly limited if you stick to just one region and one fund type. If you want more of that capital, if you want more of the pool, if you want more revenue, you need to branch out. If you offer separately managed accounts (SMAs), launch a pooled investment vehicle. If you manage hedge funds, launch a liquid alt fund. If you are a US mutual fund manager, launch a Undertakings for Collective Investment in Transferable Securities (UCITS) fund.
Crossing regions, but keeping the investment type roughly the same, often presents fund managers with the best opportunity for growth. Any new market will require a new distribution network, but from a product point of view, you already have the factory -- the investment strategy, the portfolio manager, and the analysts -- all in place. You "just" execute those functions for both a 40 Act fund and a UCITS fund.
But crossing regions comes with a risk. While there is often a long-term view towards regulatory convergence, in the near term, the more regions and regulatory regimes you have to worry about, the greater the risk that some regulatory event will create an undesirable situation, as with what happened recently with UCITS V.
In March 2014, the European Parliament and Council agreed on its fifth incarnation of the UCITS Directive, to be transposed into national law and put into effect over the next couple of years. Past UCITS rules have been largely beneficial to fund sponsors, but UCITS V has taken much more of a turn towards protecting investors. One of the components of that investor protection is the remuneration paid to risk takers -- analysts, portfolio managers, or any senior executive.
UCITS V will set rules on how those employees can be paid to ensure that they work for the best long term interests of their investors, rather than what will generate the largest bonus for them in the near term. Such a policy follows the belief that the best way to do so is to pay the adviser in shares of the fund, and make them hold that investment for at least three years.
In addition to the obvious drawback for US asset managers sponsoring UCITS funds -- the restrictive remuneration rules -- there are also a couple more hidden costs. The remuneration rules might spread to all of the assets managed by shared teams, all compensation, not just the European component. As well, since most UCITS funds do not have the legal setup to allow for US investors, there will be a cost to change the structure to allow the US-based analysts and advisers to own shares of UCITS funds.
Launching a UCITS counterpart to a successful 40 Act fund was once a good way for a US asset manager to broaden their product line and grow revenue. With UCITS V, going global may get a little less attractive.
Paul Soltis is the North American Market Manager for Confluence, the leading provider of automated data management solutions for the investment management industry. Paul has more than 15 years of investment management back-office administration experience. Prior to ... View Full Bio
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