Ucits products becoming a global investment passport

The enduring global success of the Ucits fund brand continues to spur investment optimism amongst an asset management community grappling with the current international financial environment. Despite the widely reported scale of redemptions in a range of investment funds since the start of the current financial downturn, the geographic spread in demand for Ucits products – and projections of their likely growth - continue to impress and offer key reasons for long term market optimism. The sheer expansion in uptake of the funds in both developed and developing markets has surprised many and their success has brought a bumper harvest of support related work to key European fund centres such as Luxembourg and Ireland. At their launch in 1985, Ucits were widely envisaged as purely pan-European investment structures facilitating regional retail cross-border investment. But their popularity has quickly spread well beyond continental Europe as investors in centres as far afield as Asia and Latin America recognised the compelling and well regulated investment package they offered. In turn, the growth of the Ucits market has enabled fund managers to globalise their businesses cost effectively without the need for a physical presence in many of the new jurisdictions their funds serve. As soundly regulated, flexible and investor friendly fund structures, Ucits continue to punch well above their weight in terms of popularity with both retail and, increasingly, institutional investors worldwide. Global reach A measure of just how far the Ucits brand has come is provided in a recent survey of asset managers conducted by CREATE Research and sponsored by asset servicing specialist RBC Dexia Investor Services. The report: Global fund distribution: Bridging new frontiers involved 110 fund managers from 23 countries with funds under management of E15,75 bn. It highlights how Ucits funds – in their current incarnation as Ucits III products – increasingly attract business from both retail and institutional investors in regions as diverse as Asia, Latin America and Africa. According to the report, Ucits – now in their third incarnation as Ucits III funds – are rapidly evolving into a global investment passport and a benchmark for international industry excellence. Anticipated growth for Ucits products on an asset weighted basis is likely to continue at an average compound rate of 20 per cent in Europe, 25 per cent in Asia and Latin America and 12 per cent in Africa. All of this creates some potentially superb business opportunities for fund managers, distributors and service providers such as third party administrators and transfer agents. And the picture could soon be even brighter. Many funds industry professionals are keenly awaiting 2011 when the next generation of Ucits products (Ucits IV) is set to be implemented. The revised wrapper structure is likely to significantly widen the types of investment instruments and practises which can be employed within the Ucits format – at a stroke widening options for asset managers to innovate and placing a new onus on service providers to develop robust, yet flexible, support services. All of this should also be good news for end investors who already enjoy an impressive range of investment opportunities within Ucits funds. From a jurisdictional perspective, the emergence of Ucits has had a huge impact in propelling Luxembourg and Dublin to become European fund centres of excellence. Both jurisdictions now offer a formidable suite of support services including, critically, transfer agency support which has allowed them to spur the growth and global distribution of offshore funds into a wide range of geographic markets. A new web of alliances The CREATE/RBC Dexia Investor Services survey points out that the increasing globalisation of the Ucits market is rapidly encouraging the development of a new web of alliances – with fund managers building links with third party distributors in countries where they do not have proprietary channels. At a wider level the manufacturing and distribution of funds are becoming decoupled, creating new opportunities for dedicated service providers to act as a supporting link between the two parties. The evolution of third party fund administration in the Ucits space has seen service providers move way beyond the provision of basic custody, fund accounting and transfer agency to embrace income collection and securities pricing. Increasingly, providers are venturing into middle office functionalities such as performance reporting and attribution, trade reconciliation, risk analysis, simulation models and stress testing. More than ever before, third party service providers are recognised as adding genuine value to the investment process and bringing real bottom line benefits to investment and distribution drives. According to the survey the role of administrators looks set to expand further as service providers adapt to become conduits between manufacturers and distributors. Under this scenario administrators could play a pivotal new function – promoting new alliances between fund managers and their potential distribution partners and attracting new players to the Ucits funds arena. The world of fund manager/distributor relationships is undoubtedly changing, with the gradual separation of the two roles – in part spurred by globalisation with asset managers seeking fresh distributors as they enter new markets. From a European perspective, new initiatives such as the Markets in Financial Instruments Directive (MiFID) have accelerated this trend at a regional level – promoting complete transparency of total expense ratios to allow component costs to be assessed at every stage of the investment process, encouraging fund managers to focus on their core investment skills. The survey identified key market appetite amongst fund managers for their service providers to become more involved in assisting alliances and providing functionalities that connect fund managers and distributors. From a statistical viewpoint, 54 per cent of respondents indicated that administrative services underpinning distribution alliances would be critical to the future success of their Ucits funds. This finding presents both challenges and opportunities for third party administrators. Sheer market growth has already encouraged dedicated third party administrators such as RBC Dexia Investor Services to make significant new investment in services which can offer support for front end players in the asset management arena. Many promoters already demand a unified transfer agency model which can operate across multiple geographies and time zones, dealing with distributors on the ground in as wide a number of jurisdictions as possible. The ability to offer local language support, presence, expertise and understanding is also key. Evolving common standards In an increasingly fragmented global distribution and processing environment and with investment instruments becoming ever more complex, global third party service providers have the opportunity to develop a critical role in evolving common standards for the wider funds industry as a vital interface in the investment chain. Some leading players in this market - including RBC Dexia Investor Services – have already made significant new investment in this area in a bid to position themselves to support shifting and increasingly complex client needs. Going forward, the expanding role of administrators as facilitators in the global fund network, is likely to attract new players to the Ucits market who had hitherto stayed out because of lack of access to distribution channels and information. The expansion of Ucits sales into less developed markets such as The Middle East and Africa – regions where the funds already have a significant foothold – is also likely to give a major fillip to the business and will add to the growing need for robust linkage between fund promoters and distributors and comprehensive multijurisdictional middle and back office support. While the Ucits market does face competition – most notably and recently from structured products – it continues to offer a compelling proposition to investors, distributors and administrators alike. With the global market set to grow for Ucits products and new related investment structures in the pipeline, now is the time to prepare for the fund management and service opportunities which lie ahead. Companies which delay stand to miss out on some golden opportunities as the Ucits revolution enters its next exciting phase. Tony Johnson is global head of sales and relationship management at RBC Dexia Investor Services

Tony Johnson