Appetite for Alternative UCITS shows no abating
The appetite for alternative UCITS funds continues to grow amid institutional investor demand and regulatory uncertainty around the Alternative Investment Fund Managers Directive (AIFMD).
A number of institutional investors, such as risk-averse pension funds and insurers within Europe, are more amenable to investing into UCITS as they recognize the product offers them generous liquidity terms and is onshore, something that resonates with their underlying shareholders.
UCITS strategies have evolved markedly over the preceding three decades having shifted beyond vanilla bonds and equities into more dynamic offerings, particularly following the passage of UCITS III. Nonetheless, regulators are conscious that the brand must remain robust if it is to retain its investor appeal, with the European Securities and Markets Authority (ESMA) clamping down on alternative managers transacting in commodity derivatives, for example.
The allure of UCITS is not just confined to Europe. Allocators in Latin America and Asia-Pacific (APAC) remain enthusiastic buyers of the brand. However, the ASEAN Collective Investment Scheme (CIS) which will permit cross-border retail fund passporting between Singapore, Thailand and Malaysia went live in August 2014, and this initiative could pose a challenge to UCITS.
Another UCITS challenger in APAC could be the Asian Region Funds Passport (ARFP), which envisages fund passporting between Australia, New Zealand, Singapore, South Korea, Thailand and Philippines, although this is some way from fruition. Interest in UCITS among US investors remains lacklustre as many prefer to invest into ’40 Act funds, although this aversion to UCITS could yet change. Nonetheless, UCITS remains one of the most reputable fund brands in APAC and Latin America.
AIFMD uncertainty is also facilitating growing interest in UCITS with a number of US managers looking to unveil UCITS compliant alternative funds. Several EU member states have gold-plated their national private placement regimes (NPPR) – such as Germany and Denmark - making it increasingly hard for AIFMs to market to institutional investors.
While there are some barriers for UCITS to clear when marketing across the EU, there have been major improvements following UCITS IV’s introduction making it easier to distribute, without impediment, into the majority of member states.
Those non-EU firms relying on reverse solicitation to attract capital have found that it has yielded few results, while others have been warned by lawyers that minor marketing breaches could expose them to severe regulatory sanctions. Continued uncertainty as to whether the pan-EU marketing passport will be extended to non-EU managers is also pushing more non-EU firms to embrace UCITS. The costs associated of AIFMD are still unknown, and many managers are pursuing UCITS as it is a tried and tested model.
Going forward, UCITS V – due to be implemented in March 2016 - will introduce a number of changes. It will impose a stricter version of depositary liability than AIFMD whereby depositaries will be prohibited from discharging any liability for loss or misappropriation of assets at the sub-custodian including the Central Securities Depository (CSD). It will also subject fund managers to remuneration restrictions similar to that of AIFMD as regulators seek to harmonise the two Directives.
There are even discussions around UCITS VI, which some believe will facilitate a pan-EU depositary passport meaning managers will not need to appoint a depositary operating in the same jurisdiction as their UCITS fund. This would be hugely beneficial to jurisdictions such as Malta which do not possess a wide range of depositary operations. There is also speculation around the adoption of stricter eligibility criteria for assets that can be traded by UCITS. It is believed this is part of European regulators’ attempts to make UCITS strictly retail and AIFMs institutional.
At present, alternative managers are readily embracing UCITS as they recognize the capital raising opportunities it affords. Simultaneously, uncertainty around AIFMD is prompting some non-EU managers to embrace UCITS in order to gain a European footprint.
Colin Keane, Country Head of SS&C GlobeOp Ireland