Fund Distribution: New Opportunities?
The European fund industry is characterized by the success story of a truly European idea: UCITS, the acronym of Undertakings for Collective Investments in Transferable Securities. What started in 1985 as a European Directive with the modest ambition of defining a single framework for funds within the European Union ended up as a strong global brand for investment funds that is
now recognised around the world.
Initially, UCITS were intended only to be marketed across the European Union thanks to the creation of a new concept called the "European Distribution Passport" which implies that a fund domiciled in one European country can be sold very easily to investors located in other countries of the European Union. Over the years, however, a growing number of countries in Asia, Latin America and the Middle East have accepted UCITS. They are satisfied that the UCITS framework provides a stable, high quality, well-regulated investment product with significant levels of investor protection.
To this day, UCITS is the only type of fund to have achieved this level of international recognition. Luxembourg has emerged as the leading cross-border distribution centre, with 68% of all cross-border UCITS registrations being generated by Luxembourg funds.
Luxembourg domiciled investment structures are distributed in more than 70 countries around the globe. Singapore, Hong Kong and Taiwan were the first non-European countries to open their doors to UCITS products and were then followed by Latin American countries such as Chile and Peru where the local pension funds are keen to invest in UCITS. Chilean pension funds, for example, use their foreign investment quota to invest heavily in Luxembourg UCITS. This quota was capped at 30% of total net assets for a number of years but has now been raised to 80%. At the end of 2012, 871 Luxembourg UCITS were registered in Chile for investment by local pension funds. In the Middle East, the new 2012 Emirati fund legislation has increased interest in UCITS products. In 2012, the number of UCITS registered there increased from 14 to 46.
Since Luxembourg was the first country to implement the UCITS Directive the country gained a first mover advantage and attracted international fund promoters wanting to benefit from the new opportunities offered by UCITS. Since these funds needed service providers, a range of professional support services developed in Luxembourg which in turn attracted more promoters. The ability to sell Luxembourg UCITS to investors located in different countries has attracted fund management
groups from around the world to the Grand Duchy. These companies are establishing UCITS with a clearly defined global distribution strategy: a South Korean promoter selling Luxembourg UCITS to Hong-Kong; a Brazilian promoter gathering retail investors from several European countries, UCITS have become truly international. Today, promoters from more than 40 different countries have chosen Luxembourg as their UCITS global distribution hub. The first players to come, as early as the late 1980s, were the large European and American fund management groups. More recently, a growing number of Asian, Latin American and Middle Eastern players are reaching a significant size and are now considering selling beyond their domestic market. UCITS is for them an ideal tool to expand internationally and a number of new players from these regions have recently launched funds or are in the process of launching funds in Luxembourg.
Until a few weeks ago, alternative investment funds were regulated at national level and managers willing to market their funds in the European Union had to face up to 27 different authorisation regimes. The AIFMD (Alternative Investment Fund Managers Directive) which entered into force in July this year will put an end to this by setting up a single authorisation regime. Once authorised, the EU managers will be entitled to market the EU AIF that they manage to professional investors, using the simplified regulator-to-regulator notification mechanism established under the UCITS Directive. Just like UCITS, these funds will therefore also be granted a European passport and this passport will also, at a later stage, be available to non-European managers and funds that comply with comparable regulation. This will open the alternative investment fund market to cross border fund distribution. Given Luxembourg’s position in the cross-border space, we expect that the implementation of the AIFMD will further enhance Luxembourg as a leading domicile for fund and management companies in the alternative sector.
With new markets opening their doors, asset management groups from Asia, Latin America and the Middle East setting-up funds in Luxembourg and the new opportunities offered by the AIFMD passport, the future of cross-border fund distribution looks bright.
by Pierre Oberlé, Alfi