There has been a mixed response from investors to recent European fund vehicle launches, with investors in many countries retaining a bias towards buying domestically-domiciled products.
The structure generating the most excitement in the UK is the Authorised Contractual Scheme (ACS), which brings the UK into line with the tax advantages offered in Luxembourg and Dublin in so-called tax-transparent funds.
A Northern Trust survey of UK-based finance professionals found that around half expected the value of UK ACS funds under management to exceed £250bn by next year, with almost a quarter predicting that as much as £500bn could be invested by the end of 2017.
A spokesperson for the Investment Association says there is growing interest in this structure, most notably from the pensions sector as an alternative to master trust funds and as a pooling vehicle for local government pension schemes, with the 89 schemes in England and Wales set to merge into six super funds in the next few years.
As of the end of October, 78 ACS funds had been authorised by the FCA. There is potential for very large assets levels to be gathered once the market has adjusted to what the structure offers, suggests Calisan, adding that apart from tax benefits, the ACS also offers a wide range of transparency advantages across fund rationalisation, regulatory reporting and distribution.
BNP Paribas Investment Partners head of external distribution UK Mike Woolley says the vehicle has proved to be more popular with charities and pension funds than with private investors “for whom the administrative requirements have posed challenges”.
However, HSBC head of tax product securities services Ed Turner says this is not indicative of failure in the vehicle’s design.
Uncertainty in the UK fund market as a result of Brexit means the government’s plan to create an ideal UCITS master-feeder structure has taken a blow, continues Turner.
“Those asset managers previously looking at the ACS for UCITS master-feeder structures for cross-border distribution may now be forced to instead look at similar vehicles in Europe. That said, without the ACS local government pension scheme and UK life company assets would be flowing offshore.”
In a separate move by the UK, in June the Treasury published a response to feedback on its July 2015 proposals to amend UK limited partnership law, with the intention that the changes would be fully operational within a year. The objective is to promote the UK limited partnership as a market standard structure for European private funds and maintain and enhance the UK as a competitive fund domicile.
According to Sascha Calisan, head of fund distribution support at Northern Trust, this vehicle has the potential to help the UK make up ground on Ireland and Luxembourg as an international funds base, particularly in the private market investment space.
“The partnership structure is more recognised in the US than in the mainstream European financial centres, but there will always be a good use for the structure, particularly for institutional or more sophisticated investors,” she says. “With appropriate government support, it will provide a flexible and transparent alternative to existing vehicles.”
FCP & SICAV
Morningstar data indicates that Europe-domiciled Fonds Commun de Placement (FCP) had assets of almost €1.8trn at the end of October, while assets in Sociétés d’Investissement à Capital Variable (SICAVs) were just under €2.6trn (the two Luxembourg open-ended collective investment structures only differ materially in terms of the legal entity, which has tax implications).
However, Woolley suggests that neither have gained significant traction in the UK partly because of the requirement to report all fund holdings as though they were direct holdings for tax purposes. Both structures are platform compliant, but are not available on all platforms.
The head of product management at a major global bank is more dismissive, suggesting that there is nothing inherent in these structures that would persuade an investor to abandon their domestic bias.
“This is also the case in other European countries – the removal of historical barriers does not change buying patterns overnight. Investors in France, Spain and Germany are even more domestically-biased than those in the UK,” he says. “The transparency and protections inherent in MiFID will change attitudes, but it will take time.”
ELTIF & RAIF
Views on the potential of infrastructure-focussed European Long-term Investment Funds (ELTIF) and Luxembourg’s AIFMD-compliant Reserved Alternative Investment Fund (RAIF) also diverge.
Pat Lardner, chief executive Irish Funds expects demand for ELTIF to grow, recognising that it is a specialist product in terms of investment focus and the term over which investors’ capital will be deployed.
“The policy imperative and positive link to the Capital Markets Union project are clear and while it is still very early days, we have seen indications of interest from some managers already investing in the infrastructure space and also those interested in targeting the mass affluent market,” he says.
There is interest from the asset management community in establishing products that can attract investment from ELTIFs in the future, says Paul Heffernan, HSBC’s head of cross-border sales, Europe, securities services.
“We expect the ELTIF market to grow steadily, although it may take some time for investors to fully appreciate the advantages and apply them in their portfolios,” he says.
Levels of demand will depend on liquidity, how investments are viewed for capital risk and the treatment for the fund over the long term, says Calisan, who warns that the various tax treatments in different countries across the EU may make the fund harder to sell.
Dominic Johnson, chairman of the New City Initiative also says there is limited interest in ELTIFs as they are hamstrung by a number of factors and suspects they might be slow to catch on, following the path trodden by similar European fund initiatives such as EuSEFs (for social enterprises) and EuVECAs (for venture capital).
“Despite being a retail AIFM, ELTIFs have a high investment threshold which disenfranchises a number of potential clients,” says Johnson. “Also, ELTIFs have exposure to infrastructure, real estate and private loans – these are illiquid assets and require investors to be locked into the investment for up to seven years, which does not appeal to retail market.”
He says the motivation for creating the vehicle was that it might be embraced by mid-sized pension funds or insurers lacking the wherewithal or knowledge to invest in infrastructure. European regulators have sought to encourage this by easing the Solvency II capital requirements for insurers with ELTIF exposure.
On the other hand, Luxembourg’s track record of creating popular, well-regulated fund structures bodes well for RAIFs.
Calisan describes it as an interesting addition to Luxembourg’s range of fund structures expected to offer greater flexibility and improved time-to-market over other options, while in the opinion of Heffernan it is further evidence of Luxembourg’s presence at the forefront of the fund wrapper development curve.
Another structure that has met with almost universal approval is the Irish Collective Asset Management Vehicle or ICAV. More than 290 vehicles have been launched so far with assets of €25.5bn as of end of September, positive net flows every month and ICAVs being used both for UCITS and AIFs, says Lardner.
“The vast majority of these have been in respect of new fund registrations,” he adds. “We expect the number to continue to grow strongly in respect of both new funds and increasingly in relation to existing funds converting from other Irish investment funds structures.”
Calisan observes that ICAV has been termed one of the most significant developments in the Irish fund industry, with the structure providing flexibility to investment managers operating funds in Ireland by offering legislative advantages and potential tax efficiencies.
“The ICAV has become the legal structure of choice in Ireland for both UCITS and non-UCITS vehicles,” says Heffernan. “The significant majority of new umbrellas being established are being set up as ICAVs and platform managers are seeing the most benefit given the changes to accounting requirements.”
When asked whether Ireland’s collective asset management vehicle has generated as much business as expected, Johnson notes that it appeals to managers and investors by effectively checking the box for US taxable investors, enabling them to be treated as tax-transparent entities.
“There has been a number of high profile fund managers converting to ICAV structures and the feedback has been positive,” he concludes. “We expect the ICAV to gain traction going forward.”