Asian fund houses risk getting caught in the crossfire as the European Union looks to propose a bonus cap for staff at firms running Ucits funds.
The proposed directive by the European Securities and Markets Authority (Esma), to be put to member states for voting next month, may mean portfolio managers and others involved in running Ucits funds will have their bonuses limited to 100% of their salary.
But so far the draft directive does not outline whether this will affect the remuneration policies of firms managing Ucits funds outside the EU, says Katia Panichi, a Hong Kong-based partner at Luxembourg law firm Elvinger, Hoss & Prussen.
A foreign fund house using a management company in Luxembourg to run Ucits funds can, under certain conditions, delegate portfolio management to one of its operations elsewhere – say, in Hong Kong. In theory the current proposal would not affect the staff in Hong Kong.
Under the current proposals, remuneration policies for asset managers should be as closely aligned as possible to those under the Alternative Investment Fund Managers Directive (AIFMD), says Panichi. The AIFMD prescribes that where portfolio management is delegated, alternative investment firms are subject to its rules on remuneration. The question, she notes, is whether Esma will adopt the same guidelines for Ucits funds.
If it were to do so, some argue, that could hasten the development of other fund domiciles such as Hong Kong, where firms such as BlackRock and Franklin Templeton are already putting local operations in place in anticipation of the proposed China-Hong Kong funds mutual-recognition scheme.
Though the situation remains unclear, some Asian fund houses are sounding opposition to the potential move. It could have negative implications for the region, where over 6,000 funds structured under the Ucits regime are sold, largely in Hong Kong and Singapore, notes Conor O’Mara, the Hong Kong representative of the Irish Funds Industry Association (IFIA).
Representing Hong Kong-based managers that domicile funds in Dublin, O’Mara says a bonus cap for senior executives would force firms to increase fixed pay to compensate for the lower overall amount and remain competitive.
And paying senior staff more in salary doesn't necessarily provide the best motivation for fund houses to generate returns, argues O'Mara. “That is not in the interest of investors and it may well push down net returns in the long run.”
The IFIA takes the view that Ucits rules already prevent excessive risk-taking by fund managers, through requirements on, for instance, the use of leverage, investible assets, concentration of investment securities and pricing transparency.
“The relationship between outcome, compensation and risk is complex. It’s not linear. There are a lot of things that exert influence on it,” said Pat Lardner, CEO of IFIA, speaking to AsianInvestor on a recent visit to Hong Kong.
Others agree, suggesting that the debate over bonuses was separate from the ongoing debate over bank bonuses in Europe. “Investment bankers are remunerated in bonuses for avoiding the failure of the entity,” says another industry representative, declining to be named. “It’s very different for asset managers, where there is an incentive structure that rewards success [with higher returns].”