Mutual recognition fails to dent Ucits appeal

The appeal of Ucits and other fund structures remains strong among investors despite the lure of the upcoming Hong Kong-China mutual recognition scheme, say asset managers.
Mutual recognition fails to dent Ucits appeal

Investors are keeping the faith in Ucits funds despite next week’s launch of the long-awaited mutual recognition scheme, asset managers say.

Other fund structures are also retaining their appeal, suggesting that investors are taking a wait-and-see approach to the new Hong Kong-China scheme.

However, concerns have been raised that managers are relying too heavily on external fund structures’ regulations as a substitute for adequate due diligence.

Tobias Bland, CEO of Hong Kong-based fund manager EIP Alpha, said that “potential clients globally are indicating that they prefer Ucits. Ucits for us is now inevitable.”

To date, the firm has focused more on US-based investors, who continue to account for two-thirds of AUM. But investors based outside of the US are accounting for a growing share of the pie.

Citic Securities International is the largest investor in EIP’s China Opportunities Fund that the firm launched last December, for example.

Asia-based clients are “keen on Ucits,” said Bland. Furthermore, “European clients historically did not demand Ucits,” but now more Europe-based fund-of-funds and family offices were doing so, he said.

Other fund managers are launching products to tap that demand. Gottex Fund Management launched a Ucits long-only fund – the Gottex VStone Yellow Mountain Fund – earlier this month, for example, giving European investors access to renminbi-denominated A-shares.

Michelle Leung, CEO of Xingtai Capital Management, pointed to “a completely different set of investors” for the Ucits and Cayman versions of the manager’s flagship China consumer fund.

Leung explained that Xingtai first launched a Ucits fund in 2013, but then seeded a Cayman-domiciled version of the fund last year after seeing “quite a lot of interest from US endowments looking at long-only managers doing fundamental research”.

The portfolio and strategy are the same for both, except for the fact that Ucits funds are subject to concentration limits.

No more than 10% of the net assets of a Ucits fund can be invested in the stock of the same issuer, and a maximum of 40% of a fund can be invested in positions that account for over 5% each.

Ensuring that concentration limits are not breached requires daily monitoring. That requires the manager to implement basic risk management practices at a minimum.

Some observers worry that investors are relying on regulations such as Ucits as a substitute to undertaking adequate due diligence on funds that they are investing in.

But regulations may prove to be false comfort. “I’m sure we will see some spectacular failure of risk management in China, for example, in the next year or two,” predicted Laurence Wormald, software provider Sungard’s head of buy-side risk research.

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