The European Union's Ucits III fund structure is proving increasingly popular in Asia as well as in Europe, and Ucits IV is set to make further improvements to the scheme.
The new structure -- due to make its debut in July 2011 -- will not only provide further clarity and potentially spark consolidation in a very crowded European market, but could also be a "blueprint" for a similar approach in Asia, argues Margaret Harwood-Jones, global head of institutional sales at BNP Paribas Securities Services in London.
"In my mind, there is some similarity between Europe and Asia as regions," she says, citing the large number of different markets that both contain. "So the disparity you've had in Europe today, which is what Ucits IV is trying to address, is something that exists in Asia," adds Harwood-Jones, who was speaking to AsianInvestor on a recent trip to the region. She suggests that a similar model in Asia could allow the funds market here to act "in a more pan-Asian way".
But she feels that is some way down the road, and the more immediate benefit of Ucits IV will be to give some clarity in a very crowded market space in Europe. Harwood-Jones also says it is likely to lead to a consolidation and reduction in the number of funds, meaning a higher amount of assets under management per fund.
"So, as that market becomes a bit less cluttered, it will create a better environment for strong fund managers in Asia to see how they could position themselves in Europe," she adds. "And it gives Asian managers a more effective mechanism to use in a structure that's already known."
Indeed, Asia-based firms, such as Singapore's Fullerton Fund Management and Hong Kong-based Galaxy Asset Management, are already starting to make use of the Ucits III structure with a view to boosting their sales in Europe.
Ucits III outlines a framework for funds suitable for marketing to retail investors. It widened the range of instruments that can be used, notably allowing some use of derivatives, making it possible for some hedge fund managers to launch versions of their strategies in a Ucits version. Ucits IV mostly aims to make cross-border distribution easier by harmonising regulatory frameworks across the single European market.
However, while Ucits IV will be a very positive step forward, says Harwood-Jones, it won't be easy to implement. "There is a huge community of stakeholders involved in the process and this is a market development that's been incubating for a number of years," she adds.
Once EU member states reach the point where there's complete clarity on Ucits IV, each country will then have to deploy and adopt all the requirements. "So there's no certainty yet," she says, "and there's an extremely high probability that there will not be an absolute like-for-like situation in each and every market."
As a result, market participants will need to keep an eye on the local regulations in each of the markets where they are doing or plan to do business, says Harwood-Jones. It's likely that the outcome of Ucits IV will vary from market to market and manager to manager: "[The outcome] will be reflective of and dependent on how asset managers are currently organised and what their plans are for distribution," she adds.
Hence, Harwood-Jones doesn't envisage the whole funds industry moving to the classic master feeder structure, where master funds are domiciled in Luxembourg or Ireland. "For some fund managers, the right decision will be to have their structure in an individual country designed for distribution specifically in that country."
That will mean that to fully service their clients, securities services providers will need to offer a global solution and platform and be able to meet customer requirements locally in every market, says Harwood-Jones. "To service one client, you might need to be able to support a Ucits IV master feeder fund alongside a number of domestic funds at the same time in different countries," she adds.
Harwood-Jones also raises the issue of the EU alternative investment fund manager (AIFM) directive currently being drawn up. "We can't end up with a different outcome from Ucits IV and AIFM," she says, "as we'd end up with over-regulation and conflicts. For industry participants, there's a real imperative that we lobby for consistency and convergence or a 'safe landing' of both initiatives."
She sees this as posing a "very real risk". On the one hand, long-only managers are now more likely to use alternative-type instruments in their strategies, and on the other, alternatives managers are interested in using Ucits. "So fund managers and fund promoters won't want part of their business regulated in one way and another in a different way," she adds.