Nevertheless, excepting Luxembourg and Dublin domiciled funds, most European Ucits remain tied to their national origins, so are less likely candidates for international distribution. Asian regulators and investors are becoming more Ucits brand-aware and many countries, with the notable exceptions of China and India, register Ucits in their markets. In some cases, Ucits are actually being fast-tracked through the registration process and distributors are finding that efficiency of Asian regulators, makes the funds simpler to register in certain Asian countries than in parts of Europe.
But what of competition for Ucits from global and local players? The US mutual fund regime is not even close to the success of the Ucits brand. Overseas mutual fund sales have not reached far beyond military personnel and the funds are seen as less tax efficient than their Luxembourg and Dublin Ucits counterparts, which are able to roll up income and gains with no tax, instead of having to distribute to avoid tax. Wider distribution enables European fund houses to manage their expense ratios more efficiently, delivering better value to the investor and competing with their large US rivals. Many US fund groups understand that to go global, they must launch from Europe, specifically Luxembourg or Dublin.
At local level, one of the factors driving Ucits’ success is a lack of serious competition for the brand. Ucits’ tax efficiency, reputation for investor protection and ability to use certain derivative instruments gives them a major advantage over their long-only local competitors.
This advantage is, however, a delicate point. When the Ucits III regulations came into force, their use of short instruments was met with caution by Asian regulators. Luc Frieden, Luxembourg’s minister of Justice, remarked that when preparing future European investment fund regulation, the global dimension of financial markets and Ucits excellent reputation outside the EU must be considered. He also noted that simply because Ucits are successful it does not mean that all kinds of similar investments should be include in the framework. He believes an extension of the Ucits framework to other short instruments seems counter-productive and that Ucits need to retain their image of high-quality mass-market products, offering excellent investor protection. He fears that throwing too much into the Ucits pot could harm their excellent reputation at home and abroad. Luxembourg’s financial regulator and investment fund association, ALFI have been actively promoting the Ucits label in Asia in a series of roadshows, talking to local regulators and local investment fund associations to build trust.
There is no doubting Ucits’ popularity with Asian investors. Three Ps of the marketing mix are covered: the Ucits product, tax efficient price and promotion thanks to a growing reputation. The question of place (distribution) is not yet so clear. There is no pan-Asian single fund market. Each country has its own regulatory and tax environment, language, currency, distribution processes and most importantly, investor culture. These factors all complicate distribution, and a successful strategy is one that is well-tailored to local requirements. The complexity may be more of an opportunity than a threat for European fund groups which have experience of Europe’s diverse markets. In countries such as Hong Kong, Taiwan and Singapore, Ucits account for 70 per cent of the funds market, but how is this distribution achieved?
As regards the distribution model, many Asian countries’ distribution channels are dominated by banks, with which fund managers must deal. However, when those banks start to sell their own asset management products, open architecture comes under threat. As the markets grow, the established distribution channels are expected to come under greater competition from new players such as fund platforms.
Investment managers are increasingly turning to specialist providers such as Caceis to help them face the complex operational challenges of interfacing with diverse Asian Transfer Agents, order routing formats and styles of reporting. Straight-through processing (STP) levels are generally very low in Asia and processes such as order routing and settlement and delivery are predominantly handled by telephone or fax. Swift’s XML 20022 standard is gaining acceptance with larger players in Asia, which will drive standardisation among the smaller players, facilitating interoperability and interfacing. Efforts are also being made by the Asian Fund Automation Consortium (Afac), a group of global fund managers in Asia seeking to increase automation with distributors by defining a common STP strategy for each country.
In terms of the TA’s own systems architecture, a common technology layer that meets its TA requirements across the board range of markets it supports, seems essential, but this ideal is proving very difficult to put into practice, and in most cases TA structures remain local. Without a common platform, data fragmentation among different data-warehouses can prevent the TA from using consolidated data for sales and regulatory reporting and trailer fee calculation.
The Ucits regime with its modest initial goals has proven hugely advantageous to European fund groups’ global ambitions, especially those based in Luxembourg and Dublin. Finding the right local distributor and an experienced TA service provider are key to penetrating Asian markets and to ensure continued growth in those markets, all actors need to push for standardisation, automating processes, increasing STP rates and reducing costs and risks.
Etienne Carmon, head of international product development with CACEIS Bank Luxembourg.
In association with CACEIS Investor Services.
