Fund of funds take off in Spanish market
The Spanish asset management industry has gradually increased its range of investment products, and both international funds and SICAVs and domestic SIMCAVS are gaining weight within the whole Spanish investment market.
In the last few years the market for investment funds in Spain has grown in size and, for some investment vehicles, this growth could be described as being spectacular. This is especially the case for funds of funds.
The development and growth of the funds of funds market in Spain during the last three years has been huge if we take into account the small size of the market in 1998.
At that time only e5m assets were invested in funds of funds products. Today the figure invested through these vehicles represents around e5bn. The reason for this has been changes in regulation. “In terms of regulation, funds of funds were incorporated in Spain later than in other countries,” said Angel Martínez-Aldama, research director at Inverco, during a conference organised by IBC Global Conference held in Madrid last month.
“The fact that until 1998 only 5% of the fund’s total assets could be invested in other investment funds was a huge limitation on the the growth of the market,” Martínez-Aldama said.
Although the size of the market it’s still modest compared to that of other countries in Europe, the opportunites for growth in the near future are significant and investors are becoming more aware of this potential.
“Funds of funds have advantages for both fund managers and investors,” said Jose María Marcos, deputy director at the Comisión Nacional del Mercado de Valores (CNMV). “From the fund manager point of view, funds of funsd allows them to increase sophistication of offer and access to investment strategies regardless their size,” he said. “For investors, it faciliates diversification by accessing funds which require large volume investments.”
He added: “On the negative side, there are still fears towards possible of duplication of costs and conflicts of interest in the selection process. However, in my opinion funds of funds are economically justified because of the added value they bring to investors and managers.”
When the funds of funds vehicles started operating in Spain they mainly invested in funds investing abroad, but currently the investment in Spanish funds is larger, representing 57.62% of total investments (see table 1).
Comparing the regulation on funds of funds in Spain to the proposed UCITS directive there are some significant differences. Firstly, in Spain there exists a legally defined concept which refers only to funds of funds products, this is not the case in the UCITS directive. Also, funds of funds in Spain have to invest at least 50% of their portfolios in other funds, while the proposed directive estates that funds of funds could invest between 0 to 100% of its assets in other funds depending on the choice of manager.
In terms of the underlying funds in which funds of funds can invest, the directive says these can be UCITS or other supervised funds offering a similar level of protection as long as the investment in non-UCITS funds is not higher than 30% of total assets. On the other hand, funds of funds in Spain can invest in UCITS or non-UCITS products so long the investments do not undermine the purpose and risk of the investor -ie hedge funds are not allowed-along with other restrictions regarding supervision.
Taking into account these factors and other differences regarding conflicts of interest, information disclosure and investment diversification, the Spanish funds of funds will not be in harmony with the directive once it comes into force. “Also, given that the Spanish regulations are quite new, it is unlikely that there will be major changes in the short term,” Marcos said. “Considering all this, those promoters intending to use their passports should design internal operating regulations in line with European legislation.”
At present in Spain there are two types of funds of funds: the third party funds of funds which invest in funds of other entities and the self-managed funds that invest is funds of the same investment house.
“Around 95% of the funds of funds which invest in domestic funds are managed by the same entity that is in charge of the fund of funds product,” said Marcos. “This suggests that these vehicles are predominantly used for marketing and commercial purposes more than as a management tool,” said Marcos.
Iñigo Gallastegui, director general for marketing Santander Hispano Gestión said: “Four institutons, BBVA, Mutua Madrileña, SCH Gestión and Morley Stanley Dean Witter, control 64% of the net worth of total funds of funds in Spain” (see table 2).
Looking only at self-managed funds the situation is still even more concentrated, with BBVA managing 78% of the total.
Controlling the risk in this kind of product could be seen as being easier than when dealing with third party funds, although investment diversification could suffer. “The big advantage of self-managed funds is that we are thoroughly familiar with them and always know the assets that make up the portfolios of the acquired funds,” said Miguel Angel Penabella, risk control director at Santander Central Hispano Gestion.
“This way we can control variable and fixed yield investments, control risk level by currency and country and sector breakdowns.” He added: “In the case of third party funds the information that we have is more limited,” he said.
But when it comes to investment in some specific geographical regions of sectos foreign, the use of third party products by international managers becomes essential. With this regards, funds of funds have been a very good platform for foreign manager to introduce their products, and as customers become more demanding and sophisticated the need for this type specialised funds will increase.
According to delegates at the conference, expectations for growth of funds of funds in Spain over the coming years look positive. Both as a management tool for offering investment opportunities with a international market component as well as a marketing tool for offering domestic funds with more added value. However, changes in regulation and more harmonisation with European legislation are needed if these products want to fully enter the cross-border investment scene, attracting foreign investors and allowing Spanish customers an easier access to international investment vehicles.