Pooled investment vehicles are a fact of modern investment life. There can be few portfolios that do not use funds in some capacity, and an increasing number of plan sponsors are now using funds solely as their chosen vehicles, viewing them as fundamental components of their portfolios.
No longer, it seems are funds poor man’s stocks and shares - the province of the smaller scheme”. At long last they have received their due acknowledgement for their ability to: give access to illiquid markets; to track markets efficiently; to diversify risk while giving the desired exposure; to allow for quick acquisition and disposal; to be the only route into some markets. This is to say nothing of the tax advantages they can have, depending on the market. And now funds are being swept into the increasingly technical analytical world that shares inhabit, with every tremor in their net asset value being tracked, calibrated and reported on.
With the move predicted to defined contribution schemes, what other vehicle than unitised funds can cope with the here today and gone tomorrow aspects of current careers? A mobile workforce requires mobile investments - only funds can fit the bill. Who wants to employ actuarial Shylocks to calculate and cut off slices from segregated funds for departing members?
“The medium becomes the message” was a phrase coined by a guru about television. But something similar is happening to funds. What was the vehicle, the fund shell, is now becoming the object of pursuit. What is the best vehicle to hold our assets, institutional investors are asking? For pensions assets there may be local exempt funds - our feature starting on page 28 looks at the different European jurisdictions and assesses what is available. Where funds are domiciled is also becoming a factor that needs more attention from European investors.
As institutions set up their own be-spoke funds, location and structure become very important, particularly when there are cross-border objectives. Pan-European investment and pension funds are the very practical manifestations of this need, where the search for the ideal vehicles has been in progress for the past decade.
Now the two streams may be merging into one.
The advent of the Ucits directive in the 1980s brought the promise, if not the illusion, of a common market in investment funds and the aim of managers to have a structure to meet the needs of all EU markets. This led to the creation of big umbrella structures of sub-funds, often holding institutional assets. But these had limitations as to how far the assets could be pooled and managed as one, particularly when funds emanated from different jurisdictions.
Different techniques have been used such as pooling, where umbrella fund operators found they were running sub-funds that mirrored each other identically, for example for both institutional and retail clients. Under master-feeder fund arrangements, a global fund or master fund takes in the assets from the feeder funds.
More sophisticated versions are now being developed, one is the cloning or co-management technique offered by Banque Indosuez Luxembourg (BISL), which gives more flexibility than a master-feeder arrangement by being able to run individual funds as a legally distinct portfolio of assets, with the ability to participate in the common investment functions, through its special rebalancing system.
At BISL in Luxembourg, Oliver Storme says: “We were approached by a Swiss client interested in cloning pension schemes in different countries of Europe.” Even though schemes would have to keep different assets proportions in different countries, the “free assets” could be pooled centrally using the system. “Technically it would be easy to do this”, says Storme, though acknowledging that while cloning is being used for investment fund purposes, no pension scheme as yet has adopted the structure.
The ‘Hub and Spoke’ system, being developed by the Signature Group for use across jurisdictions both in the US and Europe, believes its approach will be of interest to institutional invest-ors. Signature’s Sheenagh Gordon-Hart says the group expects to have its first system operational in Europe before the end of the year. “We developed this structure to take account of the Ucits requirements, but it could apply to institutional investors.”
Approaching the issue from the pension scheme perspective, John Watson of London law firm Ashurst Morris Crisp has summed up the situation facing plan sponsors who want to implement cross-border pensions arrangements, but are frustrated by the failure of any initiatives at the EU level as far as retirement provision. “If one cannot have a Europe-wide pension scheme, then what about a fund which schemes throughout Europe - or indeed the world - can invest in?”
Watson has been very much involved with developing the Pooled Fund Pensions Vehicle (PFPV), which is based on a unit trust structure. But a problem for PFPVs is that though they are expected to be up and running before the end of the year, they can only have limited applications compared with their potential. As Anthony Ashton of Bacon & Woodrow says, in many ways they would be the ideal vehicle, particularly on account of their tax advantages, “but they have to get off the ground.” This means obtaining recognition not only in Europe but also worldwide.
In the meantime, Ashton reckons that companies such as multinationals who want to get as close as they can to meeting the needs of pooling assets internationally should use bank common trust funds (see box). “”These are the only ones that have been successful to date”“he says.
Much of what makes them successful is the capability of the organisation sponsoring them to provide the surrounding services, such as tax collection and reclaims and the range of investment services. But, he adds, “they have no special tax advantages.”
The announcement by the Luxembourg banking community that it was seeking to launch a European Pension Fund has added a new element in the debate. It thinks the way forward is to use an insurance company vehicle as the appropriate structure and the Luxembourg authorities are now in discussion with their opposite numbers in other countries as to how to get their co-operation (see page 33). Dublin’s International Financial Services Centre has set up a joint internal committee representing its fund and insurance sides to examine what sort of vehicle they might offer to tap the international pensions market.
Of course, should the insurance company route prove the most effective vehicle, the investment element within this is highly likely to be either some form of internal or externally provided pooled fund!