The more things change the more they stay the same. The latest UCITS proposals to increase cross-border fund activity within Europe were heard at the recent Gestión y Distribución de Fondos en España conference held in Madrid but incited little positive reaction from delegates.
UCITS funds have been traditionally used by retail investors but are increasingly attracting institutional interest and will be of particular interest in the future to pension funds who are looking to convert to defined contribution plans.
However, since the arrival of UCITS 3 last June, where European Commission representatives relayed the idea of a European passport for fund managers as opposed to one given to funds themselves, the industry has been kept on tenderhooks as to the outcome on the latest proposals. The latest ammendments to the commission's proposals, now known as UCITS 4, were indeed wide reaching and forward thinking taking into consideration the increase in usage by institutional investors of mutual funds in Europe together with the move towards more esoteric areas of investment. Though taking this into ac-count, the proposals put forward seemed a touch too ambitious. Conference delegates appeared indifferent at best to the proposals, signalling that after years of failed attempts, expectations for their success are low.
UCITS 4 which is currently being finalised by the commission for presentation to the European Parliament later this year, continues to push for the service provider approach as op-posed to giving the fund individual approval to distribute throughout Europe. The commission now also intends to clarify the areas where UCITS funds are allowed to invest, particularly regarding the usage of de-rivatives and securities lending by funds and standardised futures and options contracts which would be specifically aimed at the institutional market. The types of funds allowed under the proposal would be increas-ed to include money market funds and the popular fund of funds structure. Fund of funds has appeal for many in-vestors of diversifying risk, but has been refused by the European Parliament time and again along with the master feeder structure. The contact commitee behind the proposals are now pushing for a pure and not hybrid instrument", said Marc Bayot, strategic adviser to Generale Banque and president of the European Federation of Investment Funds (FEFSI), implying a fund which can invest in vehicles other than those solely regulated under the UCITS directive.
An interesting idea which is being put forward is the introduction of invididual portfolio management where UCITS providers would be allowed to run pension funds and other institutional portfolios within either a single vehicle or the proposed fund of funds structure, the latter giving smaller pension funds the opportunity to diversify their assets while proportioning out the risk element. But perhaps the area which is the most am-bitious of the Commission's proposal is the plan behind easing the implemention of cross-border distributions for fund sponsors. The main suggestion which will be put forward by the Commission in July will be putting the responsibility for agreeing cross-border distribution in the hands of the fund sponsor's home country within a one month time span, which was viewed by many delegates as an unrealistic goal in light of problems currently encountered by promoters wishing to access other European markets. Bayot reacted to this by saying that he strongly believed that"the easier way to provide cross-border marketing would_be by only using the home country regulator to expand the growth".
The reaction from FEFSI to the proposals are welcoming in parts though, "there are still important points missing in the proposal," said Bayot referring to in particular the lack of regulation for master feeder funds, index trackers and the usage of repos.
He sees the continued growth in round trip funds, that is to say, funds which have been set up in offshore domiciles which are solely sold back into the home country of the fund sponsor. "Domestic funds," he said "will to my judgement remain still the majority in the years ahead." He added "Banks have realised that this industry has a lot of potential."
Elsewhere in the conference, Spanish regulator Ramiro Martinez-Par-do, general director of the Fomento Division of the Comisión Nacional del Mercado de Valores, echoed the insular approach of some continental markets which has hampered the progress of a cross-border fund industry by criticising the usage of offshore domiciles, naming Dublin in particular. "What is good for Spain is to have funds domiciled in Spain, managed in Spain and invested in Spain."
Three hundred UCITS to date have been registered in Spain, with a law expected soon which will permit the usage of fund of funds within the country. Martinez is keen to develop the domestic fund industry further within Spain citing the success of recent Spanish regulation which allowed the creation of 200 new in-vestment companies. Regulations, he said have: "favoured in my opinion, this growth in the industry." The Spanish Ministry of Finance, he said, is curently developing new legislation which will liberlalise collective investment vehicles, namely to enable them to introduce an institutional class of share. "I think that the future will have to go along these lines," he said.
Spain currently represents approximately 20% of the total European growth in assets in 1997, according to Lipper Analytical. "Spain is easily running with the leaders," added Carmen Cavero Mestre, deputy managing director and chair of the fund committee of Gesbansander Santan-der INVERCO. Cavero precicted further growth for Spanish funds which will be linked to an increase of investment by pension funds and anticipated an influx of foreign fund managers offering international products post-Emu. "Europe is going to be the new framework for the investor," she said, adding "As Europe will no longer ap-ply as a diversification, we will have to look at other markets such as the US, Japan and emerging markets." And as a result, she concluded, for those domestic fund managers who currently have a stronghold on the Spanish market, they may be left with little choice but to join forces. "It will be necessary to reach necessary levels of volume or create alliances".
p The EU fund market has seen significant growth according to FEFSI figures, citing that in 1996 net assets held in funds stood at Ecu1.37trn ($1.39trn) which rose to Ecu1.75trn last year. The leading providers of UCITS continue to be the French, holding just under 26% of the EU market share, with Luxembourg coming second with 19.6% and the UK holding 12.2%."