The arrival of UCITS III has provide some investment houses with the opportunity they have been looking for to package their funds for the European institutional market.
Payden & Rygel Global, a UK based global fixed income specialist, has amalgamated its range of eight offshore bond funds into a single umbrella structured as a UCITS.
Until recently Payden & Rygel offered two umbrella funds, one structured as a UCITS and one structured as q non UCITS “professional” fund. The UCITs umbrella covers five offshore funds: European Bond, Euro Liquidity, Global Emerging Markets Bond, Global High Yield Bond, International Short Bond and Sterling Liquidity. The non UCITs umbrella fund covers three funds: International bond, US Core bond and Sterling Income.
Robin Cresswell, managing principal of Payden & Rygel Global, explains: “We made the decision a few years ago that we would have a professional umbrella fund and a UCITS umbrella fund. Professional did not have to adhere to UCITs guidelines, has full flexibility to trade a broader range of instruments, and has more leverage, more use of derivatives.
“We wanted to consolidate these funds and UCITS III gave us the opening to do that. With the introduction of UCITS III everything that we were doing in the professional fund we can now do in the UCITS fund. So all of the Irish funds are now amalgamated into a single UCITS umbrella fund.”
The consolidated funds now total $600m (E492m). “We think that will be a little ahead of $1bn by the end of 2004,” he says.
The market for the umbrella funds is institutions with funds that have too few assets for segregated funds but who want access to specialist services, says Cresswell. “In Europe you’ve got pension funds which are investing for the first time outside their domestic equity and bond markets. They’re looking worldwide for investment and they’re saying how can we do this in the most transparent way possible – an Irish listed fund central bank authorised its UCITS III
Cresswell says Payden & Rygel Global decided to make all the funds UCITs III compliant for two reasons: “First, in some jurisdictions institutions can only invest along the lines prescribed by UCITS III. So they can’t use the flexibility outside UCITS III. Secondly institutions see UCITS III as a mark of good housekeeping and they like the idea that the fund is regulated or overseen by a central bank or regulator.”
The move has meant no change to the strategies, he says. “Before UCITS III the strategy of the funds was already inside the definition of UCITs III. But in some cases they were outside UCITS I or II. So UCITS III gave us the opening to do that .”
Another benefit is that the fixed overheads of the funds are halved, he says: “That takes on added significance when you start talking about bond funds. There aren’t the super-growth potential or high revenue potential from bonds that you might have in equities, property or hedge funds. So every 10 basis points in fees matters.”
Payden & Rygel Global has put a cap on each of its offshore funds’ total expense ratio (TER). This ranges from a TER of 28 basis points for its cash funds to 75 basis points for its specialist funds.
“Our international bond fund which sits pretty much in the middle of all our funds has a total expense ratio TER of 35 basis points. That includes management fee, administration, custody, legal, accountancy, everything is wrapped up in that one fee. If the fee exceeds that, Payden writes a cheque to the fund to ensure that cap is not exceeded.”
Although the funds will operate within the guidelines mandated by UCITS III, they will not yet be authorised as UCITS III funds, says Creswell: “We’re not going to have these expressly authorised as UCITS III at this moment. The first reason is that the rules that permit a UCITS III to be recognised by the Financial Services Authority haven’t been written yet, and we want our umbrella fund to be recognised in the UK.
“The second reason is that once the funds are authorised as UCITS III you are required to have a Irish fund management company. There are other requirements and the guidelines mandating what are required have also not yet been written.
“So rather than sign up blind for guidelines which haven’t been written we’ll take full advantage of the flexibility, which we’re allowed to do, and some time between now and 2007 deadline the funds will be authorised as UCITS III.”