This publication was present in Luxembourg to report on discussions around Europe's UCITS market.
Europe’s 33-year-old UCITS fund market has become a global brand and should inspire the development of a pan-European pension fund market which is needed to tackle creaking state retirement systems, a conference in Luxembourg has heard.
UCITS (“Undertakings For The Collective Investment Of Transferable Securities”) are umbrella investment structures that can be marketed across the European Union without having to be separately regulated in each of the 28 EU member states. Since the first version of these funds was launched in 1985, the market has expanded, currently holding about $9 trillion of assets.
The structure combines clear-cut rules with flexibility to encourage innovation, David Wright, chairman of Eurofi told a conference hosted by Association Luxembourgeoise des Fonds d'Investissement (ALFI). There are firms developing new asset classes and strategies, testing new ideas for UCITS funds ... ”that is what you want”, he said. (Eurofi is an organisation Wright created to foster discussion around financial regulations.)
He hopes that the success of UCITS will inspire the case for a pan-European pension fund model, which is necessary at a time of ageing populations and the shift by governments out of forms of pension provision, he said. “There’s a massive opportunity to build a pan-European product,” he told delegates.
UCITS has been Europe’s first integrated and harmonised product. “It was this harmonisation that gave confidence to investors, governments and regulators,” he said.
The idea of such a pan-European pension product, perhaps similar to the 401(k) model used across the 50 states of the US, was discussed by Burkhard Ober, head of public policy at Allianz SE. There is a case for studying whether such an idea is feasible, he said, although there are a number of tax and regulatory hurdles across the EU to be cleared.
Adam Lessing, head of Central & Eastern Europe at Fidelity International, spoke about what he said remains the “cumbersome” processes and costs involved of distributing funds across Europe.
The European Commission in March this year proposed measures to remove final barriers to the cross-border distribution of funds, such as by the creation of a Capital Markets Union.
The EU investment funds market amounts to a total of €14.3 trillion ($16.8 trillion), but the Commission has warned that the market has not yet achieved its full potential. Just over a third (37 per cent) of UCITS funds and around 3 per cent of alternative investment funds (AIFs) are registered for sale in more than three EU member states. This is also due to regulatory barriers that currently hinder the cross-border distribution of investment funds, the Commission has said.
Speaking at the same event, Sheila Nicoll, head of public policy Schroders Investment Management, praised the development of the UCITS fund structure as a major European achievement. "UCITS was a brand designed as a retail product but it also appeals to institutional investors,” she said, saying that this was one of the drivers of its growth in assets.
Nicoll talked about the issues surrounding strains on publicly funded pensions and the need to encourage more saving and investment among the wider population. A problem, she said, is that the language of modern finance often puts the public off, made worse by suspicions about pricing practices by asset managers.
She also said that the industry has a problem in being perceived as still over-charging the public. “There are perceptions that we have lots of hidden costs,” she said.
“I think there is a threat around costs ... there is so much stuff out there about how much money we make,” Nicoll added.
Brexit and other uncertainties
Inevitably, the issue of Brexit - and the impact on the European funds market - came up.
Kian Navid, policy officer – Investment Management European Securities and Markets Authority (ESMA), said that regulators had to be ready if the UK leaves the EU next March without a deal involving a transitional agreement.
As UK and European rules are often identical, agreement on mutual recognition of such rules should be possible; an issue as always is political uncertainties, he said.
Other panel sessions at the ALFI conference included presentations from Latin American investment industry figures - a sign of how UCITS funds are being embraced by players in that part of the world - as well practitioners from Asia.
In Asia, there have been moves to develop "passportable" funds on a par with the UCITS regime. There is the Mutual Recognition of Funds regime recently enacted between Hong Kong and mainland China; there is also the ASEAN fund passport initiative, which relates to how Singapore, Malaysia and Thailand have agreed a framework for the passporting of funds to enable cross-border offerings. The Asia Region Funds Passport was initially set up by Singapore, New Zealand, Australia and South Korea.