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Julius Baer Poised for Landmark in US Mutual Fund History

A staff reporter, 29 January 2005

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The American Securities and Exchange Commission has agreed, in principle, to allow Julius Baer Multi Stock UCITS to become the first Europea...

The American Securities and Exchange Commission has agreed, in principle, to allow Julius Baer Multi Stock UCITS to become the first European fund to be listed on both US and European exchanges. Julius Baer will market the fund with support from Signature, a Boston-based family office, indirectly to private banking clients via third party institutions. The UCITS (undertakings in collective investments for transferable securities) fund is presently listed on the Bourse de Luxembourg. Julius Baer declined to provide specific details on the fee structure or the North American exchange it intends to use for the product. To date, no UCITS fund has ever been listed on stock markets in both the US and Europe before in spite of the clear benefits from an investor perspective, so why has it taken so long to happen? Why have the Americans taken until now to allow a cross-listing of this kind? A representative of Julius Baer’s investment fund services arm in Zurich told Private Client Management: “It’s not really about the Americans, it’s more about taking the risk and making the effort to do it. European companies have shrunk from cross-listing UCITS in the past because of the risk of failure and the prospect of bearing all the related costs. The US regulators have been in favour of such a move for years and the SEC has already told us that it is likely to give the fund its approval in the coming weeks.” The fund is not designed directly for private banking purposes but for institutional investors. Instead of offering the transatlantic fund to its own private clients, Julius Baer plans to offer it to the institutions who will, in their turn, sell it directly to their private client and retail customers. Julius Baer declined to name the institutions to which it intends to market this fund initially. Hubs and spokes This development should allow fund managers domiciled in the European Union to move top-performing investments into the USA. Julius Baer will be helped by Signature Financial, a family office based in Boston, Mass., which developed its ‘hub and spoke system’ ten years ago. By this mechanism, fund companies can separate a fund’s investment activities – the buying and selling of securities – from all their other activities. The fund company has one hub fund in which shares are bought and sold using fund assets plus as many spoke funds as necessary to gather assets from many distribution channels. The spokesman for Julius Baer continued : “With this system, you can import a European product to the States. Indeed, there will be two funds – an American and a European one – sitting side by side.” Under the global hub and spoke programme, the US fund can use the track-record of the European fund as its own. This, Julius Baer expects, will give it a major marketing advantage. Philip Coolidge, Signature Financial’s CEO, explained to Private Client Management the reason why the US fund can do this: “The two funds that exist will be co-management and co-custody, so if you’re the portfolio manager you’ll have only one portfolio and not two. You will also have only one custodial account. Because of this, you get: economies of scale, with the need to manage only one portfolio; and the same track record, so you’re lowering the break-even point to get into the States. “If it’s not a mirror, you lose the performance track record and the economies of scale. Keep those, and you get the largest number of bangs to the buck, as they say.” “The hub and spoke structure has already worked for US/non-US funds already, but not for UCITS. This is a new departure and a landmark in mutual fund history. As for the SEC giving its consent, there are no outstanding issues as far as we know.” An idea whose time has come? Based on the potential of this listing, Signature Financial's Coolidge outlined the next step that cross-border funds might take: “We’ve been talking to regulators all over the world for some time. I’ve been doing it for seven years. There are other ways to utilise the hub structure. Suppose you’re an investment management firm with a British, German and French equity fund. Plus you have a Pacific basin and a US equity fund. Someone comes to you and says he wants a global equity fund. Traditionally, the answer would be to set a new one up, with yet another new portfolio to manage. “In this context, it would still be a new fund, but you’d get the two advantages of economies of scale and a carrying-over of the track record. Someone would have to allocate assets between each fund, but there’s a mirror effect for every other purpose.” Coolidge did, however, take issue with one part of the Julius Baer explanation: “The US fund won’t be listed on a stock exchange. This is an open-ended fund, and in the USA only closed-ended funds are listed. There is no benefit for anyone who does it because they would have to pay a fund commission. So instead, the fund will be listed on fund supermarkets.”

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