Ucits IV to boost M&A activity

Mergers and acquisitions of fund managers, and the subsequent emergence of blockbuster groups as well as products, are becoming more likely in European financial services since the publication of the final Ucits IV regulations. The latest instalment of the European Union’s push to democratise financial services – by making investment techniques and structures, previously the mainstay of investment banks and insurance companies, available to the man in the German strasse or French boulevard – is a key aspect in the development of the cross-border funds market in an efficient way, according to State Street’s latest Vision Paper, Ucits IV: The path to greater efficiency. “This will pave the way, we think, for European fund super brands to emerge,” said State Street’s William Slattery, the man charged with communicating the vision to the market, in the custody bank’s bid to engage the fund management community and win more retail houses as clients. “That sort of emergence of large scale brands is already occurring. If you look at individual countries right now you can already see the embryonic development of some super-brands. There is some large consolidation already going on,” said Mr Slattery. While master-feeder structures and a framework to allow fund mergers both domestically and cross-border will certainly allow the opportunity for cost savings, Mr Slattery warned significant obstacles stood in the way of the new framework accomplishing all of its goals. “There are still different national tax regimes and these create considerable barriers to cross-border fund mergers. People will not merge funds if they feel the cost to investors is so significant that it would make them withdraw from funds,” he added. “Europe is an economic area made up from an enormous number of countries, and national investor preferences are still a major aspect of the market, and do often result in local investors being orientated to buying nationally domiciled products. Our conclusion is that mergers are unlikely to happen, at least in the short to medium-term, on the scale envisaged by the European commission.” Ucits IV will benefit some fund managers more than others, according to Gavin Ralston, head of product development at Schroders. “It is down to the volume of funds and the complexity of your fund arrangements. The more complex you are the more benefit you will get from the new arrangements in Ucits IV,” he explained. “Ucits IV is very good news if you have a series of fund ranges in different jurisdictions. If you are a company that has made a lot of acquisitions and has inherited fund ranges in Germany and Italy and France and so on then it provides a great opportunity to put them together,” said Mr Ralston. “We are not in that position because we only have two fund ranges, one in Luxembourg and one in the UK, so there aren’t the same opportunities to rationalise as there are for some of our competitors,” he added. Mr Ralston however welcomed the moves towards greater transparency, with the new directive aiming to help investors by making information about funds presentable in a clear and understandable manner. The Key Investor Information (KII) document will include details of investment objectives, performance, charges and risk, and replaces the simplified prospectus found in Ucits III. “Rather than having the simplified prospectus which involves pages and pages of detail, you have got something that can be read in five minutes,” said Mr Ralston. Since the first Ucits directive in 1985, worldwide Ucits assets – contained in open ended funds registered in Europe, generally in Dublin or Luxembourg, which can be sold across borders – have grown to almost E5,100bn. “Ucits is a top quality product and a fantastic brand. I don’t think that there is sufficient realisation in our community here in Europe about what a successful export brand it is,” said Mr Slattery. “US managers who want to distribute global products use Ucits by choice, and one of the significant debates in the US investment management community is how can we develop our mutual fund product as a global fund product to compete with Ucits.” The Ucits IV directive is set to become law in all 27 EU Member States by July 2011, and aims to increase economies of scale and reduce costs for investors by improving the regulatory environment, said State Street’s Tim Caverly. “If you look at European funds in general the average size is five times smaller than US funds, so it is a somewhat fragmented marketplace. The tenets within Ucits IV that enable the pooling of assets, with fewer but deeper pools, obviously creates more efficiency and brings lower costs to run those products.”