Ucits: a global phenomenon

The original idea of the undertakings for collective investment in transferable securities (Ucits) directive and the new funds that it would create, was based purely on the thinking of European Union (EU) member states. It was built around the concept of a common denominating qualification with its “quality” mark of regulatory control, designed to win and deserve the trust of potential fund investors.

Fifteen years on, Ucits fund usage across Europe has come a long way – and not just within the EU or wider Europe: the reality, and a totally unforeseen benefit, is that Ucits funds have become a truly global phenomenon.

As they came of age, Ucits funds, with their strong regulatory comfort factor, found themselves in the right place at the right time.

As the mass hysteria for stock market and investment fund participation swept across the world in the late-1990s, Ucits funds, with their strong quality-control label, could hardly fail to have marketing appeal.

Trying to measure the business success of fund management groups selling Ucits products against a background of other European fund market progress has been almost impossible to date, because it is obscured by the opacity of national statistics. However, with the advent of newer data collection methods we can now calculate the full weight and potential of these widespread strategies and separately categorise their promoters as a new grouping of fund industry participants – the “true” cross-border fund groups.

There are more than 30,000 funds in issue in the European fund market and traditionally a first mass analysis views individual markets by domiciled assets under management. (See Table 1).

But this is a flawed picture because it takes no account of cross-border fund business, predominantly domiciled in Luxembourg and Dublin. The two centres feature strongly in the domicile asset rankings, but they are not really fund “markets” because their assets are not the result of indigenous investor activity. They are fund “centres” – convenient locations where cross-border funds can be administered, serviced and packaged for distribution elsewhere.

Challenging the word “market” leads us on to redefine two other market constituents: “round-trip” and “cross-border” funds.

National provenance

Round-trip funds are funds domiciled predominantly in Luxembourg and Dublin, whose promoters really intend them to be marketed back to their home-country market.

One simple example is many of the funds that are domiciled in Luxembourg, but are of German provenance. There are many funds of other national provenance also in this group.

Consequently, if we reallocate the assets of round-trip funds back to their countries of parentage, the asset ranking table changes and we see the true size of domestic market activity.

The asset totals remaining in Luxembourg and Dublin therefore belong to market participants with wider, international cross-border, distribution strategies. (See Table 2).

This analysis now affords us the opportunity to look not only at each country as a potential market for product distribution, but also to better understand the true nature of the market participants, both domestic and international. The relevance of domicile is diminished and the balance of Luxembourg and Dublin assets, essentially now belonging only international funds, amount to e583bn in total.

The combined weight of assets of the international groups ranks them in second place in the asset ranking tables. (See Table 3). It should be noted that this redrawing of the map is not meant to demean the importance of either Luxembourg or Dublin, but emphasises their importance as the central hubs of a growing fund industry.

Source: FERI FundFile and investment fund trade associations

But to feel the pulse of international fund group business even more closely we can make one further refinement. It is best to take a proxy-definition that an Ucits fund is not a proper cross-border fund unless it has distribution authorisations in five or more countries – and not just in Europe. This is our threshold to indicate very firm Ucits principle sales ambitions and we categorise such funds as “true” cross-border.

Establishing the true cross-border universe

An analysis of the number of distribution authorisations of every fund in Europe reveals a true cross-border universe of over 2650 funds promoted by 125 investment management groups, and they are not all to be found in the international categories discussed above. For example, there are many UK open-ended investment companies (Oeics) to be included as well as funds from other domiciles where the promoters have perhaps based their pan-European strategies from their domestic home-bases.

This five-country screening process removes a small layer of international fund assets but adds another e27.2bn of assets from elsewhere resulting in a true cross-border universe of funds with total assets of e610bn.

(See Chart 4).

But assets are only one part of understanding market dynamics. The sales trend analysis really completes the picture. (See Chart 5). Cross-border groups are widely perceived, in most markets, as having more equity market expertise that domestic groups. It is therefore no surprise when viewing results to discover that equity funds are by far the category’s most active area.

Table 6 shows the top 10 cross-border groups ranked in terms of net sales of equity funds, compared with the net equity fund sales of the top 10 domestic groups in the two other major markets, France and Germany.

Rodney Williams, managing director, FERI Fund Market Information. For further information e-mail: infoplus@feri-fmi.com