Cross-Border 2019 UCITS and Beyond Article

Opportunities Beyond UCITS Products While UCITS are the foundation of a cross-border strategy, not all strategies work within the confines of the UCITS framework. Changing investor preference is affecting how cross-border funds are being developed and distributed. To meet this changing demand, firms are considering solutions beyond UCITS funds, which come with new challenges and product considerations. The Challenges with Pivoting to Alternatives As investors continue to search for yield and uncorrelated returns, interest in private equity, infrastructure, and real estate has become more significant in recent years. At the end of the Q3 2018, EU Alternative Investment Funds (AIFs) grew to a record €6.1 trillion, according to EFAMA. This has pushed traditional asset managers to consider more alternative assets classes and products. The shift to alternatives is not without challenges, especially if managers are trying to distribute their products broadly. Mike Tumilty, Director of Operations at Aberdeen Standard Investments cautions, “Every alternative fund brings nuances, special tax considerations, and suitability issues. This makes the underlying assets less conducive to being put into pooled vehicles that can be widely distributed.” For example, the European Long-Term Investment Fund (ELTIF) is designed to give retail investors access to more illiquid investments. However, due to issues with the regulatory framework, ELTIF’s have not yet taken off. In the short term, while EU policymakers look to fine tune the ELTIF framework, managers looking into alternative funds will still have to use more bespoke fund structures. A move into alternatives in Europe also brings with it another regulatory regime known as the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD applies to all managers selling AIFs in the EU, regardless of where the AIF or managers are domiciled. In addition to compliance and reporting requirements, the AIFMD also governs the distribution of AIFs in the EU and includes a pan-EU passport. However, the AIFMD passport is currently restricted to only EU-domiciled AIFs and non-EU AIFs must rely on private placement for distribution in the EU. Despite the challenges, the growth of alternatives is set to continue. PWC estimates that globally alternatives will grow at an average of 11% per year through 2020. To support this growth, asset managers need to invest in their platforms and find ways to make their processes more scalable. Asset managers looking to sell alternatives into the EU also need to understand how the AIFMD will affect their operations and distribution strategy. This includes determining if they can leverage their existing UCITS infrastructure or if they need to supplement with additional resources. Cross-Border and Local Funds Combine for Global Distribution While the use of UCITS funds for cross-border distribution has been successful, the truth is that a global distribution plan requires a mix of local and cross-border funds. Firms often establish a UCITS in Luxembourg or Ireland as their flagship cross-border product and then supplement that with local products where necessary. Angela Billick, Head of European Investment Product at Manulife John Hancock, notes, “Firms need to look at each market and find the best way to offer solutions to investors. While UCITS funds are an important piece of any firm’s cross-border strategy, a truly global approach requires having the right mix of global and local products.” This strategy is particularly relevant for firms looking to enter Mainland China. Chinese policymakers have been unwilling to open the market to UCITS funds. This means that asset managers looking to access Mainland Chinese investors need to use local products. There are two main routes into the Mainland market for non-Chinese firms to consider. “Every alternative fund brings nuances, special tax considerations, and suitability issues. This makes the underlying assets less conducive to being put into pooled vehicles that can be widely distributed.” — Mike Tumilty Director of Operations, Aberdeen Standard Investments