James Williams, Hedgeweek

Asset managers criticize proposed bonus cap on UCITS managers… uptick seen in UCITS fund launches in response to impending AIFM Directive…

There’s been an uptick in the number of alternative fund managers launching UCITS-compliant funds in recent months in response to growing uncertainty around the Alternative Investment Fund Managers’ Directive (AIFMD) reported CooConnect.com, citing comments made by panellists at an ALFI conference in London. Serge Weyland, head of regional coverage for North America and UK at CACEIS Bank said that managers running SIFs and hedge funds launching UCITS funds to avoid running AIFMD-compliant was “a noticeable trend”. He caveated the point by saying that it was only those managers running strategies such as CTAs or emerging markets-focused products “which can easily be replicated in UCITS that are doing this”. One anonymous attendee, however, said that he hadn’t seen a surge in hedge fund managers entering the UCITS space but rather it appeared to be a “minority”, noting that the costs and the number of strategies which hedge funds can realistically put into a UCITS “do not make it an attractive proposition for the majority”.    

Asset managers have criticized the proposals for bonus caps under UCITS regulations, suggesting that the move could create misalignment of incentives between managers and clients, said an article on myInvestorCircle.com, a peer group network, last week. Earlier this year, European politicians voted in favour of capping UCITS manager bonuses at 100 per cent of annual salary. Speaking at the ALFI conference in London, Jeremy Agnew, Managing Director, Legal at BlackRock was quoted as saying: “It’s not clear that a cap meets the goals of the client and in some ways it may promote short-termism. There needs to be a focus on the remuneration of managers aligning with those of clients.”

Stephen Cahill, head of compensation and benefits at Deloitte, added that the bonus cap developments would likely place the European financial services sector “at a disadvantage to counterparts in the US and Asia, and will make it much harder European firms to attract and retain their key talent.”

It is highly likely that European managers will lobby hard to overturn the decision for a salary cap, which seems to have been introduced in lockstep with a cap on bankers’ bonuses. Starting in 2014, bankers’ bonuses will be capped at twice their base salaries, despite opposition from the UK government. And now it seems UCITS managers will face the same restrictions, even though, unlike their banking counterparts, they’ve had no recourse to indulge in casino banking, which brought the whole financial system to its knees in 2008. Unfortunately, it seems, European politicians are keen to tar everyone with the same brush. Expect a potential brain drain of manager talent to the US and Asia over the next couple of years.

Sarasin & Partners last week announced the launch of a new fund: the Sarasin IE Emerging Markets – Systematic Fund. The Dublin-domiciled fund will employ the same investment strategy as the 16-year old Luxembourg SICAV, Sarasin EmergingSar Global Fund.

Unlike more conventional emerging market funds, which tend to have high exposure to the BRIC markets, the new fund will be equally weighted across 19 emerging market countries from the MSCI Emerging Markets index. This will give the Fund greater diversification than the index, which is 64 per cent weighted in just five countries: China, South Korea, Taiwan, Brazil and South Africa. Exposure to these 19 markets will be achieved through a process of unfunded swaps, executed with a number of different major investment banks.

Given that emerging markets are characterized by high volatility and low correlation, the fund will rebalance back to equal weightings on a monthly basis. Commenting on the new fund Andrea Nardon, Fund Manager, Sarasin & Partners said: “Most emerging market funds find it hard to gain exposure to the smaller emerging market countries, but these are typically the more dynamic performers. The Sarasin IE Emerging Markets - Systematic Fund is a diversified way of gaining access to a well spread and evenly balanced portfolio of emerging market countries.”

Guy Monson, Managing Partner and CIO, Sarasin & Partners added: “The emerging world is undergoing a one-generation lifestyle change comparable to what the developed world experienced in the industrial revolution. Our long-practiced systematic approach has shown that that it is a remarkably consistent way of containing volatility through equal weightings of lowly-correlated markets. We believe this is an excellent way of gaining a share of the economic growth story likely to characterise the world for many years to come.”

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