James Williams, Hedgeweek

UCITS funds record net outflows of EUR15billion in September… momentum building for UCITS V…

UCITS funds recorded net outflows of EUR15billion in September (compared to net inflows of EUR15billion in August) according to the latest investment fund industry factsheet released by the European Fund and Asset Management Association (EFAMA).

Looking at the figures in more detail, net sales of equity funds rose to EUR14billion, a substantial increase on August which attracted just EUR2billion, while bond funds registered net outflows of EUR9billion; a sign perhaps that investors were willing to put more risk on the table in September. Long-term UCITS recorded net inflows of EUR9billion, up from break-even point in August.
 
The most revealing statistic concerned money market funds. These suffered significant outflows of EUR24billion in September compared to net inflows of EUR15billion in August. Total net assets of UCITS increased by 1.6 per cent to EUR6.753trillion at the end of September.   
 
Bernard Delbecque, Director of Economics and Research at EFAMA, commented: “In September, equity funds benefitted from improved investor sentiment amid stronger expectations of continued liquidity support from the Federal Reserve as well as receding tensions in Syria, whilst bond funds suffered from persistent uncertainty about bond market developments.”
 
The future of UCITS funds in Asia has been thrown into question with Asia CEOs suggesting that proposed regional fund passports could render UCITS irrelevant in certain markets reported AsianInvestor this week. There are three fund passports being discussed: the Hong Kong-China mutual recognition scheme, the Asean funds passport and the Asia region funds passport. This could, over time, push Asian investors to favour locally-domiciled funds rather than UCITS. Alan Harden, the Asia Pacific CEO of BNY Mellon Investment Management, was quoted as saying: “The days of Ucits are probably numbered,” adding that he was most optimistic about the Hong Kong-China passport proposal. Lieven Debruyne, CEO of Schroder Investment Management in Hong Kong, said that the different fund proposals would result in domestic fund structures becoming a bigger part of selling mutual funds: “This doesn’t mean Ucits will disappear, but will lose importance,” Debruyne was quoted as saying.
 
Momentum is building behind Ucits V being agreed before European elections in 2014 according to Sebastien Danloy, head of Investor Services, Europe & Offshore at RBC Investor & Treasury Services. Writing on InvestmentEurope.net this week, Danloy said that under the Lithuanian presidency momentum for Ucits V “ is gathering pace, with a clear impetus for it to be passed ahead of next year’s European elections in the spring”. Key to the future potential of the Ucits framework in new markets will be on keeping it harmonized across EU jurisdictions and simple enough for international investors to access according to Danloy.
 
“From an operational perspective, the main evolution of Ucits V is the extended principle of depositary liability, largely transposed from the Alternative Investment Fund Managers Directive (AIFMD)... Essentially the burden of risk now shifts from investors to custodians in the event that assets are lost, even if this occurs through a sub-custodian to which safekeeping of assets has been delegated independently of the custodian.
 
“The new depositary liability regime will have the benefit of establishing a harmonised liability and responsibility framework for depositaries across European countries,” wrote Danloy.
 
UCITS funds reportedly account for 100 per cent of the non-Peruvian funds that managers of Peru’s mandatory pension plans are permitted to buy according to Anouk Agnes, the deputy director of Luxembourg’s funds’ industry association, reported International Adviser this week. The situation is pretty much identical in Columbia as well. Agnes noted that the reason why these South American countries favour Ucits funds so strongly is because their mandatory pension schemes are highly restrictive in terms of the type of funds they are legally allowed to buy. Only the safest funds will do; hence the appeal of the Ucits brand.
 
“What we noticed as well was that the Ucits funds these pension funds are buying, almost 100 per cent of them are Luxembourg-domiciled Ucits,” Agnes was quoted as saying; a real feather in the cap for Luxembourg, which remains Europe’s leading funds centre. An estimated 10 per cent of Columbia’s USD70billion in pension fund assets and 36 per cent of Peru’s USD40billion in pension fund assets are held in Ucits funds according to Agnes who was talking at the two-day ALFI event in Luxembourg on 19 and 20 November. 

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