Wealth Strategies

Understand The Power Of UCITS Funds

John Donohoe Carne Global Financial Services Chief Executive 18 February 2009


Rebuilding client trust through transparent and straightforward investment products is a vital goal for the wealth management industry. UCITS funds can provide an excellent starting point for such a strategy, argues Carne, the investment advisory firm.

“HSBC set to launch private bank rebrand,” according to a Financial Times headline earlier this month. Why are they spending $10 million on this, you may ask? They do so with the intention of “rebuilding [...] fee income and client trust.” The question therefore is how to rebuild client trust.

In a short space of time there is a serious reluctance of wealthy individuals to invest through private banks and this poses an enormous threat to revenues. Rob Taylor, chief executive at Kleinwort Benson Private Banking, is quoted as saying, “it is more important that we improve the professionalism of [the] industry.”

The starting point in regaining client confidence is giving them what they want. They want a manager they can trust and one who invests in products that provide transparency, ease of understanding, liquidity, diversity, cost effectiveness and risk control. Securitised products such as certificates, warrants, linked notes, local access products, and derivatives too often do not meet these criteria and hence investors have become nervous about them.

One investment vehicle which should be considered by wealth managers is an investment fund structure called UCITS (Undertakings for Collective Investment in Transferable Securities). The European Commission believes it will be the core component of the European savings industry and is promoting its use and evolution.

UCITS III was a major evolution of the product. It broadened the definition of the eligible assets to include derivatives for investment purposes, indices on commodities, hedge funds and property, fund of funds and many more. It also allowed up to 100 per cent leverage. At the time, many people did not see the potential of these changes. Now they do. UCITS III has allowed the inclusion of enhanced fixed income strategies, credit funds, absolute return funds, commodity funds, a huge variety of ETFs, Delta 1 and 2 funds, long/short strategies, fund of funds and many more.

The big difference with UCITS funds - compared with other vehicles - using these strategies, leveraged or unleveraged, is that they are done in a risk-controlled manner. For example, investment risk is managed through risk diversification limits; counterparty risk is managed by limiting cash deposits, and derivatives exposures. A governance framework is provided through a board of directors, designated individuals, a custodian, an administrator and a business plan is made available to the regulator.

Where derivatives are used, a risk management process must be in place and approved by the regulator.  With UCITS, both the product – the fund - and the service providers are regulated.  Investors in UCITS have more confidence that their assets will be safeguarded than may be the case with other investment vehicles.

At Carne we have assisted many managers in the design and set up of UCITS funds, including hedge fund managers implementing long, long extension, or absolute return strategies. They want to diversify their product and client base and believe these new products will be attractive to wealth managers. An additional benefit is that UCTIS funds can be passported through Europe,
Switzerland, Asia and
South America and they are ideal for wealth distribution platforms.

Exchange traded funds that are established as UCITS are growing at an amazing rate. Barclays Global Investors predicts that the industry will triple to $2 trillion within the next two years. They believe that investors who are expressing concerns over counterparty risk, transparency and liquidity of structured products, swaps, certificates and notes will favour ETFs. Wealth managers can facilitate this client demand, for instance by developing Tactical Asset Allocation funds investing in ETFs. ETFs allow TAA models and macro, country and sector allocation models. They provide efficient ways of gaining international diversification, along with commodity and fixed income selection. Wealth managers can add client value through deciding on such high level allocation strategy rather than through manager or stock selection.

The UCITS “brand” has become very powerful. We believe that this is in part due to its usefulness as a tool for wealth managers to restore product confidence as well as improving revenues by offering diverse product strategies with effective distribution.

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