Thoughts on Why US Asset Managers Should Consider UCITS Funds

As an international product development specialist, I often get asked why a US manager should consider an “offshore” UCITS fund?

The question actually comes up surprisingly often, and many times as a result of a non-US institutional investor approaching the US manager wanting to invest in one of the manager’s strategies.  The conversation goes something like this: “I really like your investment strategy but I can’t invest through your US mutual fund or private placement and I don’t want the cost and complexities of a cross border managed account.  If you were to  launch a UCITS fund, we would be interested in being the seed investor.”

Thus the US asset manager begins to explore what this means to him and his organization in terms of opportunity, cost, hassle, etc.  

The following is my general response. Most of the points I will provide are universal reasons why any US asset manager should take a serious look at the international investment market. However, there will also be a few points, scenario specific, as to why I believe a manager faced with a seed money offer should understand that this moment could be an inflection point where capability and opportunity are aligning to facilitate that manager’s entry into the global market with a number of risk factors eliminated or reduced substantially.

There is a larger investment fund market outside the US than inside the US.

The US market now accounts for only 48% of the global investments in packaged products.  Therefore, the larger and faster growing investor base now exists outside the US.

The UCITS fund structure is a global brand that can service a vast majority of the international (ex-US) investment fund market.

UCITS are acceptable as “salable” in over 70 countries worldwide vs. the ’40 Act funds’ limitation to the US market only. Granted, there are jurisdiction registration requirements in each country, but the UCITS is still a single fund and the national “wrappers” are significantly easier to create than de novo funds per jurisdiction.  An additional benefit available to US fund managers, who have an existing US mutual fund, is that the majority of the heavy lifting in product creation is already done. Based on the existing operations and disclosures, the UCITS product development is simplified by applying their current fund experience and processes to the new UCITS package. Between the two funds, the fund manager can now access the majority of the world’s investors, leveraging the same fund development effort.

Global private wealth is growing substantially, the world is pulling out of global recession, and there is now a cost effective, less risky way to access this trend.

The US is leading the world out of a long and deep recession and we are also coming out the other side from a global financial crisis.  US markets are the preferred market to invest in as the world’s wealth is recovering, growing and looking for a “safe” investment.

Regulatory changes, though seen as a negative right now, are providing a path to approach the ex-US investor in a transparent, responsible way.

The “offshore” market is no longer the Wild West. Accessing the correct global structure and jurisdiction allows quality asset managers to conduct business on a global scale in the transparent responsible way they currently do in their own domestic environment.  Regulation may increase operational and administrative costs but it brings legitimacy to products and comfort to investors that only grow the total investor market.

The existence of mature registration jurisdictions, coinciding with a mature, comprehensive and turnkey operational environment, reduces the inherent risks of entering a new market.

Over the last 20 plus years, the development of Ireland and Luxembourg as quality, regulated jurisdictions for creating investment structures, has culminated (post financial crisis) in the development of regulatory and operational platforms created specifically to service non-domestic asset managers. The development of turnkey regulatory and operational platforms has allowed and encouraged the growth of a unique financial industry offering, predicated on the concept that asset managers can now distribute their expertise globally, leveraging pre-packaged regulatory and operational fund services.  This means that the managers’ registration status in their home jurisdiction is accepted by notification rather than re-application.  AML, compliance, call centers and fund governance are all provided turnkey, and under the provider’s registration, so that the cost and risk of entry into the global fund marketplace is substantially reduced.  As a result, most US asset managers do not need to put any people on the ground initially and only will do so when success and/or growth demand it.  C-suite managers (CCO, CFO, COO) will have to take on additional oversight responsibilities but most of the extra operational and regulatory workload is actually performed by the third party service providers.

The development of comprehensive third party distribution services will reduce risk by eliminating the need to put “boots on the ground” and build a distribution network from scratch.  This new development greatly reduces entry cost and failure risks.

Historically, access to the non-US investor was costly and difficult.  Each little nation had its own registration requirements for both funds and distributors of funds. There were multiple currencies and languages and extensive cross border selling restrictions.  Banks dominated the funds’ distribution and like their US wire house counterparts, asset managers found getting shelf space was costly and time consuming.  With the advent of the EU, the Euro, and UCITS, the European fund and investing market became more integrated and began to act as a single market in most respects – except distribution.  However, in the last three years there has been the emergence of firms who call themselves third party marketers but are in fact aggregators and syndicators of networks of domestically established and registered distribution groups.  These TPMs in Europe are not wholesalers for hire as we know in the States but are essentially sales departments for hire who will actually get your product into investors’ hands via local and trusted distributors known and coordinated by this new breed of TPM.  One of the biggest risks in setting up a fund overseas is the commitment in fixed costs for personnel and a legitimate commitment to these individuals not to “cut and run” when fear begins to grow around this new venture.  Much of what has been created in Dublin and Luxe is designed to remove the fixed costs of regulatory, operational and distribution investments by providing good quality turnkey services to accomplish these functions, thereby substantially reducing a new manager’s entry risk.

The existence, in our seed partner case, of a catalyst to initiate the entrance into the global fund market cannot be underestimated.  Having an institutional partner who is willing to come alongside the new fund manager, as a seed investor, is a huge and critical point of validation to other investors.

It is a question of striking while the iron is hot.  If you have an investor who is willing to be “first in” with a substantial allocation as seed for the fund, you have eliminated significant cost and reputation risk in your new fund launch.  This seed investment allows the manager the benefit of knowing the launch date with certainty, knowing that the fee minimums are exceeded and are well on their way to breaking even, day one.  There is also a huge benefit with this institutional investor seen as “first in” which can substantially reduce other institutions’ reluctance to invest in a new fund.

Existing US funds success in asset growth and strategy returns, added to the fact that the US strategies use US securities, creates a unique and timely combination. 

This is more of a timing and momentum comment.  In many respects, the desire to expand a manager’s footprint globally is a logical extension of a US fund’s current momentum. The fund’s growth and strategy success almost begs for expansion into the global market.  Outside a manager’s internal momentum, the global financial markets are recovering and the US is seen as leading that recovery.  The world is currently in an investment cycle where the demand for US exposure is high.  However, non US investors can only access the US market via UCITS funds or their “domestic” funds using a US based strategy.  Access to these buyers is extremely limited for a US manager without their own UCITS fund.

So there appears to be a convergence of turnkey fund services, broad and effective TPM fund distribution, US market momentum, a beneficial investment cycle and (in some cases) a seed investment partner, all of which have combined to create a unique environment for the US fund manager that is hard to ignore!

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