UCITS Fund Distribution 2012 PwC Ireland pptx

www.pwc.ie /assetmanagement UCITS Fund Distribution 2012 PwC Ireland September 2012 UCITS Fund Distribution 2012 PwC Page 3 of 33 Table of Contents Overview 4 Introduction 5 UCITS Global Footprint 9 Distribution channels 15 The KIID - Fund charges & SRRI 17 Regulatory impacts 21 Taxation of UCITS funds 24 Case Study - Ireland 26 Services 31 Contacts 32 UCITS Fund Distribution 2012 PwC Page 4 of 33 Overview This report aims to provide practical and useful information relating to the UCITS funds market. It is broken into seven small sections. The first section aims to paint an overall picture of the UCITS funds industry’s place in the worldwide investment community. The other sections discuss the key markets for UCITS funds and what distributions channels are in use in these markets. There is also a discussion on the new KIID which all UCITS must now produce and sections on the regulation affecting this industry and tax reporting details for UCITS funds. Finally, there is a case study on Ireland which is one of the key UCITS funds domiciles. “The UCITS product has gone from strength to strength since inception over 25 years ago, it is a strong reputable brand name recognised throughout Europe, Asia and beyond.” “The UCITS funds industry accounts for over 36,000 funds, with just under EUR 6 trillion in assets, with over 70,000 fund registrations in over 75 countries worldwide.” UCITS Fund Distribution 2012 PwC Page 5 of 33 Introduction Investment fund assets worldwide stand at EUR 20.8 trillion as of quarter one 2012, according to the European Fund and Asset Management Association (EFAMA). Looking at the worldwide distribution of investment fund assets as the end of quarter one, the US and Europe hold the largest share in the world. Source: EFAMA International Statistical Release Q1 2012 Other countries include: Argentina, Chile, Costa Rica, India, New Zealand, Mexico, Pakistan, Philippines, Rep. of Korea, South Africa, Taiwan and Trinidad and Tobago. The tables on the next page provide an analysis of the top investment fund regions over the last five years. If we compare the US with Europe we notice two interesting facts. The size of the U.S. mutual fund industry is nearly twice the size of the European mutual fund industry. U.S. net assets are EUR 9.3 trillion whereas the European combined net assets are EUR 5.9 trillion. If we look at the fund numbers there are over 35,000 European funds compared to over 7,000 U.S. funds. The reason behind this gap is that on average U.S. domiciled funds are 6 times larger than European domiciled funds. Europe is home to a greater number of smaller funds. U.S. domiciled funds being larger benefit from greater economies of scale. Europe has tried to rectify this situation with the introduction of improved regulation in the form of UCITS IV which provides mechanisms for funds to merge and create feeder structures. This regulation is discussed in more detail in the Regulatory Impacts section. UCITS Fund Distribution 2012 PwC Page 6 of 33 Source: EFAMA International Statistical Release Q1 2012 Source: EFAMA International Statistical Release Q1 2012 Note: No figures for fund numbers are available for Australia. UCITS Fund Distribution 2012 PwC Page 7 of 33 Mutual fund industries differ greatly from region to region. This report focuses on Europe where the majority of mutual funds are set up as Undertakings for Collective Investment in Transferable Securities (UCITS) which are governed by European legislation. UCITS benefit from an EU wide “passport” which means that once they are authorised in one EU member state, they can be sold in any other EU member state without the need for additional authorisation. Due to the necessity to comply with a common European standard, UCITS are now regarded globally as very well regulated funds, with robust risk management procedures, a strong emphasis on investor protection and coming from a stable environment. As a result, the UCITS brand is recognised beyond the EU and UCITS products are accepted for sale in Asia, the Middle East and Latin America. Not many other regions have the same robust framework for distribution. Asia is a fragmented market with different tax and regulation requirements from country to country and no coordinating entity such as the EU, each country stands on its own. Asia could almost be viewed like the fragmented Europe of 25 years ago, before the harmonisation of UCITS occurred. There has been some discussion of an Asian passport similar to UCITS. Given the very fragmented and compartmentalised state of mutual fund markets in Asia, and the lack of a rulemaking body similar to the European Union in the region, a pan-Asia fund passport is not likely to become a reality in the foreseeable future. Indeed, it seems likely that bilateral or small group agreements are more likely to happen if a passport of any kind develops at all. Asian firms are beginning to create their own UCITS and market these funds in their own jurisdictions and elsewhere in Asia. Asian investors are already significant buyers of European domiciled funds. UCITS also provides a passport to other jurisdictions in the Asian neighbourhood for Asian asset managers just as it can for Europeans. The two largest fund markets in Asia are China and Japan and are two of the more closed markets in Asia to UCITS funds. In China, funds may be obtained only by and through financial institutions that have been licensed as Qualified Domestic Institutional Investors, the QDII scheme. Some QDIIs would also obtain a Qualified Foreign Institutional Investor license to enable them to invest directly through Hong Kong. Individuals are barred from either license; only qualified institutions can invest directly in funds. Within the institutions, however, there is a growing appetite for diversification, although culturally the Chinese tend to be cautious investors, fond of tangibles like real estate. Chinese asset managers see UCITS as the vehicle to distribute their own product into Europe. Japan has a large domestic fund market. There are many legislation and regulatory hurdles to cross. A fund selling into Japan must be similar to a Japanese domestic investment trust with limits on commodities and commodity derivatives. Umbrella structures are not allowed. It would make more sense to set up a domestic fund in Japan in the long run. The Japanese asset management industry is nonetheless quite mature and sophisticated, and Japanese managers are among the few Asian countries who have established a presence outside of Asia. Australia is the largest fund market in the Asia Pacific region. It has one of the largest and fastest growing fund management sectors in the world. Its growth is underpinned by Australia’s government- mandated retirement scheme (superannuation), therefore similar to the U.S. it has a large domestic market. Australia has one of the world’s highest percentages of individuals with direct and indirect exposures in the stock market. Approximately 6.7 million people (41 per cent of the adult Australian population) own shares, (either directly or via managed investment funds). The level of direct ownership is estimated at 36 per cent of the adult population. Australia is focused on internationalising their funds industry. A recent survey showed that approximately one-third of investment managers operating in Australia already source funds under management from overseas clients. However, the five largest managers of overseas assets accounted for 75 per cent of this market. Foreign investment managers looking to market their funds to persons in Australia need to satisfy Australia’s financial services laws which may require obtaining a license to provide services in Australia. The U.S. has a large domestic market of target investors, the US region is nearly twice the size of Europe. U.S. investors have thousands of U.S based mutual funds to choose from. All mutual funds marketed to U.S. retail investors must be registered with the SEC and must abide by the rules set forth under the Investment Company Act of 1940, commonly referred to as the "'40 Act." Those who are not residents may still invest in U.S. mutual funds and maintain accounts while in the US or from their home country. A number of U.S. asset managers have set up UCITS funds in Europe in order to distribute to the European and Asian markets. Canada’s mutual fund industry has similar rules and guidelines as the U.S. and it also has a large domestic market. UCITS Fund Distribution 2012 PwC Page 8 of 33 Brazil has upwards of $800 billion of invested assets mainly tied up in the country’s domestic bond and equity markets. New regulatory changes may cause a shift of direction in Brazilian investment flows towards the international markets. These new changes pave the way for registered investment funds, high net worth investors and, above all, pension funds to invest abroad. One of the main changes is that local pension funds are now permitted to allocate 10% of their assets in offshore markets. Since pension funds account for around half of all investment assets in Brazil, it amounts to a potential outflow of $40 billion to $50 billion. A large number of international asset managers are establishing a presence in Brazil as few domestic asset managers can genuinely claim to offer expertise in international markets. Although for the time being, high domestic interest rates continue to make Brazil’s bond markets an attractive, low-risk haven for local investors. However, Brazilian interest rates must fall at some stage and institutional investors are already starting to look for different instruments and different markets. Offshore funds cannot be sold in Brazil so asset managers are obliged to use master-feeder structures – using locally domiciled ‘international investment funds’ as their feeders. Asset managers must also register locally and are required to maintain a substantial presence in Brazil. The market is highly regulated, with firms obliged to provide data to the regulator on a daily basis. Brazil may be a ‘slow burn’, but it offers immense potential as a funds market on a three to five year view. As we can see mutual fund markets differ greatly from market to market. Some are more open than others and some have huge growth potential in the coming years. The UCITS framework has had some impact on most markets whether it is through selling directly into a region/country or with asset managers from a particular region/country setting up UCITS funds themselves in order to access the markets in which UCITS can sell into. Asset managers from all the above mentioned countries have set up UCITS in Europe. The UCITS product has become a well established brand name recognised throughout the asset management industry worldwide. UCITS Fund Distribution 2012 PwC Page 9 of 33 UCITS Global Footprint On a Global basis we can see that Europe is the most popular market for UCITS funds with over 62,000 registrations over 10 times more that the next highest investing region, the Asia Pacific. This is followed by the Americas and then the Middle East/Africa. The main countries of distribution in Europe are; Germany, Switzerland, Austria, the UK, the Netherlands, France, Spain, Italy, Sweden and Finland. The top countries for distribution outside of Europe are; Singapore, Hong Kong, Chile, Macau, Taiwan, Bahrain, Peru, Korea and South Africa. The tables on the following pages give a complete ranking for all the main regions mentioned above. Source: Lipper for Investment Managers (LIM), July 2012 UCITS Fund Distribution 2012 PwC Page 10 of 33 Europe Ranking Country Number of registrations 1 Germany 5,769 2 Switzerland 4,848 3 Austria 4,664 4 UK 4,372 5 Netherlands 3,949 6 France 3,944 7 Spain 3,861 8 Italy 3,486 9 Sweden 2,998 10 Finland 2,518 11 Belgium 2,438 12 Denmark 1,739 13 Norway 1,654 14 Portugal 1,481 15 Greece 883 16 Liechtenstein 805 17 Czech Republic 570 18 Jersey 545 19 Slovakia 495 20 Poland 481 21 Estonia 444 22 Hungary 366 23 Latvia 360 24 Guernsey 296 25 Gibraltar 270 26 Lithuania 237 27 Other 232 28 Iceland 231 29 Cyprus 225 30 Malta 148 Other includes: Andorra, Bulgaria, Croatia, Greenland, Isle of Man, Monaco, Romania, Slovenia and Ukraine. Asia Ranking Country Number of registrations 1 Singapore 2,042 2 Hong Kong 1,157 3 Macau 862 4 Taiwan 845 5 Korea 317 6 Other 124 Other includes: Australia, Japan and New Zealand. Americas Ranking Country Number of registrations 1 Chile 973 2 Peru 481 3 Trinidad & Tobago 52 4 Bermuda 20 5 Other 18 6 Cayman Islands 12 Other includes: Bahamas, British Virgin Islands, Columbia, Mexico, Panama, Saint Martin and United States. Middle East Ranking Country Number of registrations 1 Bahrain 576 2 Turkey 34 3 UAE 33 4 Other 8 Other includes: Jordan, Lebanon and Oman. Africa Ranking Country Number of registrations 1 South Africa 215 2 Botswana 21 3 Other 11 Other includes: Egypt, Liberia, Mauritius, Morocco and Swaziland. [...]... The majority of funds are distributed through banks- retail & private  Private banks are the main distribution channel followed by insurance/retail banks and then financial advisors Source: PwC Research UCITS Fund Distribution 2012 PwC Page 15 of 33 European Distribution Channels The tables outline the distribution channels in the key distribution countries in Europe and Asia for UCITS funds Banks are... UAE UCITS Fund Distribution 2012 PwC Page 29 of 33 Source: Lipper LIM, PwC Analysis, July 2012 Other countries include: Bahrain, Belgium, Canada, Chile, Denmark, Finland, Greece, Iceland, Jersey, Macau, Monaco, Portugal, Peru, South Africa and Taiwan Source: Lipper LIM, PwC Analysis, July 2012 Other countries include: Australia, Belgium, Jersey, Peru, Portugal, Singapore and South Africa UCITS Fund Distribution. .. that the dominance of the banking fund distribution channel is not yet over Page 16 of 33 The KIID - Fund charges & SRRI Fund Charges UCITS funds must now provide a Key Investor Information Document (KIID) to investors Any new UCITS funds set up since July last year have already been publishing KIIDs All existing UCITS funds had a year to make the switch, as of 1 July 2012 they must also publish KIIDs... by Strategic Insight UCITS Fund Distribution 2012 PwC Page 18 of 33 For the four distribution channels, the asset-weighted average annual management charges are split between fund managers and fund distributors as follows: Distribution Channel % Retained by Fund Manager % Retrocession to Distributor Bank 47% 53% 1-FA:Advisor 56% 44% Platform 54% 46% Insurance 45% 55% For the five fund types, the asset-weighted... can see Ireland has experienced strong growth year on year Growth of Irish UCITS Source: Irish Funds Industry Association (IFIA) UCITS Fund Distribution 2012 PwC Page 26 of 33 Distribution Irish domiciled funds are distributed to a large number of countries across Europe, the Americas, Asia and the Pacific, the Middle East and Africa The charts below outline the key markets in which Irish UCITS are... Turkey UCITS Fund Distribution 2012 PwC Page 27 of 33 Main assets types for Irish UCITS per region Europe Middle East Asia The Americas Source: Lipper LIM, PwC Analysis, July 2012 As we can see above the main asset class in each of the four regions is equity, over half of all the funds distributed in each region are equity funds Bonds are the next popular asset class in all regions 23% of all Irish UCITS. .. 2011 2012 (Q1) 2006 2007 2008 2009 2010 2011 2012 (Q1) Source: EFAMA statistics UCITS Fund Distribution 2012 PwC Page 13 of 33 UCITS Fund Industry Growth Analysis Year 2006 2007 2008 2009 2010 2011 2012 (Q1) Net Assets (€ trillion) 5,956 6,159 4,543 5,315 5,990 5,634 5,961 3% -26% 17% 13% -6% 6% 36,156 37,330 36,011 36,490 36,147 36,106 8% 3% -4% 1% -1% -0.11% Year on Year % Growth Total number of UCITS. .. Senior T: + 353 1 792 8547 E: suzanne.senior@ie .pwc. com Andy O’Callaghan T: + 353 1 792 6247 E: andy.ocallaghan@ie .pwc. com Jonathan O’Connell T: + 353 1 792 8737 E: jonathan.oconnell@ie .pwc. com Marie O’Connor T + 353 1 792 6308 E: marie.o.connor@ie .pwc. com Ken Owens T: + 353 1 792 8542 E: ken.owens@ie .pwc. com UCITS Fund Distribution 2012 PwC Page 32 of 33 www .pwc. ie/assetmanagement This content is for general... are currently no “other” funds in distribution in the Middle East or the Americas UCITS Fund Distribution 2012 PwC Page 28 of 33 Top Markets for Irish Equity Funds in Europe Top Markets for Irish Equity Funds outside Europe Other Channel Islands Portugal Other Denmark Norway Belgium Finland Luxembourg Italy Spain Sweden France Netherlands Austria Germany United Kingdom No of funds Bahrain South Africa... potential benefits derived from the violation UCITS Fund Distribution 2012 PwC UCITS VI The EC initiated the process that will lead to UCITS VI, in its consultation paper issued on 26 July "Product Rules, Liquidity Management, Depositary, Money Market Funds, Long-term Investment" The UCITS VI proposal comes fast on the heels of the proposal to amend the UCITS Directive in relation to depository functions, . www .pwc. ie /assetmanagement UCITS Fund Distribution 2012 PwC Ireland September 2012 UCITS Fund Distribution 2012 PwC. 2011 2012 (Q1) Growth of UCITS funds by assets EUR billion UCITS Fund Distribution 2012 PwC Page 14 of 33 UCITS Fund Industry Growth Analysis