Maintaining UCITS in emerging markets

Are the days numbered for the UCITS brand in emerging markets? Charles Gubert believes EU regulation could damage its reputation in these markets.

With its enviable global footprint, UCITS is a force to be reckoned with. Outside of the EU, it enjoys significant sales in Asia-Pacific (APAC) and the Americas, and it is increasingly prominent in pockets across the Middle East and Africa (MENA).

Expounding why UCITS has enjoyed success over so many other fund structures is not difficult. Investors “get” UCITS and understand fully what they are buying into, namely that it is a well-regulated, flexible product with decent consumer protections to match. Meanwhile, fund managers can passport UCITS across the entire EU giving the brand enormous asset gathering potential. But UCITS is not invulnerable, and fund passporting schemes are already emerging, at least in some of the newer, developing markets.

In APAC, the ASEAN CIS, ARFP and MRF have launched although AuM remains painfully low. Meanwhile, moves are being made in Latin America to develop a fund passporting scheme covering Argentina, Brazil, Chile, Colombia, Mexico and Peru. Most UCITS providers remain unperturbed by these rivals, particularly as neither region truly possesses anything that resembles market or regulatory harmonisation, at least when benchmarked against the EU.

The popularity of UCITS in APAC and Latin America is indisputable today, but its future is less assured. Interestingly, the architects of any UCITS decline in these regions will not be the product providers, but rather the EU regulators that oversee them. Simply put, many emerging markets feel that EU regulators have taken them for granted. This is most prominent in Singapore and Hong Kong, where a number of major players are seething that they are still none the wiser about their AIFMD equivalence status.

To further rub salt in the wound, the European Securities and Markets Authority (ESMA) could impose curbs or onerous restrictions on delegating core portfolio management activities to third country managers. Emerging markets were not the original target of ESMA’s review, but rather UK financial institutions who might have been tempted into setting up letterbox entities to preserve their Single Market access once the country formalises its EU departure.

A lot of emerging market managers have fewer assets than those in Europe or North America, and therefore rely on delegation because it takes huge costs off setting up a UCITS or AIFM as they do not need to have senior staff residing in the EU. If the EU abrogates this right, these managers will not go on mass European hiring sprees, but will rather redouble their asset raising efforts closer to home. This could be a turning point for UCITS, as those managers will likely elect to use one or multiple regional fund passporting schemes to distribute instead of a European fund structure.

It is very probable regional regulators would fully endorse these managers’ embrace of localised fund passporting schemes. UCITS will not fail if it loses the Latin American or APAC markets as most of its inflows come from within the EU, but its reputation could be undermined. If EU regulators do not shy away from protectionism, the UCITS brand could become a lot less influential and admired in emerging markets.