Ucits III roundtable, 6 September 2010,
Roundtable participants:
- Christophe Belhomme, CIO, FundQuest
- Tim Bell, Managing Director, Hedge Funds Advisory, UBS Wealth Management
- Marilou Calara, Head of Global Product Development, Citi
- Alex Hoctor-Duncan, Head of European Retail Sales, BlackRock
- Aidan Kearney, Co-Head of Multi Manager Funds, Aberdeen Asset Managers
- Jerome Lussan, Managing Director, Laven Partners
- James Rous, Co-Manager, Thames River Capital
- Manfred Schraepler, Head of db Funds, Deutsche Bank
- Yuri Bender, Editor in Chief, Professional Wealth Management
Yuri Bender: Ucits III structures have proved incredibly popular with fund groups. Is there a feeling this EU-approved brand may be misleading investors as to the risks involved in an underlying portfolio?
Alex Hoctor-Duncan: These products need careful handling and professional advisers have a key role to play in ensuring investors understand what they are investing in and above all invest in the product which is suitable to their specific needs. Ucits III is a fantastic innovation. It is not new, it is just that very few people initially understood the concept, because we were not used to innovation of regulation within such a structure.
In 2002, when the new investment powers came out, businesses that had the people, the energy or the foresight recognised immediately the opportunity for traditional long-only manufacturers to create and deliver something new for their customers – which is the ability to build funds which aim to deliver a consistent absolute return with lower volatility than the wider stock market. Historically, that has been the domain of the hedge fund world. Now distributors have more choice: a hedge fund or a Ucits III fund, the combination of both offering a complementary range of investment options.
But Ucits III offers no guarantee. If you do not have a skilful manager, the product will not deliver and customer satisfaction levels will be lower than expected. The decision for us about launching a Ucits III fund has to be based around a fund management team’s skill and customer suitability. You also need the strong support of risk management, infrastructure, operations and marketing – it is very relevant how a product is positioned and communicated nowadays, so clients understand what they are buying. The level of education required is much higher than people think, and professional advisers have a fundamental role to play in this area.
Yuri Bender: Is the proliferation of products really driven by investors’ demand for liquidity, transparency and regulatory oversight or is it a case that it is a difficult time to sell investment products, so the fund houses have to come up with a new way to package or, as you say, position their products?
Alex Hoctor-Duncan: Yes, there is a danger of fund houses just coming up with products for the sake of gathering assets. I heard recently about a distressed debt Ucits III fund being launched, which may or may not be true but it immediately rang alarm bells due to its possible illiquidity. We should be willing to stand up and say, ‘We do not want the Ucits III framework to be challenged like this. Customers want sensible, easily understood, recognisable products that are suitable for a diversified portfolio.’
Marilou Calara: Private banking clients have expressed interest in more liquidity and transparency for several years. But until 2008/2009 it has been a minority – you would hear it now and then, but not all the time. After the market collapsed in 2008/2009, you had clients exiting – those who were able – from alternatives funds. After a short period of time, the clamour for more liquidity and transparency was much more significant than in previous years. As was mentioned, Ucits III funds have been around since 2002. We had a handful on our advisory platform previously, but it has been during the last two years that we are seeing managers because they are getting phone calls from people like us saying, ‘What do you have in this space?’ and you start seeing a lot of the funds coming through.
We are going very cautiously into this space, so you might see today significant numbers of managers opening funds and I think there are some flows into them. But certainly for Citi, we are going very, very slowly. It has taken us at least six months just assessing what is out there and, with the number of funds coming out. There are some long-only managers wanting to play in this space, which is something we are not comfortable looking at. We want proven managers who have done this in the hedge fund space and can make these strategies work, who are now going into an environment that is slightly more controlled. We are certainly not looking at a long-only manager who has never done the short space before and thinking they can jump in. There are just too many other competitors who have better records.
