As the framework for Ucits IV takes shape, Victoria Hartley looks at how this could bring a s...
As the framework for Ucits IV takes shape, Victoria Hartley looks at how this could bring a significant boost to cross-listed ETFs and increase the choices available for investors
With the New Year came another step toward the goal of spurring greater volumes of cross-border fund sales.
The European Commission voted to accept the Ucits IV Directive on 13 January and although implementation is still set for the far off point of July 2011, the framework is now in place.
With Ucits IV, the European Commission's interest in creating a clear framework for fund management activity offers the building blocks European fund managers need to expand distribution and make their products accessible to as many global investors as possible.
Mona Patel, head of communications at the Investment Managers Association (IMA), said the Directive came into force in 2003, allowing European funds to be authorised and sold EU-wide after national authorisation.
"In 2003, it was very much a desire for firms to get into European countries. Maybe, with the economy as it is, Ucits IV could drive that sort of enthusiasm once again," she said.
Ucits: the challenges ahead
Ucits III structurally enables fund managers to passport funds from one European country to another after listing first on a domestic index. The burgeoning ETF market in the UK has been driven by European fund houses that list domestically and then cross-list to other European exchanges to get the widest possible distribution and exposure.
For example, Societe Generale, Lyxor's parent company, traditionally lists its funds on the NYSE Euronext based in Paris, which has several subsidiaries across Europe including Belgium and the Netherlands. Barclays' ETF arm, i-Shares, traditionally lists first on the London Stock Exchange (LSE) and dbx-trackers, as a Deutsche Bank subsidiary, lists its ETFs on German indices.
Dan Draper, head of ETFs at Lyxor, said the ETF providers in the UK have really embraced this pan-European vision but says a lot of infrastructure problems remain. There is no doubt Ucits III has helped managers access Latin America and Asia, he says, but if you buy in Germany and try to sell the same assets in Italy, the different currency issues and multiple settlement systems still present problems.
"In comparison to the US with one trading currency, just two indices - the NYSE or NASDAQ - and a clear settlement system, European institutional investors would probably also prefer one place to trade," said Draper.
The US versus the rest of the world
The UK ETF market is thought to be about 10 years off the pace set by the US. Ucits III and eventually IV will continue to lay the groundwork for the kind of cohesive larger scale markets in Europe currently operating in the states - but the sheer diversity in the rest of the world continues to keep fund managers on their toes.
Reid Steadman, global head of ETF licensing at Standard & Poor's, said: "Taiwan, Korea, Hong Kong - they all have a different set of regulations and requirements in terms of what is needed to get a fund up and running."
Fund managers cross list into major exchanges such as Singapore and Hong Kong so that they can reach out to various markets in the region, which they might have difficulties reaching otherwise, he added.
Cross listing is not only a cost-effective way to attract investors it clearly also keeps the cost base lower of entering new, often smaller-scale markets.
Pietro Poletto, head of ETF Markets at the London Stock Exchange Group, said the LSE has seen plenty of interest lately from US ETF providers who want to list in Europe.
"Cross-listing creates new trading opportunities, such as arbitrage between different venues, or between different currencies in the case of the London Stock Exchange's multicurrency platform," he says.
According to Poletto, some issuers are looking to reduce the number of listings they have across Europe, which means providers are looking for markets with the best depth of liquidity and other advantages.
"The London Stock Exchange is clearly a strong choice, and we are introducing arrangements to make it easy for ETFs listed elsewhere in Europe to access our markets, through a new 'passporting' arrangement," he said.
Cross listing: how investors benefit
Above all, investors benefit from the economies of scale achieved by cross-listing, said Manooj Mistry, head of exchange traded fund structuring at Deutsche Bank's ETF arm, DB xtrackers.
"Management fees can be kept low and the fund variety is far better than if providers had to approach each country separately. By cross-listing marginal funds, the winner is the investor and on an exchange like London, you can also list in a variety of currencies," said Mistry.
Securing distribution out to Asia and the Middle East with its developing economy investors is understandably strategically important for ETF providers.
But for retail investors or private banking, buying ETFs trading on the local exchange in the local currency is potentially a far bigger issue than being able to trade assets across Europe.
Other considerations like capital gains, using a tax regime advantageously or the regulatory framework remain more important to retail investors than using cross listing as a tool to boost portfolio performance.
Draper said successful currency speculation in the ETF market using cross listing is only for the specialists, not the average retail investor.
"Highly sophisticated arbitrageurs have very fast IT systems which use cross-listing to gamble against rising or falling currencies and win, but the average investor is likely to just get slaughtered," said Draper.
Few well-established market makers have sophisticated enough systems to succeed, added Draper, although it is rumoured that some of the bigger investment banks are trying to upgrade systems to achieve similar results.
"However, in general, cross listing is a favourable strategy, because it allows fund managers who are very good at what they do to expand their reach and their investor-base," said Steadman.
He added: "Other advantages to investors of cross-listing include providing investors with larger funds with longer track records from an ETF sponsor who is already up and running. So instead of having a new fund in a new market, investors get the benefit of investing in an established fund with scale."
James Daly, senior investor centre representative at TD Waterhouse, said when Deutsche Bank launched its ETF range into the UK under the dbx-trackers brand two years ago, investors could suddenly access short funds and other far more interesting fund selections.
Dbx-trackers plans to list three new cross-listed funds in February, including the Dow Jones Stoxx 600, the MSCI AC Asia excluding Japan and the MSCI AC Pacific excluding Japan.
The DJ STOXX 600 Size indices are fixed component number indices designed to offer representation of large, mid and small-capitalisation companies in Europe. The index covers 18 European countries, including Austria, France and the United Kingdom, and the ETF fund comprises large, mid and small indices of 200 components each. The fund serves as the basis for four regional sub indices: the DJ EURO STOXX Index, the DJ STOXX ex UK Index, the DJ STOXX NORDIC Index and the DJ STOXX ex EURO Index.
Lyxor also raised the bar and embraced the market with offerings like its FTSE 100 Tracker. This fund offers investors both a closer tracking record to the index and a far lower expense ratio, according to fund specialists Morningstar.
Draper said the FTSE 100 fund doubled in assets under management (AUM) in December 2008. "The tracking disparity is 10 basis points per year less than i-shares and has a lower expense ratio than i-shares fund as well at 30 points to their 40," said Draper.
The SICAV structured fund has UK distributor status and is structured to appeal to channel island investors, said Draper.
"With listing, it's all about knowing your clients and where you are focusing the fund," he added.
On 13 January, the European Commission said 'yes' to the long-awaited Ucits IV Directive and although implementation is still some way off in July 2011, the framework is in place for strategists to work toward.
Jarkko Syyrilä, director of international relations at the IMA, called the vote a "major milestone' adding that it would open up ' more opportunities for Europe's investors."
Syyrila said: "We call on the European Commission and CESR (the Committee of European Securities Regulators) to work out swiftly the implementing measures of the Directive to ensure that these crucial improvements can be implemented without further delay by July 2011."
According to the IMA, Ucits IV will offer European fund markets more cohesion by simplifying the regulatory environment and creating cost savings through economies of scale. It is expected to give greater choice of investment funds to investors; and increase investor protection by making sure that retail investors receive clear, easily understandable and relevant information when investing in Ucits funds.
Today, Ucits funds manage assets amounting to €6400bn, which is about half of the EU GDP.
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