The change to the Collective Investment Schemes sourcebook last month was an important landmark for the industry, providing an additional retail scheme that can invest in a broader range of products
An important landmark in the fund management industry happened on 13 February 2007, with the regulations governing Collective Investment Schemes changing to the Collective Investment Schemes sourcebook (Coll).
Unlike many regulatory changes that we have experienced in the past, this one has generally been well received by the industry.
For the first time in many years it will allow many new innovative products to come to market within a simple fund structure that retail investors are already familiar with.
So what has changed? Coll was the end result of CP185 that was issued back in May 2003. Its aim was to provide a modernised and less prescriptive regulatory regime offering more flexibility and opportunity for improved investor choice. One of the key proposals of the paper was to "provide further flexibility for fund managers to manage their funds".
To a certain extent, the industry had already been moving down the line of flexibility prior to Coll with the introduction of Ucits III. For the first time, this enabled managers of a securities scheme to use derivatives as an integral part of their investment strategy rather than for just for Efficient Portfolio Management (EPM).
The changes announced under Coll included the introduction of three types of scheme, namely Ucits Retail (UR), Non-Ucits Retail (Nurs), and Qualified Investor Schemes (QIS)
The Ucits Retail scheme is essentially very similar to the existing Ucits schemes that were set up prior to Coll, and many of the existing funds in the UK have simply converted to the new structure with minimal change.
What does it mean?
What Coll has done is to provide an additional retail scheme that can invest in a broader range of assets thus allowing some funds to offer alternative propositions. A fund constructed as a Nurs is now allowed to invest in all the asset classes permitted within a Ucits but also into gold, property and a broader range of collectives including unregulated collective investment schemes.
A QIS can go further recognising the fact that these are aimed at the professional investor. It can invest in a very broad range of assets and with negligible spread rules other than those disclosed in the scheme documentation.
The impact of these changes is that under Ucits, we are seeing many more managers planning to use derivatives within their funds, particularly in the fixed interest and absolute return arena. In addition we are seeing the development of new capital protected vehicles within a fund structure.
QIS's have been slower to take off. While the new regulations open up the opportunity for new and exciting structures, other doubts, especially with regard to taxation, have resulted in the industry holding back on many potential developments.
The one change that the industry has been quick to support has been the introduction of Nurs. In particular the funds-of-funds business areas have taken this as the structure of choice, especially where they are focused on UK distribution. The additional investment flexibility allowed under a Nurs has resulted in several innovative products coming to market.
In fact, it is the introduction of the Nurs rules which are behind the growing trend toward multi-asset portfolios.
A new breed of fund
The more flexible fund regime has led to the emergence of "multi-asset" portfolios, which include traditional assets such as equities and bonds, along with alternative assets such as private equity, hedge funds and commercial property. This level of diversification offers many benefits to investors, which have not traditionally been available in the past under former fund regulatory regimes.
Thanks to the new flexible fund regime, these multi-asset funds can offer a spread of different assets, including specialist investments namely, private equity, property and hedge funds along side equities and bonds, which provides important diversification benefits for the investor. Previously, it was not straightforward investing into these asset classes.
This flexibility offers important diversification benefits for investors, the key advantage being that in most cases, these are not correlated to mainstream asset classes. For example, commodities, private equity, hedge funds and property will perform differently to equities and bonds. Including some exposure to these asset classes and to other specialist investments means this can potentially lead to smoother returns.
The inclusion of specialist assets as part of a broader portfolio means that it is also possible for a portfolio to post positive returns, even if stock markets are falling. Indeed, it was the high exposure to shares in the late 1990s that meant many investors suffered losses when global stock markets plummeted. After learning such harsh lessons, investors now want absolute returns rather than volatile performance that is relative to the stock market. Multi-asset portfolios are designed to fit the bill perfectly in delivering such a product.
Not a solution in themselves
While the new flexible fund regime has enabled the development of these new multi-asset portfolios - and the inclusion of a mix of assets in beneficial - they are not an automatic recipe for success in themselves.
For instance, "multi-asset" is becoming an increasingly popular catch phrase, but not all funds which carry this label really offer such diversification across all asset classes. Certainly, there are some funds that market themselves describe themselves as multi-asset, but merely offer equities, bonds and property.
Furthermore, among true multi-asset portfolios it must be questioned whether all fund houses that will enter this field are equipped to manage such portfolios. Even the most well established and experienced fund-of-fund managers have traditionally focused on equity and bond related funds, so for many these new asset classes are new territory. It is therefore important that a multi-asset fund manager has a highly resourced team with expertise in these areas.
The new, more flexible rules have led to many new breeds of fund, including one that offers many benefits for investors, who now want to target absolute returns. Because of the many benefits, and likely strong appetite, such multi-asset portfolios are likely to proliferate. However, not all will be truly diversified products with adequate expertise or resources to enable managers to select the best in breed for all asset types.
Overall, Coll has increased flexibility for managers, but also selection risk for advisers in choosing the best possible products.
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