A favourable tax environment and the Irish financial regulator's cooperative stance has seen Dublin firmly established as the centre of choice for many Europe-facing fund management companies
Simple tax structures, a facilitating regulator and fund flexibility have helped Dublin to establish itself as an international fund management centre.
The latest edition of Lipper Fitzrovia's Dublin Fund Encyclopedia shows annual fund growth of almost 28% for funds serviced in Ireland, to a new total of $1,212.4bn (almost €1bn) at 30 June 2006. Domiciled net assets are now $806.6bn, up from $622.7bn a year ago.
Of the 321 fund management companies with funds domiciled in Dublin, US fund management companies have overtaken UK managers and now have net assets of $351.1bn under management.
In the report, Ed Moisson, director of European fiduciary operations at Lipper Fitzrovia, says: "Ireland's continued ability to attract both domiciled Ucits funds and non-domiciled funds for administration or custody services is reflected in a combined figure of 5,090 funds serviced by the industry."
This impressive total is good news for the Irish government, the Irish Financial Services Regulatory Authority (IFSRA) and the industry.
Twenty years ago, the picture was very different, explains Micheal Deasy, head of financial institutions and funds administration at the IFSRA.
He says: "In the late-1980s we faced high unemployment and had a huge rundown area in Dublin's docklands. Developing the financial centre has solved many of these issues."
Public and private bodies pushed ahead with ambitious plans to create Dublin's International Financial Services Centre (IFSC). The launch coincided neatly with the introduction of Ucits, making funds 'passportable' across Europe. Meshing European regulation in with local law was a hard task, admits Deasy, but the results were worth it.
He comments: "Ucits is quite prescriptive, although it is highly attractive for the retail market. We built on this foundation, with less prescriptive local rules for wholesale funds. The financial centre and the wider financial services industry across Ireland is now a mainstay of the economy, employing around 20,000 people, half of them in the fund management industry."
A recent report by the Taoiseach (the Irish prime minister) entitled Building on Success says the industry now creates a trade surplus of around €5bn per year as well as substantial tax revenues. The reasons for the centre's success are varied. Fund managers like the favourable tax environment and the cooperative stance developed by Ireland's regulator.
A big supporter is JO Hambro Capital Management, which has had a significant impact on the UK intermediary market with its range of alpha-generating Dublin funds.When the company entered the market, performance fee-based funds were not allowed by the UK, forcing the company to locate its new products offshore.
Sven Kuhlbrodt, marketing director, says: "The company settled on Dublin from the outset. Administration costs are lower in Dublin, making it far cheaper than Luxembourg as a centre. And, of course, it is English speaking, an advantage if you are targeting the UK market."
Paul Dellar, head of product development at Insight Investment, says the positive nature of the regulator is also a boost. He adds: "As a regulator, the authority is quite open and human. We have built quite a good relationship."
Insight has its sights firmly set on the European market and recently launched a multi-manager absolute fund, Insight Global Diversified Return, from Dublin for the European retail market. Faced with the choice of Luxembourg or Dublin, Dellar says the final decision is easy: "If you are looking to launch towards Europe, then Dublin becomes a natural choice. We certainly do not see the need for a third centre."
Certain tax advantages also sway the decision. He says: "At a detailed level, you have to pay an annual taxe d'abonnement between 0.01% and 0.06% on the value of the fund in Luxembourg. In Ireland, you do not. As a fund you pay no tax at all locally and corporation tax is low too."
Firms within the IFSC pay just 10% corporation tax, although this is being phased out. Others typically pay 12.5%, among the lowest in Europe.
Jonathan Polin, marketing director at Resolution Asset Management, says Dublin has a well-advanced regulatory framework, is strong on due diligence and that the rapidly expanding third-party administration sector is good for those looking to set up there.
However, he warns: "It does take time to set up a new range, but once that is done we can get new funds up and running quickly under the umbrella approach."
Traditional perceptions of offshore markets and funds still cloud investors' views and may prompt some to make investment decisions on a false basis. Kuhlbrodt believes many European investors, and their advisers, remain misinformed about tax status.
He says: "You really need to look at what end investors think about domicile. A lot of their opinion is based on sentiment and is less informed than it could be. The perception is that offshore funds in Dublin are more advantageous and that is simply not the case."
The European Savings Directive renders old perceptions irrelevant for investors in equity funds. As national governments boost information sharing powers and crack down on tax avoidance, intermediaries have a job on their hands to change investor attitudes.
Kuhlbrodt adds: "In most European countries, people worry about dividend income and capital growth. British investors have different concerns. It is not universal in each country."
In the UK, intermediaries are warming quickly to the advantages of Dublin-registered funds as concerns about the complexity of British tax legislation mount.
Dellar adds: "The British tax code is so complex, the tax authorities have not kept up with the regulators and new products. When Qualified Investment Schemes (Qifs) were launched in the UK, for example, we had to wait two years for the tax rules to be put in place."
The fund industry is increasingly vocal about the policies of Chancellor Gordon Brown, stealth taxes and inconsistencies in the system. The crackdown on avoidance is seen as a priority, with no place for streamlining and encouraging fund management and investment onshore.
A recent report from the UK's Investment Management Association (IMA) pointed the finger of blame firmly at HM Revenue & Customs for the current situation.
Mona Patel, head of communications at the IMA, says: "Last year, we said the UK was safe as an asset management centre, at least in the short term. The Irish story has been phenomenal, it has come from nowhere to almost on a par with the UK in no time at all. It also offers specialist fund types, targeted at institutions and has a better regulatory and tax regime for alternative assets."
In comparison, Patel believes UK authorities have imposed uncertainty and instability within the tax regime, leading to a general lack of confidence and trust by fund managers.
Dellar says the UK Government leaves his company, and others, with no choice when launching new funds. "Dublin is now our natural domicile," he explains. "We will only launch London funds if they are destined only for the UK market, until the tax situation is cleared up."
Polin adds: "It is not just about funds, it is about the UK. If the Chancellor wants to retain his position, his opaque and complex stance has to change."
Such worries play directly into Dublin's hands. While the UK adds layers of taxation, Irish authorities are keen to iron out imperfections. Recent changes include the abolition of the 1% capital duty on company capitalisation, abolition of holding tax on regulated Eurobonds, removal of tax on investments in securitisation vehicles within money market funds and the introduction of special share classes to facilitate hedging of foreign exchange risk.
Alternative asset class growth has been a big topic in the fund management industry. According to Gerry Brady, managing director at Capita Financial Group, Ireland is now home to one-third of the world's hedge funds and administrators that are keen to profit from the tide of new fund launches.
Brady says: "Even fast growing funds in Bermuda, the Caymen Islands and British Virgin Islands are choosing to be administered here. Ireland has the expertise and competence they feel comfortable with, even if they are regulated elsewhere."
The rate of creation is now outpacing that of Luxembourg, Brady says, which is putting a strain on the local employment market.
"We are the 44th licensed administrator to set up here and all are dealing with record levels of new business," he says. "Many are turning away as much business as they are accepting and this is an issue for recruitment and staffing."
As local salaries rise, other low cost nations are making a play for Ireland's administration business, adds Brady. The solution is to remove Ireland's 'minimum activities' rules, which dictate that virtually all administration for Irish-domiciled funds must be undertaken in Ireland.
He comments: "It is no longer appropriate to dictate the location of each and every individual within the process. Does it really matter where people are, as long as management and accountability remain firmly in place?"
In order to keep Dublin ahead of the game, the government is also considering a stamp duty exemption for funds re-domiciling to Ireland and potential capital gains tax changes for non-resident unit holders.
New fund structures could also be on the cards, says Deasy. "The industry is also looking at the speed it takes to get funds to the market. We already have wholesale Qifs subject to ordinary authorisation procedures. We may well see the development of 'super-Qifs" where we would take a step back, although there would have to be other safeguards, particularly over consumer protection. It is early days yet."
Dublin has transformed itself into an international financial centre, with many fund manager groups choosing it as their preferred place of domicile. Groups see it as a stable place to do business and it has a lower cost base than other jurisdictions. The regulator is planning to create additional product structures to make sure the growth continues. key points
Fund flexibility and simple structures have helped Dublin
Strong growth in funds under management
Administration costs lower in Dublin than in Luxembourg
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation