In an ideal world, the perfect situation for a fund promoter would be to have a single investment fu...
In an ideal world, the perfect situation for a fund promoter would be to have a single investment fund adaptable to the requirements of his target client, be they institutional or retail, and irrespective of the latter's country of domicile. As the business has seen down the years, structures which have been successful in a certain environment and which the promoter has then tried to adapt for a different market segment have rarely been successful in their new guise. On the other hand, promoters who have tried to create made-to-measure funds according to each investor profile have often found that they end up with a large number of small funds whose performance suffers because of the relatively high proportion of fixed costs compared with the size of each fund. What, then, can be done to reconcile these various needs in a simple, manageable and cost-effective structure?
The asset pooling method has actually been applied to Luxembourg investment funds for some five years already: in addition to meeting the requirements of the promoters outlined above, it also allows investors access to a larger range of investment management possibilities and this in a more cost-effective way. The growing success of interfund pooling has been due to the compatibility of this technique with European Directive rules and regulations, in addition to being an invaluable tool for promoters across a whole range of products and applications, including multi-manager funds, unit-linked products, pension funds, and also with the realm of private banking.
As the name suggests, this technique involves the pooling of assets of an identical nature across specific portfolio accounts, i.e. assets managed by a single investment manager or by a selected number of investment managers (multi-manager approach). Therefore, a pool gathers together the assets of a similar kind (same geographic region, same economic sector), or assets managed in a similar fashion. What are the advantages of pooling at investment management level? Pooling permits a larger choice of investment options, a greater geographical and economic diversification, and a tailored investment strategy. The management of the assets takes place at two levels. At the level of each sub-fund, the asset allocation is decided according to market parameters, whilst respecting the investment profile of the sub-fund concerned. This allocation is made across the portfolios which compose the whole fund.
At the next level down, the portfolio management activity is carried out by the specialists in the specific markets. This high degree of knowledge, coupled with the appropriate allocation of assets, leads to improved performance. Economies of scale mean the investment manager no longer has to split their sale and purchase orders according to the number of sub-funds linked to the asset pool. The associated workload is reduced, while at the same time the volume of assets managed in a single block is increased. The allocation of pool assets to the relative sub-funds is made automatically by the custody system.
A considerable advantage is offered to the investor in terms of increased choice and access to specialised and recognised investment managers. So far, the 'fund of funds' structure does not enjoy a European passport. In applying the fund of funds principle and modifying it to a structure of internal asset portfolios (discretionary mandates), an OPC set up with interfund pooling is able to be distributed with a European passport.
The flexibility of such a structure will perhaps be less than of a fund of funds structure, but the formula is made attractive by the possibilities it offers in terms of enhanced risk diversification (maximum percentages of allocation at portfolio level).
Investors can access top quality fund managers at a cost significantly lower than that of an identical, non-pooled fund which does not benefit from the economies of scale offered by intra-fund pooling.
Co-management is nothing more than the application of pooling between two investment funds which are separate legal entities. Such a structure would be of interest, for example, to a fund promoter who has an umbrella fund targeted at institutional investors, and who wishes to develop a retail-targeted fund whilst centralising the new assets with existing investment managers, but without duplicating the volume of work that this entails for the latter. Although from a technical point of view such co-management possibilities are already a possibility, the applications is presently restricted to investment funds incorporated under one and the same legal jurisdiction and administered by the same custodian bank.
Private banking pooling
Every private bank seeks to offer its clients the choice of an investment profile perfectly adapted to their needs. The clients themselves look to obtain the best possible return according to their preferred degree of volatility and risk. The success of private banking lies not only in achieving both these aims, but also in providing a level of reporting traditionally reserved for the professional domain. In recent years, with the increasing transparency of products aimed at the private sector, the client has become more demanding across the board. No longer is he content just to hear now and again that his investments are performing well, but he wants real detail of the overall picture - where is his performance coming from, which sectors are providing real returns, what value is he getting for his fees? Consequently, he now has access to a level of reporting which is identical to that hitherto destined for the professional user. And, as the individual investor discovers for himself the opportunities which can now be attained, pooling techniques, and the requisite infrastructure which accompanies them, have become more than ever a must to attract
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Equity release panel
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TISA's Peter Smith
Shone a light on 'closet trackers'