One of the themes that has long been in the background to the investment sector is the push by various regulators to create a fully operational pan-European fund market. But despite European directives seeking to make this a reality, such as Ucits III, IV and now V, one barrier has remained – UK investors prefer their homegrown Oeics to offshore Sicavs.
This could be down to a stigma that funds domiciled outside Britain are vehicles for tax evasion or because of their different regulatory structures. But one reason stands out more than any other: in a world where UK investors buy their funds from platforms, for a long time the shop has been closed for Sicavs. A lack of initial demand and operational issues meant that 10 years ago investors simply could not get access to an offshore fund on a UK platform. While this was not a problem for the biggest UK investment houses, it was a real burden for the smaller boutiques, particularly those with ranges that were Dublin-domiciled, for example. This is now starting to change, and more platforms have been adding Sicavs to their buying lists where there is demand and some firms have grown rapidly as a result. So this begs the question, why would an investor today still choose an Oeic over a Sicav? For many fund buyers the structure of a fund is irrelevant. It is who manages it and what is in it that are the most crucial factors. There are differences, such as ISA-bility and a fund’s reporting status to make sure it is placed in the right tax-effective pot for clients, but these are factors that will not necessarily drive the overall decision on whether or not to buy a fund.
Indeed, there is an argument from some fund buyers that Sicavs actually offer more investment flexibility to their fund managers than Oeics, and this comes down to the different ways in which they are regulated.
Regulatory discrepancies
UK-listed funds are regulated by the Financial Conduct Authority, while Dublin and Luxembourg-domiciled funds are covered by the European System of Financial Supervision, which was formed as a European Commission-led reaction to the global financial crisis.
There are differences between the two regulatory regimes that can open up discrepancies between the two types of funds, one of which is greater mandate flexibility for offshore funds.
The Ucits III directive attempted to bridge this gap a number of years ago, allowing groups to apply for wider investment powers for their Oeics, giving them the ability to short stocks and use derivatives.
Matthews Asia is a case in point of how attitudes towards offshore funds have changed. The Asian fund specialist wanted to diversify its client base from the US and entered Europe with a Dublin-based offshore range. Despite the strength of its fund range in 2005, many advisers simply would not have had the ability to buy the funds because they were not on a platform.
Today, however, its two biggest funds – Matthews Asia Pacific Tiger and Matthew Asia Dividend – sit on assets under management of £775m and £434m, respectively. However, the received wisdom is that the power a manager has in terms of borrowing, and taking net positions versus gross positions, can be wider in the offshore universe. This means that while you could, in theory, have identical onshore and offshore funds in terms of investment objectives, the manager of the offshore fund would have greater power in gearing up and taking bigger positions. While there are no right or wrongs when it comes down to structure, given the changing attitudes to Sicavs and the fact they are now held on platforms, the expectation would be that their assets are set to grow considerably during the next decade. And as more investors look for more specialist mandates away from the plain vanilla, this means they could soon overtake their onshore peers in terms of fund sales.
