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Value Is in the Eye of the UCITS Holder

By Giles Swan

December 3, 2020

ICI research shows a steady decline in the cost of investing in Undertakings for the Collective Investment in Transferable Securities (UCITS). European regulators are looking beyond just declining cost, however, by requiring UCITS managers to justify the value of these funds to investors. But how do investors assess value relative to cost, and what is the role of regulators?  

Is There a Difference Between Cost and Value?

Yes—a big difference. Investors value UCITS that allow them to pursue their desired investment outcomes—regular income, capital growth, or both. Investors incur costs when using the services of a UCITS manager—professional management of a portfolio, access to a wide array of different global investment options, and the benefits of regulation and oversight—in pursuit of those investment outcomes.

That seems straightforward. But how do investors assess whether a UCITS will enable them to achieve their desired investment outcomes and whether the cost and quality of the UCITS manager’s services will match their expectations? In other words, how do investors assess value?

There is no simple answer. Investors seek differing investment outcomes and assess the value of a UCITS based on its usefulness in achieving their particular outcomes. UCITS managers offer a wide range of UCITS with different approaches—such as providing asset allocation, index tracking, or active management—that appeal to different investors. But, with such a broad choice, value can be hard to define.

One simple, seemingly objective approach would equate low cost with high value. But such an assessment is badly flawed on two counts. First, it overlooks the many differences among investors—the investment outcomes they seek, the types of service they desire, and the goals they seek to fulfill, including, for some, achieving environmental, social, or governance (ESG) outcomes. Second, it fails to take into account the multitude of different ways UCITS managers seek to meet investor outcomes and objectives. Investors need to assess value on a more thorough basis that considers the UCITS’ cost and performance and the UCITS manager’s services.

Elements of Value: Cost

UCITS enable investors to access a wide array of global investment options. Investors pay UCITS managers a fee that is dependent on the asset class, management technique of the UCITS manager, and a range of other factors. For instance, actively managed UCITS are generally more costly than index tracking funds—investors pay average ongoing charges for actively managed equity UCITS of 1.36 percent compared with 0.28 percent for index tracking equity UCITS. The higher fees charged by active managers reflect the additional significant research about individual stocks or bonds, market sectors, or geographic regions for active UCITS—offering investors the chance to earn superior returns or to meet other investment objectives such as limiting downside risk, managing volatility, under- or overweighting various sectors, or altering asset allocations in response to market conditions. These characteristics tend to make active management more costly than management of an index tracking UCITS.

Investors assess the appropriateness of fees based on the UCITS manager’s approach to achieving their desired investment outcomes—the target level of investment return—and the risk of not doing so.

Regulators have recently sharpened their focus on assessing whether UCITS managers are levying “undue” costs on investors that are inconsistent with, or prohibitive to, a UCITS achieving its stated outcomes and objectives. For instance, regulators are examining how UCITS managers ensure that they have their clients’ best interest at heart and that costs and charges are reasonable and disclosed in a transparent and non-complex manner.

Elements of Value: Investment Performance

UCITS investors anticipate favorable future investment performance in line with their desired investment outcomes. Investor expectations are based on an assessment of the UCITS’ investment objectives and investment horizon against desired investment outcomes, in either absolute or relative returns, and the UCITS manager’s approach to achieving these outcomes. Regulators are examining more closely how the performance of UCITS matches investor expectations.

Elements of Value: Services

UCITS investors evaluate the services offered by a UCITS manager based on both “hard” and “soft” factors. The first includes the nature and quality of a UCITS manager’s investment approach; its organization, governance, and systems; its client engagement (e.g., reporting, customer service, complaints record); and other factors such as achieving sustainability-related investment outcomes. The second includes corporate brand, culture, and corporate values. Investors use a range of reference points when making this evaluation, including information from regulators, financial advisers, fund managers, and the media.

How Can Investors Be Supported When Assessing Value?

All investors need clear and correct information on costs, performance, and service to assess the value of a fund and understand how this fits with their expectations and intended outcomes. UCITS managers can provide this substantive information and regulators can support its clear and consistent disclosure to investors. Regulatory changes in the European Union, including MiFID II, have fostered simpler and more transparent fee disclosure, but further steps are necessary to ensure more harmonized and useful disclosure.

Some investors may benefit from professional financial advice to build a portfolio of UCITS to pursue their desired investment outcomes. Regulators should assess the distribution of UCITS to better understand investor choice, including the role and activities of intermediaries in fostering competition, delivering choice, and supporting investors in seeking out funds that provide the greatest value.

No single UCITS ticks all the boxes for all investors. Regulators should not favor one investment product over another—on the basis of cost or other metrics—or pass judgment on which UCITS provide the greatest value. Such an approach risks reducing choice, eroding efficient capital allocation and price discovery, and degrading competition and innovation. Instead, the market at large—with its myriad investors evaluating value with distinct outcomes in mind—is best placed to determine which UCITS best fit the bill.

Giles Swan is director of global funds policy at ICI Global.

Permalink: https://www.ici.org/viewpoints/20_view_ucitsvalue

TOPICS: Equity InvestingEuropeFund RegulationICI GlobalInternationalShareholder

A New Benchmark for Distribution Oversight

By Ahmed Elghazaly

July 21, 2020

On June 1, the fund industry achieved a milestone for global cooperation. In an industry-led agreement, fund distributors and fund managers of Undertakings for the Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs) joined together to issue a common protocol for distribution oversight.

Read more…

TOPICS: EuropeFund GovernanceFund RegulationGlobalICI GlobalInternationalOperations and TechnologyShareholder

Simulating a Crisis

By Sean Collins

August 15, 2017

The Bank of England (BoE) recently published a paper detailing results from a simulation intended to “stress-test” open-end investment funds. The paper suggests that under “severe but plausible” assumptions, investors could redeem so heavily from open-end investment funds (e.g., mutual funds or UCITS funds) during a period of market stress that they could cause “dislocations” in corporate bond markets.

Read more…

TOPICS: Bond FundEuropeFinancial MarketsFinancial StabilityFixed IncomeFund RegulationGlobalInternationalMutual FundPolicy Research

What's the “Exposure” of Money Market Funds to Europe?

By Sean Collins

January 26, 2017

At the American Economic Association (AEA) meetings in Chicago early this month, speakers and attendees at several sessions asked: do money market funds pose systemic risks?

Read more…

TOPICS: EuropeFederal ReserveFinancial MarketsFinancial StabilityFund RegulationInternationalMoney Market FundsMutual Fund

Matching Models to Reality: Doomsayers Are Disappointed—Again—as Funds Weather Brexit Shock

By Paul Schott Stevens

July 13, 2016

On Thursday, June 23, the electorate of the United Kingdom voted in a referendum on the country’s membership in the European Union. The result—51.9 percent in favor of “Brexit,” 48.1 percent in favor of “Remain”—went against pollsters’ and pundits’ expectations and surprised the world.

Read more…

TOPICS: Bond FundEuropeFinancial MarketsFinancial StabilityFund RegulationICI GlobalInternationalMutual Fund

When Investor Protection Becomes Protectionism

By Patrice Bergé-Vincent

June 14, 2016

Today, Europe is facing two related needs: to provide its citizens with efficient, lower-cost vehicles for savings and investment, and to bolster economic growth.

Read more…

TOPICS: EuropeFinancial MarketsFund RegulationICI GlobalInternationalMutual FundTaxes

Conducting Business in a Rapidly Changing World

By Jeanne Arnold

June 1, 2016

The global operating environment is evolving and it is critical for corporations to understand the changes afoot if they are to succeed in the 21st century, said Kevin Kajiwara, co-president of Teneo Intelligence, a division of global advisory firm Teneo. Speaking on the final day at ICI’s 58th General Membership Meeting (GMM), Kajiwara gave an overview of the economic and political shifts taking place around the world during his session, “Geopolitical Risks and the Global Economy.” After the overview, he engaged in an insightful question-and-answer session with Tom Faust, chairman and CEO of Eaton Vance Corp.

Read more…

TOPICS: EuropeGMMInternationalMutual FundTrading

Derivatives—Please Don’t Let Them Be Misunderstood

By Shelly Antoniewicz

February 22, 2016

Derivatives are important portfolio management tools that provide funds with many potential benefits, including the ability to:

  • hedge risk;
  • enhance liquidity, because derivatives can be more liquid than traditional physical securities;
  • gain or reduce exposure to unique markets or to asset classes when access through other instruments is difficult, costly, or impossible;
  • manage or equitize cash; and
  • reduce cost.

 

Read more…

TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationInternationalMutual Fund

U.S. and European Fund Investors Continue to Take Long View on EM Economies

By Chris Plantier

February 12, 2016

In an ICI Global Research Perspective last year, we showed that U.S. and European registered funds held $1.7 trillion in emerging market (EM) stocks and bonds at the end of 2014 (this total counts Hong Kong, Singapore, South Korea, and Taiwan as emerging markets). Of that, $1.27 trillion was estimated to be in equities and $431 billion was in bonds. We also showed that this $1.7 trillion was spread widely, across 80 different EM countries, and that fund net purchases of EM securities explained little of the variability of capital flow to EM countries.

Read more…

TOPICS: Bond FundEuropeFinancial MarketsICI GlobalInternationalMutual Fund

Traders, Start Your Engines: After August 24, Exchanges Need to Coordinate

By Jennifer Choi and George Gilbert

November 30, 2015

The extraordinary volatility in U.S. equity markets on August 24, 2015, exposed a significant deficiency in the rules governing these markets’ structure: a lack of harmonization across securities exchanges for reopening trading after a “limit up–limit down” trading halt in a security.

Read more…

TOPICS: Equity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund Regulation

U.S. Bond ETFs Resilient on August 24

By Shelly Antoniewicz

November 20, 2015

Some observers have suggested that equity market volatility on August 24, 2015, spilled over into other markets and products, in particular to bond exchange-traded funds (see, for example, Bank of England Financial Stability Paper, no. 34, October 2015, pages 26 and 27). In our analysis of the events of that morning, we conclude that U.S. bond ETFs were resilient and largely immune to the turmoil in the equity markets.

Read more…

TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund Regulation

New York Times Paints False Picture of Funds’ Emerging Market Investments

By Mike McNamee

August 24, 2015

With the global market turmoil over the past week, it’s no surprise that journalists are looking for hot stories of panic, investor flight, and impending crisis. Either they believe that investors are inherently flighty and panic-prone, or they believe that “this time is different” and investors who have not panicked before will panic now.

Read more…

TOPICS: Bond FundBondsEquity InvestingEuropeFinancial MarketsFinancial StabilityFixed IncomeICI GlobalInternationalMutual Fund

The IMF on Asset Management: Handle Empirical Results with Care

By Chris Plantier

July 15, 2015

In this ICI Viewpoints series, we’ve examined the wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations in the International Monetary Fund’s most recent Global Financial Stability Report (GFSR)—specifically, the chapter on “The Asset Management Industry and Financial Stability.” Those problems primarily involved poor understanding of funds and their investors. We didn’t need advanced statistical methods to uncover them.

Read more…

TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury

The IMF on Asset Management: Sorting the Retail and Institutional Investor “Herds”

By Sean Collins

June 4, 2015

Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In this ICI Viewpoints series, we’re examining the wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations in the International Monetary Fund’s April 2015 Global Financial Stability Report (GFSR)—specifically, the chapter on “The Asset Management Industry and Financial Stability.” These problems undercut the IMF’s conclusion that “Even simple investment funds such as mutual funds can pose financial stability risks.”

 

Read more…

TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundPolicy Research

The IMF on Asset Management: Which Herd to Follow?

By Sean Collins

June 1, 2015

Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In April 2015, the International Monetary Fund (IMF) published its most recent Global Financial Stability Report (GFSR), which included a chapter titled, “The Asset Management Industry and Financial Stability.”

We have heard suggestions from more than one observer that the IMF’s GFSR Chapter on asset management provides a wealth of charts, tables, and data to support regulators’ case that regulated funds or asset managers could pose systemic risks.

Read more…

TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundPolicy Research

The IMF on Asset Management: The Perils of Inexperience

By Sean Collins

May 28, 2015

Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In April, the International Monetary Fund (IMF) released its most recent Global Financial Stability Report (GFSR), including a chapter on “The Asset Management Industry and Financial Stability.”

Read more…

TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundPolicy Research

SEC Chair White Affirms Agency Has Tools to Address Risks in Industry

By Rachel McTague

May 8, 2015

The U.S. Securities and Exchange Commission (SEC) has the tools it needs to address systemic risks to the extent they exist in the asset management industry, said SEC Chair Mary Jo White at the opening session on the final day of ICI’s annual General Membership Meeting (GMM). White also announced that David Grim—who had been serving as acting director of the SEC’s Division of Investment Management—has just been named director of the division. White said she is thrilled that Grim, a 20-year veteran of the SEC in the investment management area, is taking the reins at a time when the Commission is moving forward to implement proactive regulations for the industry.

Read more…

TOPICS: BondsCybersecurityEuropeEventsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationGMMGovernment AffairsInterest RateInternationalMutual FundShareholderTreasury

The IMF Quietly Changes Its Data, but Not Its Views

By Chris Plantier

April 21, 2015

On Friday, April 10, we pointed out that the International Monetary Fund (IMF) apparently had vastly overstated the size and growth of bond fund holdings of emerging market bonds in its latest Global Financial Stability Report (GFSR).

Read more…

TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury

Federal Reserve Reverse Repo Facility Helps Stabilize Short-Term Money Markets

By Chris Plantier

April 17, 2015

Following a pattern observed at the end of recent quarters, money market fund holdings of European issuers dropped at the end of March, although the decline was not as large as the previous quarter, ending December 2014. As we have noted before, for regulatory reasons European banks have been paring their balance sheets at the end of each quarter, resulting in a temporary decline in their desire to borrow from money market funds.

Read more…

TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

The IMF Is Entitled to Its Opinion, but Not to Its Own Facts

By Sean Collins and Chris Plantier

April 10, 2015

On Wednesday, the International Monetary Fund released its latest Global Financial Stability Report (GFSR), including a chapter on the asset management industry and financial stability.

Read more…

TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury

European Banks Borrow Less from MMFs; the Federal Reserve Borrows More

By Chris Plantier

January 20, 2015

As we discussed in April and July of last year, due to regulatory pressures European banks generally have become less willing to borrow from U.S. money market funds (MMFs), especially at the end of the quarter. This quarter-end effect was particularly large at the end of December 2014.

Read more…

TOPICS: EuropeFederal ReserveMoney Market FundsTreasury

The IMF Makes All of OFR’s Mistakes—And More

By Sean Collins and Chris Plantier

October 10, 2014

The International Monetary Fund (IMF) just released its latest Global Financial Stability Report. In the immortal words of Yogi Berra, it is déjà vu all over again.

The IMF report bears more than a passing resemblance to Asset Management and Financial Stability, published by the U.S. Treasury Department’s Office of Financial Research (OFR) in September 2013. The OFR report was met with widespread criticism for its misinformed discussion of hypothetical “vulnerabilities” posed by mutual funds and other asset managers.

Read more…

TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury

Why Regulated Funds Are a Relatively Stable Source of Foreign Investment for Emerging Economies

By Chris Plantier

September 26, 2014

The press and policymakers focus a great deal of attention on flows to U.S. and European regulated mutual funds and exchange-traded funds (ETFs), in part because these funds are perhaps the most easily observed and readily measured players in capital markets.

Read more…

TOPICS: EuropeFinancial MarketsFinancial StabilityFund RegulationICI GlobalInternationalMutual Fund

“Preemptive Runs” and Money Market Fund Gates and Fees: Theory Meets Practice

By Sean Collins and Chris Plantier

August 20, 2014

A recent post on the blog of the Federal Reserve Bank of New York discusses the possibility that new rules by the Securities and Exchange Commission (SEC) allowing money market funds to temporarily impose fees or gates during times of market instability could increase the risk of preemptive runs on such funds during times of stress, rather than helping to limit destabilizing withdrawals, as the SEC intended.

Read more…

TOPICS: EuropeFederal ReserveFinancial StabilityFund GovernanceFund RegulationGovernment AffairsInternationalMoney Market FundsTreasury

Sizing Up Mutual Fund and ETF Investment in Emerging Markets

By Chris Plantier

August 18, 2014

In coming decades, emerging market (EM) economies will need substantial new capital to accompany and sustain their rapid growth.

Read more…

TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationICI GlobalInternationalMutual Fund

European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June

By Chris Plantier

July 18, 2014

As we discussed in March and April, European banks have generally become less willing to borrow from U.S. money market funds due to regulatory pressures, especially at the end of the quarter. Specifically, the new Basel III requirements seek to increase capital ratios of banks and explicitly limit how much banks fund their operations through short-term borrowing (which includes short-term securities banks issue that money market funds invest in). This quarter-end effect was particularly strong at the end of June as European bank regulators continued to monitor bank progress toward meeting the new Basel III requirements, which will be fully phased in over the next few years.

Read more…

TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort

By Chris Plantier

April 16, 2014

The March money market fund holdings data indicate a large drop in the share of fund assets allocated to European counterparties and a large increase in the share of fund assets allocated to U.S. counterparties. This shift is likely temporary and reflects reduced willingness of European banks to borrow from money market funds at the end of the quarter, rather than reduced demand from money market funds. Also, the increase in lending to U.S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via its overnight reverse-repo (repurchase agreement) facility.

Read more…

TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

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