Portfolio Adviser • October 2016 • Viewpoint

In the wake of the of the UK’s unexpected vote in June to leave the European Union, five leading figures explore what Brexit means for the fund industry

Gary Corcoran: The starting point for this debate is that as long as the UK is a member of the European Union, the Financial Con-duct Authority (FCA) is classed as a ‘competent authority’ capable of granting authorisation under the Ucits directive.

Ucits is an EU directive and on leaving the union that status will be lost, and Ukdomiciled Ucits funds will cease to be Ucits. Is that as dramatic as it sounds?

Jasper Berens: It all depends on whether the UK is granted ‘passporting rights’. If not, the UK has to get equivalence [officially, a status of ‘equivalent jurisdiction’]. Then, we will have to do everything that the EU would expect us to do, but without a seat at the negotiating table.

There is absolutely no point in us as a fund management industry saying Brexit is not going to be an issue.

Another question is whether people in the EU will want to buy UK-based Ucits funds until they know what the outcome of all this is going to be.

Hugh Prendergast: I think the answer will be passporting, which will be the best outcome for both sides. In the unlikely event that is not achievable, then equivalence will be absolutely crucial.

Robin Stoakley: If I were a management committee without a Sicav fund range, I would be launching a Luxembourg Sicav as soon as possible. But you are going to have problems such as a lack of performance and track record.

HP: The almost universal recognition of Sicav is a huge asset. In terms of Jasper’s question about uncertainty holding back flows to a UK-domiciled company, the answer is ‘yes’.

This probably could accelerate having a Europe- friendly, and Asia and offshore Latin- American friendly vehicle that is domiciled in Europe.

Jose Cosio: Our European headquarters is in the UK but our entire Ucits line-up is in Luxembourg via a Sicav platform, so we are coming into the UK from outside and would have to design a UK Oeic platform to penetrate the IFA or retail market in the UK.

HP: From the perspective of a non-UK asset manager that is passporting funds into the UK, it could get more expensive. As the rules start to differ between the UK and Europe, you are going to have more infrastructure, legal and compliance support physically located in the UK to support the rules and meet the needs of the local regulator.

Nick Ring: In the UK, we engage with the Investment Association (IA) and City UK, and in Europe the European Fund And Asset Management Association. There are a number of lobbying entities with which we share our agenda and sensitivities, and on which we rely.

JB: With my IA board hat on, it is really important for these negotiations that fund management groups play everything through the associations, particularly the IA and City UK. If people have bilateral conversations with the treasury, the FCA and the government, it will just get out of control.

GC: With all this uncertainty is there the chance that investors will trust pure Ukbased businesses less than the bigger pan-European or global fund groups?

JB: It is almost certainly going to be fine in the UK, but there may be an issue with a UK company selling Oeics into Europe, where they have historically been very successful. If negotiations go badly around passporting and equivalency, it is clear European clients may want to take their money out, so the fund manager will see constant outflows.

UK clients may look at that and ask why they would want to invest in it. I am not ex pecting that to be the case but it could be one of the issues.

JC: If boutique managers that have historically been accessible within continental Europe decide to retrench into the UK, investors will see a more limited choice and a restriction on managers they have had access to.

NR: The key thing from a regulatory perspective is the Ucits stamp, not Oeic versus Sicav. If you are a Ucits fund of funds, you pretty much have to invest in underlying Ucits funds.

RS: Do not forget, 25 years ago our UK unit trust administrators probably could not have handled hedged fund classes or even different currencies. The infrastructure was not in place to sell into Europe then.

JB: That is still true. The operational infrastructure for Dublin Ucits and Luxembourg Sicavs around hedged share classes is considerably better than it is in the UK.

It is easy to launch a hedged share class in Luxembourg, and it is still very hard in the UK. It is getting easier, but count the number of hedged share classes in the UK.

GC: Is there anything coming out of Brexit you are looking at in terms of how you run your business that concerns you?

NR: We just need to get on with it. We are not spending hours and hours doing scenario planning but have broad views around the headline stuff such as, if there is no passporting, then what does that mean?

HP: Our working assumption is that passporting will make sense for all of us so we are optimistic that it will be maintained. In the event that it is not, we will just have to see what the ground rules are.

We will plan once we have some facts. As the only EU-based asset manager around this table, our only question will be how we maintain our access into the UK domestic market. We will do what we need to do, through to setting up parallel vehicles, if that is what has to be done.

JC: Do you think you will have faster consolidation in the asset management business, in terms of the number of companies out there producing product?

HP: It is not just Brexit. It is the regulatory changes that are effectively favouring the large-scale players over the smaller ones. It is going to be harder and harder to be a small asset manager.

RS: As we get into the fourth quarter, provided there is no other major shock for UK managers, Brexit will be the norm – a blip – and we will carry on.

There will be the odd significant shock and people will run for the hills, but then they will come back.

JB: Investors throughout the year have been concerned about market volatility, reducing risk assets, and that has continued post-Brexit.

Flows in the UK were tough last year, and they continue to be tough this year. The wider issue for me is how we entice people back into assets, as they are sitting on a trillion pounds of cash in the UK.

And that has got a whole lot nastier with interest rates having just gone down again. I cannot see risk coming back on the table until next year.

RS: What will drive people to risk assets is the demand for income, because the only place you can get an income now is from an equity. The demand for income is as strong, if not stronger, than it has ever been.

The cost of structuring, to enhance income, is expensive now but equity income products do look attractive when you take other income-producing assets into account.

HP: There has been sustained demand for what we call ‘target income’. These funds use selective single stock call writing to enhance income, making a trade-off between potentially giving up upside versus enhancing the income.

The other area is sustained demand for liquid alternatives, probably more so in the low-risk space. Equity market-neutral, or relatively conservative multi-strategy funds. Investors are looking for something that is safe, a cash or fixed-income equivalent.

JB: Neither of those two trends will go away as people will always want income, particularly in a low interest rate environment, which we are likely to be in for a long time. People want different sources of alpha.

‘THERE WILL BE THE ODD SHOCK AND PEOPLE WILL RUN FOR THE HILLS, BUT THEN THEY WILL COME BACK’

‘THE WIDER ISSUE IS HOW WE ENTICE PEOPLE BACK INTO ASSETS, AS THEY ARE SITTING ON A TRILLION POUNDS OF CASH IN THE UK’

‘IF BOUTIQUE MANAGERS THAT HAVE HISTORICALLY BEEN ACCESSIBLE IN CONTINENTAL EUROPE RETRENCH INTO THE UK, INVESTORS WILL SEE A MORE LIMITED CHOICE