RBC Dexia’s latest survey, undertaken in conjunction with the global consulting firm Accenture*, analyses the key trends facing the Spanish investment industry against a backdrop of change in both the local and global asset management sectors.

Drawing on the views and experiences of a wide range of investment market participants, our latest report assesses the key issues facing the Spanish market and likely strategy responses as the domestic investment management sector evolves. The report focuses on performance and transparency, product and technology, global regulation and opportunities, rationalization and efficiency and the current appetite for outsourcing.

Our survey offers valuable insight and analysis to investing institutions considering their options within the Spanish investment management sector or seeking topical market research on this dynamic and important market.

*The use of the Accenture and RBC Dexia logos does not constitute an endorsement of each others’ products or services. Accenture and RBC Dexia names and logos are registered trademarks.

• Incorporate environmental, social and corporate governance (ESG) issues into investment analysis and decision-making processes
• Be active owners and incorporate ESG issues into their ownership policies and practices
• Seek appropriate disclosure on ESG issues by the entities in which they invest
• Promote wider acceptance and implementation of the Principles within the investment industry
• Work together to enhance effectiveness in implementing the Principles
• Report on their activities and progress towards implementing the Principles

UNPRI Principles reflect the view that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios and therefore must be given appropriate consideration by investors if they are to fulfil their fiduciary (or equivalent) duty. The Principles provide a voluntary framework by which all investors can incorporate ESG issues into their decision-making and ownership practices and so better align their objectives with those of society at large. As of April 2012 over 1000 investment institutions had become signatories, with assets under management of approximately US$ 30 trillion.

From the collapse of Lehman Brothers to the Madoff affair, the financial crisis exposed a number of governance issues which undermined public confidence in financial institutions but which also spurred renewed interest in more visibly sustainable, responsible and “ethical” investment techniques amongst institutional investors seeking to strengthen their risk management. European debate over corporate remuneration, particularly in the regional banking sector, has fuelled further interest in corporate governance and the responsible stewardship of investment strategies.

Investor choice

While sustainable investment is increasingly popular there are some clear distinctions between the various approaches to this market and investors do have a choice of the sustainable strategies they can adopt.

Responsible investment puts asset managers’ fiduciary duty first and puts environmental, social and governance (ESG) risks on the agenda at the point of and for the duration of the investment. Responsible investment promotes “active investment” – including company dialogue and shareholder voting to address ESG concerns, but does not demand the restriction or exclusion of specific investment universes. Instead, it encourages overall engagement and inclusion to resolve issues through dialogue.

Some sustainable and socially responsible investment (SRI) funds do, however, actively filter out or screen investments in certain sectors - such as defence and tobacco manufacture – deemed unsustainable or socially or morally questionable investment propositions by underlying investors.

While ethical investment funds can follow similar strategies to SRI funds, they are principally designed to put investors’ ethical concerns first whilst remaining aligned with traditional portfolio management thinking and discipline. Their process involves either positive screening to select investments on the grounds of accepted behaviour or negative screening to deselect companies on the basis of business behaviour investors consider ethically inappropriate or unacceptable.

Nordic appeal

While sustainable investment is a global phenomenon with strong appeal to a range of European countries and widespread distribution potential, it has proved particularly attractive in a Nordic region whose member states have been historically committed to the development of socially progressive and sustainable businesses and whose institutions remain keen to evolve and engage with this approach.

Although performance statistics on sustainable investment present a mixed picture, a number of major Nordic financial institutions have already committed to following sustainable investment principles and believe this approach strengthens responsible corporate governance and makes good business sense.

Some regional investment institutions, including investment managers and Sweden’s prestigious AP funds, are also signatories to the international sustainable investment benchmarks set by the United Nations Principles for Reponsible Investments (UN PRI). The appointment of Danish pension giant Unipension’s chief investment officer Niels Erik Petersen to the board of the UN PRI in 2010, also marked the entrance of its first Nordic representative and underlined regional commitment to sustainable investment strategies.

Unique approaches

Different investment companies within the region have adopted their own specific approaches to sustainable investment. Danish investment manager Sparinvest applies a responsible investment strategy to its entire fund range which involves fully considering the risk profile of companies, looking at issues involving environmental standards, union concerns and minority shareholder rights.

Sparinvest signed up to the UN PRI in 2009 and Responsible Investment Director Jacob Christensen stresses that the move was driven chiefly by business, as opposed to ethical, considerations with the company keen to marry good corporate governance and stewardship with strong investment performance.

“It was important for us to have an objective of adding value to our existing investment process. The steps we took were all considered from the perspective of how they would add value. Early in the process we concluded that greater understanding of ESG risks would positively contribute to investment returns through our ability to make more informed investment decisions. Adding value was our goal and that guided implementation of our strategy. Overall this has positively influenced the evolution of our investment processes,” he says.

Aside from its three ethical funds, Sparinvest does not believe those companies which fail to meet meet recognised ESG standards should automatically be excluded from an investment universe. “If our fund managers believe in the potential of an investment but also recognise that there are potential ESG risks involved, it makes sense for them to flag these issues up for the company’s management to address. We interpret our fiduciary duty as meaning that we should try to improve ESG scores in our investments where possible. We also believe this will be the real driver of responsible investing in the future,” adds Christensen.

Another leading Nordic player, Danske Capital, introduced its own SRI policy in 2008. Its specific assurances to clients include a clause which means their funds will not be invested in companies violating recognised human rights guidelines for businesses. These companies are subject to dialogue which can result in their exclusion from the investment universe Danske Bank employs.

Client demand

According to Thomas H. Kjaergaard, head of SRI and Corporate Governance at Danske Capital, its adoption of robust SRI policies was driven largely by client concerns. “There was a clear expectation from our institutional clients that we, as investment managers, should be able to handle social issues in an adequate and structured way in our investment processes – particularly with regard to investment in companies active in conflicted areas such as Myanmar and the Western Sahara, in controversial industries such as arms manufacture or where companies have been seen to violate specific labour laws.”

In terms of challenges, Kjaergaard adds that SRI strategies can raise complex issues with no easy solutions and that strong dialogue between investors and companies is essential to resolve problems.

Looking ahead, he expects responsible and socially responsible investment themes and corporate governance trends to evolve and to have a greater influence over the wider investment industry. Summing up, he points to a distinctive Nordic approach to sustainable investment and corporate interaction which could have a wide influence, even beyond the region.

“The Nordic model” – where dialogue and exclusion go hand in hand – will probably be influenced by the principles from organisations such as the UN PRI. Active ownership – in terms of dialogue and voting – will be more widespread and, to an extent, annual general meetings (AGMs) will contain more non-financial issues. SRI was always a niche in corporate governance, but it looks set to take greater focus following the financial crisis,” he says.

Bankinvest is another Nordic institution which has embraced SRI. Its move in this direction was prompted initially by discussions with clients amongst blue collar unions in Denmark. The company distributes its SRI funds via its owner banks in Denmark, direct marketing in concert with external consultants and more widely through various European distribution platforms.

The company also predicts growing demand for SRI funds and believes emerging markets will act as a key focus for the funds in future.

According to Kevin Legind German, SRI Responsible at Bankinvest: “We believe that SRI funds will become more mainstream over time – helped by both UN and local political initiatives and also by SRI style approaches becoming more incorporated in standard products. We feel engagement will be a leading trend going forward. As growth and production are mainly in the emerging markets, the focus should be on this sector.”

Investor services support

A greater focus on SRI could lead to a significant expansion of the sustainable investment business. According to the most recent figures available from the European Sustainable Investment Forum (Eurosif) total EU SRI assets reached €5 trn as at the end of 2009 up from €2.7trn in 2007 and represented a growth rate of about 87% over two years.* Eurosif expects significant further growth in this market and points out that sustainable investing by high net worth investors alone is projected to rise to €2trn by 2013.

If this growth does materialise, managers will need to develop new structures to satisfy market demand. In turn, service providers such as RBC Dexia Investor Services, will be called upon to help structure products through UCITS and other vehicles, provide offshore support where required from popular fund distribution centres such as Luxembourg and Ireland and to handle more basic investor services such as custody, fund accounting, transfer agency, record keeping and data provision.

As global stock markets look to recovery, sustainable investment funds can only add to the armoury of options global investment managers offer and the industry hopes to attract significant new inflows from retail investors, high net worth investors and institutional players such as pension funds and sovereign wealth funds.

Time will tell if the appetite for these funds will increase as predicted by organisations such as Eurosif, but prospects in this sector appear as strong as at any stage in the development of the sustainable investment industry and the market looks set to attract significant new interest across both Nordic markets and beyond in the months ahead.

Alexander Wedlich
Relationship Director Sales & Distribution
RBC Dexia Investor Services

Joanna Kennilä
Relationship Director Sales & Distribution 
RBC Dexia Investor Services

*Eurosif Europen SRI Study 2010

© 2012 RBC Dexia Investor Services Limited. RBC Dexia Investor Services Limited is a holding company that provides strategic direction and management oversight to its affiliates, including RBC Dexia Investor Services Trust, which operates in the U.K. through a branch authorised and regulated by the Financial Services Authority. All are licensed users of the RBC trademark (a registered trademark of Royal Bank of Canada) and Dexia trademark, and conduct their global custody and investment administration business under the RBC Dexia Investor Services brand name.™ Trademark of RBC Dexia Investor Services Limited. These materials are provided by RBC Dexia Investor Services for general information purposes only.

RBC Dexia Investor Services makes no representation or warranties and accepts no responsibility or liability of any kind for their accuracy, reliability or completeness or for any action taken, or results obtained, from the use of the materials. Readers should be aware that the content of these materials should not be regarded as legal, accounting, investment, financial, or other professional advice, nor is it intended for such use. The views herein are personal to the authors and are not necessarily those of RBC Dexia Investor Services. ™  Trademark of RBC Dexia Investor Services Limited.

 

The global securities lending (SL) industry began 2012 with strong equity and bond returns. While equity loan balances stayed relatively flat—€608 billion at the end of March 2011 versus €616 billion at the end of March 2012—average equity returns for Q1 2012 increased by a significant 56% over Q1 2011. Bond loan balances also remained flat—€736 billion versus €745 billion over the same period—but again returns rose by a considerable 25%.

For RBC Dexia clients and the market in general, European government bonds were the highest performing segment on the fixed income side. Driven by a combination of term financing needs, collateral upgrades, regulatory requirements and the return of the JGB carry trade, year over year returns for the industry increased by 44%, while returns generated by RBC Dexia for its clients increased an impressive 88%.

On the equity side, the star performer was Hong Kong with industry returns up 311% versus Q1 2011. Strong directional demand in numerous stocks such as Real Gold, Luk Fook and Huabao propelled Hong Kong to become the highest earning SL market in Asia by a very wide margin, despite being third largest by asset size.

The standout “hot stock” of the quarter was Telus, the Canadian telecommunications company which is collapsing its two share lines in early May. The arbitrage between share prices and uncertainty around the vote caused huge demand for both voting and non-voting shares, generating €4.1 million of SL revenue for the industry so far in 2012.

Looking into Q2 2012, there are three key potential areas for revenue generation that our clients should consider:

Term trades: the demand for term fixed income loans versus various types of collateral has been steadily increasing and the additional spreads over traditional overnight trades can be significant.

Cash and equity collateral: demand for both of these collateral options continues to be very strong and clients who can accommodate them will see higher returns and utilisation. They may also enhance their risk profile through better diversification, higher liquidity and improved correlation.

Optional dividends: The growth of scrip dividend options and dividend re-investment plans has generated significant SL revenue over the last year and we continue to see it as a very profitable area.

We trust you find this information insightful and we welcome your feedback.

North American markets

Mary Jane Schuessler
Desk Head, North American trading
RBC Dexia Investor Services

Canada: Revenue generated from Canadian equities was dominated by dividend re-investment trades. CIBC’s quarterly dividend was consistent at 90 cents with a 2% discount in the re-investment plan. Risk/arbitrage opportunities, directional plays and IPO shorts remained minimal in Canada with only small financing deals generating any borrower interest.

When Telus announced plans to collapse its two-class share structure (T CN – voting line and T/A CN non-voting line), both borrowers and lenders responded with interest. With a price variance between the two lines of stock, the traditional arbitrage trade—to short the higher priced line and go long on the lower priced line—kicked into play. As the variance between the two lines diminished, an opposite opportunity presented itself—to buy the voting shares and short the non-voting line in anticipation that the deal, which was subject to a vote, did not go through. These two strategies were heavily participated and created considerable market disruption from a liquidity perspective as the company itself made an active attempt to encourage many of its large shareholders to vote their proxy. As a result, many major shareholders had to recall their stock on loan in order to vote. There were sizeable recalls in both Telus voting and non-voting shares.

Demand for Canadian Government debt declined slightly in the quarter. However, utilisation levels remained above the 60% threshold compared to over 80% in the prior period and over year end as fixed income collateral upgrade trades drove demand in the latter part of fiscal 2011. While domestic T-bill demand also weakened in Q1, as the Banker Acceptance–T-Bill spread narrowed, utilisation levels were still at elevated levels—over 75% for this asset class.

Lending clients benefited from two Government of Canada bond issues that traded “special” in repo markets during the first quarter with one issue requiring Central Bank participation. The Canadian Government Bond, 1.5 % June 1 2012, maturing in three months, was made available under the standard terms for auctions to Primary Dealers under the Bank of Canada securities lending program. Additional securities are made available by the Central Bank when they believe the securities are trading at a premium rate benchmarked against the overnight rate if the securities are illiquid. The term to maturity of each security lent is one business day and is made available through a tender process. The issue was trading well above the 50 basis point fee necessary for Central Bank participation and so the issue remained special for only a few days. The other bond in demand, the 4.25% June 1 2018 exchanged hands at 20-30 basis points for a few days before normalising back to a general collateral (GC) rate.

US: Demand for US Treasuries remains subdued, with the exception of the 10-year benchmark issue. Activity should improve with any upward revision to interest rates. RBC Dexia’s Fixed Income desk does lend investment grade corporate paper when liquidity, price and fees permit, but this activity tends to be very limited due to market and risk concerns.

In-demand securities:

• Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto Dominion Bank, Bank of Nova Scotia and Crescent Point Energy Corp. (Canada) – dividend re-investment trades
• Telus (Canada) – corporate event
• Fusion-IO Inc. (US) – directional demand
• Government of Canada Bond 1.5 % June 1 2012
• Government of Canada Bond 4.25% June 1 2018

European markets

Stephen Rudland
Desk Head, European trading
RBC Dexia Investor Services

At the beginning of the quarter, borrowing demand for Government bonds began to subside and activity switched into term trades driven by bank liquidity requirements. Term trades see borrowers taking down baskets of well rated paper, typically Government bonds for a set period of time or on a rolling term (“Evergreen”) basis. The trades require lenders to commit to the term of the trade but they retain the right to substitute assets within the agreed basket asset class while maintaining the notional value. This enables borrowers to meet their liquidity requirements and, in return, they pay a premium making the trade lucrative for lending clients. The required duration for this trade to meet liquidity criteria is a minimum of 15 days, with borrowers typically looking for one to six-month terms.

Interested in using term trades to generate an uptick in returns? Contact RBC Dexia’s securities lending team to discuss further.

While January’s downward trend in balances levelled off, and despite term trades driving demand, bond balances did stabilise through the quarter. Certain Government bond issues attracted special demand and increased value throughout the quarter most notably, France OAT FR 4% April 2014, Italy, BTPS 4.75% September 2021 and Germany, DBR 4% July 2016.

Equities enjoyed a stable start to the year with many of the same names carrying over demand from 2011. Solar panel companies continued to attract borrowers as falling polysilicon prices continued to impact their margins/profitability.

There was muted demand for general collateral(GC) equities but a number of event-driven opportunities resulted in strong demand and healthy returns as rights issues and scrip dividend trades proved lucrative. Unicredit’s rights issue was heavily discounted to the stock price and borrowers quickly sought access to this relatively low-priced rights issue to exploit the price anomaly. This gave clients holding this stock a strong close to January as borrowing levels soared. Additional rights issues in Banca Sabadell and Peugeot later in the quarter also attracted interest from those looking to access discounted stock at enhanced levels, although the discount and borrowing fees were not as substantial as those seen for Unicredit.

It was a good quarter for Scrip dividend trades, where borrowers look for the optionality contained in these dividends to generate revenue from the arbitrage between the scrip price and the share price. Revenue is generated from both the initial loan and then from a profit sharing arrangement with the borrower based upon the value differential generated. The highest fees are available to lenders able to commit to a guaranteed cash election in advance as this provides the borrower with a fixed view of the election outcome ahead of the trading period. With a number of securities declaring dividends of this type, we saw increased demand from an increasing number of counterparties.

For more information on Scrip dividend transaction opportunities, contact RBC Dexia’s securities lending team to discuss further.

As is the annual peak distribution season approaches, the securities lending market shifted towards opportunities driven by European dividend paying names. As a result of a number of changes to applicable tax rates combined with a lack of clarity over potential transaction taxes being implemented in some jurisdictions, we saw borrowing levels come down from those seen in 2011 for some markets.

Borrowers targeted strategic markets where they had particular demand and bid aggressively for those assets. As a result, we saw improved levels in Austria, Belgium, Netherlands, Norway and Spain. In primary markets, such as Germany and France, bids were slightly lower than the highs seen in 2011 but still in line with prior years. Bids in Switzerland fell more significantly from 2011, but RBC Dexia traded the largest Swiss names (Roche Holdings and Novartis AG) early and was able to capture higher bids than those later in the process. These factors softened the impact of the tax changes and ensured that yield enhancement season in Q1 remained a lucrative lending opportunity for our clients.

In-demand securities

• BP Plc (UK) – scrip
• Royal Dutch (UK and Netherlands lines) – scrip
• Wacker Chemie and SMA Solar Technology (Germany) –company outlook impacted by falling polysilicon prices
• Pandora (Denmark) – concerns over sales forecast, implementation of “corrective actions”
• France, OAT FR 4% April 2014
• Italy, BTPS 4.75% September 2021
• Germany, DBR 4% July 2016

Asia Pacific markets

Trevor Amoils
Desk Head, Asia Pacific trading
RBC Dexia Investor Services

The first quarter of 2012 saw increased demand for Asian securities driven by dividend related opportunities and directional activity. The main increase in utilisation was driven by demand for Japanese securities over the March record date. ‘Return on lendable’ increased primarily as a result of specials demand in Hong Kong.

Overall demand for Japanese March dividend baskets exceeded that in 2011 during the same period. The increase in demand can be attributed to greater regional stability following the earthquake/tsunami/Fukushima nuclear plant disaster and a change in sentiment towards Japanese dividends. Two securities that generated special demand were Olympus and Mazda Motors. Olympus parted company with its CEO after questionable transactions were brought to light and the stock traded special at levels over 10% until late January. Mazda Motors announced a record share sale to replenish capital in late February. The company was looking to raise Y150bn, or around 35% of their market capitalisation. The export-reliant carmaker forecast an annual loss of Y100bn in 2011-12. Borrowers paid up for stock as the news leaked into the market several days prior to announcement. RBC Dexia rerated existing borrows up to the 2.5% to 3% mark once the deal was formally announced.

Hong Kong continues to be the strongest revenue generating market in Asia. Real Gold is a directional play and its stock was sold down on fundamentals as the company is under investigation for accounting irregularities and lack of exchange disclosure. The stock has been in a trading halt since Q3 2011 and continues to generate good stock lending returns. Luk Fook is a consumer discretionary, which as a sector has been depressed in recent times. The stock is down 28% year-to-date. Stock is tightly held and the return to lendable exceeds 2%. In mid 2011, Moody’s released a report highlighting 60 Chinese companies that were ‘red flags’ on the basis of high concentrations of family ownership, frequent changes in auditors and over aggressive business and financial strategies. Huabao was on this list and directional interest has dropped 59% since June 2011. The return to lendable for RBC Dexia clients is currently in excess of 5%.

In Australia, outside of the consumer discretionary stocks, very few issues trade ‘special’ as supply currently substantially outstrips demand. The focus this quarter has been directional demand, focused on mining and resource sectors, and dividend-related demand where companies offer dividend re-investment plans. QBE announced a §capital raising in early March 2012 in the form of a placement, to fund acquisitions in South America. This generated a spike in demand for the stock which was further heightened as this event dovetailed into record date for their dividend. While the company slashed its interim dividend from $.66 to $.25 (AUD), the dividend still attracted a 2.5% discount on the dividend re-investment plan. The stock was ‘fully lent’ over this period. RIO has been in demand the past year due to the arbitrage between the dual listings (RIO LN versus RIO AU), as well as directional demand. JB Hi-Fi is one of the most challenging Australian names to borrow. This consumer discretionary issue had announced that their year-over-year sales around Christmas had been poor. On an annual basis, the RBC Dexia return to lendable (+/- 3%) exceeds the market return of lending at general collateral (GC) levels and re-rating around the dividend period.

In-demand securities:

• Olympus (Japan) – directional demand
• Mazda Motors (Japan) – share sale
• Real Gold HK (Hong Kong) – directional demand
• Luk Fook (Hong Kong) – directional  demand
• Huabao (Hong Kong) – directional demand
• QBE (Australia) – capital raising and dividend re-investment plan
• RIO (Australia) – dual listing arbitrage
• JB HI-FI (Australia) – directional demand

Competitive analysis:
The following graph reflects the RBC Dexia Asian Equity return on lendable relative to our competitors with similar dividend and collateral schedules.

For additional information on RBC Dexia’s securities lending capabilities, please contact:

Blair McPherson
Head of Market Product Innovation
+44 (0) 20 7029 7812
blair.mcpherson@rbcdexia.com

Mary Jane Schuessler
Desk Head, North American trading
416 955 5500
maryjane.schuessler@rbcdexia.com

Stephen Rudland
Desk Head, European trading
+44 (0) 20 7029 7226
stephen.rudland@rbcdexia.com

Trevor Amoils
Desk Head, Asia Pacific trading
+61 2 8262 5272
trevor.amoils@rbcdexia.com

RBC Dexia’s Pooled Fund Survey, produced on a quarterly basis by our Risk and Investment Analytics group, presents comparative return information for individual pooled funds available in Canada and was developed in response to a demand for unbiased industry information.

If you are interested in participating as a survey contributor, or if you have any questions, please contact RBC Dexia’s Pooled Fund Survey team at pooledfundsurvey@rbcdexia.com.

To receive more information on any of our other products, please contact your nearest consultant:

North America
Toronto: 416 955 5641
Montreal: 514 876 2495
Vancouver: 604 665 8400

Europe/UK
352 2605 3335

Asia-Pacific
61 2 8262 5088

While the Irish national economy has not been immune to wider Eurozone issues, its investment industry continues to flourish and its impressive growth story has helped the centre edge ahead of its jurisdictional rivals.

According to a recent announcement by the Irish Funds Industry Association (IFIA) Ireland saw €62 billion worth of net inflows to UCITS in 2011. This figure was the highest of all fund domiciles last year and nearly twice as much as all the other main fund jurisdictions put together during 2011.

An annual statistical report, Trends in the UCITS Market, from the European Fund and Asset Management Association (EFAMA) also revealed that Ireland bucked an international trend in 2011, attracting major fund inflows while others lost out. Domiciles such as France and Italy faced significant outflows of UCITS during 2011, with Ireland attracting an impressive €26 billion in new monies in the fourth quarter of 2011 alone.

Growth trend

These latest figures reflect a wider growth story. Over the past 11 years the net assets of Irish UCITS have grown more than 500 per cent and Ireland’s UCITS market share has increased to 14.5 per cent from 11.5 per cent at the beginning of 2011, according to EFAMA. Separate Central Bank of Ireland figures also indicate that Irish domiciled investment funds reached a record high in 2011, passing the €1 trillion mark for the first time.

So what is driving this success? According to the IFIA, robust local regulation, a proven track record in developing global fund solutions, strong distribution capabilities and favourable tax treaties have all helped. Ireland has also developed huge expertise in the investment funds arena. A raft of global asset servicing specialists, including RBC Dexia Investor Services, is present in Ireland, supported by all the major auditing and accounting firms.

In turn, the Irish funds industry supports a wide range of legal specialists and benefits from close dialogue with a supportive national regulatory authority. The centre has also proved it can operate nimbly at a regional and global level and was amongst the first EU states to fully prepare for UCITS IV Implementation in July last year. With this task now complete, local regulators and industry specialists are currently assessing the next steps likely to be required for the introduction of UCITS V regulations.

Alternative edge

Irish expertise in alternative investments also appears to be playing a major part in recent success, with many managers seeking to develop “UCITS friendly” alternative investment strategies and funds. Ireland has historically enjoyed a competitive edge over some jurisdictions in the alternatives arena, thanks partly to its long established work servicing the needs of US and UK hedge fund managers.

In addition, Ireland has been quick to realise the significance of forthcoming Alternative Investment Fund Managers Directive (AIFMD) legislation aimed at regulating alternative investment products in Europe. Each European Union (EU) member state is ultimately due to transpose AIFMD requirements into national law by July 2013. The local regulator and the IFIA are currently working hard to help ensure both the Irish funds industry and its QIF product range are fully prepared for the changes and potential challenges and business opportunities ahead.

Against this backdrop there is strong evidence that managers gearing up for AIFMD are increasingly turning their sights to Ireland and the IFIA reports that new figures for the jurisdiction’s Qualifying Investor Fund (QIF) are soaring. Recent figures from the Central Bank of Ireland also state that the number of QIFs has now reached an all time high of 1,420 with assets reaching a new peak of EUR 182 billion. In addition to its success in the QIF arena, Ireland is now developing considerable new expertise in servicing exchange traded funds (ETFs).

Ireland, which already administers approximately 40 per cent of the world’s alternative investment funds, saw QIF assets last year grow by more than 20 per cent in 12 months after registering 35 per cent growth in 2010.

Innovative approach

Looking ahead, Ireland is far from complacent about its growing funds industry success. As just one example of this, and continuing the theme of innovation, the Irish Minister for Finance recently announced he had approved the development of legislative proposals for a new corporate structure for the Irish funds industry (the “SICAV”).

This new SICAV structure will sit alongside the existing public limited company (“PLC”) structure. Under the new arrangement, the SICAV structure will enable a corporate entity to elect its classification under the US “check-the-box” taxation rules. The move has been welcomed by the industry and Irish legal specialists say it could help managers avoid certain adverse tax consequences for US taxable investors. It is anticipated that this new structure will make Ireland even more attractive to global investment managers, especially US players. The proposed legislation is expected to be enacted towards the end of 2012/beginning of 2013.

This innovation, coupled with a strong determination to remain competitive, place Ireland well on track to continue its impressive growth story. The introduction of new regulation such as AIFMD, the anticipated UCITS V and the Foreign Account Tax Compliance Act (FATCA) measures also present new challenges Ireland is well equipped to match and augur well for a centre dedicated to servicing global investment manager needs, capitalising on investment industry change and growing market share. 

Annette Stack
Director Sales & Relationship Management, RBC Dexia Investor Services Ireland Limited

Now with just eight weeks to go until the deadline, asset managers who have underestimated the work involved not only risk their chances of becoming KII-compliant but are also neglecting a competitive opportunity.

A step change for the industry
KII is more than just a legal requirement. It completely changes the way financial information is prepared and distributed in Europe, and is part of a wider global trend towards short-form documents that provide investors with greater transparency.

So far, many asset managers have underestimated the level of change required (see our article KII Pressure Starts to Show). It typically takes two months to produce and translate KII, submit it to the regulators and file it with the distributors. Many fund houses are in the middle of projects, but with ten weeks to go, many are leaving elements of it late and there are still thousands of documents to be produced.

Some smaller houses have shown no hurry to embark on projects so far: they may have decided they will outsource the process, because it is complex and time-consuming, but have not accounted for how long it will take (see our article Unlocking KII).

Keep it plain
The KII document can be printed relatively quickly. However asset managers cannot simply convert an existing prospectus into a two-page KII. It also has to fulfil plain language requirements to be compliant with UCITS IV.

Rather than just changing some words to make it sound less technical, we believe this applies to the entire approach of writing and describing an investment policy. It means taking a fresh look at how investment strategies are explained.

Today’s asset managers operate in a competitive environment and investors have a wide choice of funds. KIIs that are easy to understand and investor-friendly should also be considered as a powerful marketing weapon (see our article A Winning Edge with KII).

Distributors will rely on the document to encourage investors to subscribe to the fund. In our view, good KII contributes to the attractiveness of the fund for investors. Furthermore, with transparency and investor protection the watchwords of many national and European regulatory bodies, the clearer an asset manager is about the fund and its objectives the better.

The worst-case scenario
The UCITS IV directive does not specify any penalties for missing the deadline for preparing and distributing KII, and leaves the form of any punitive action up to the national supervisory body. However, failing to comply could impact the asset manager’s brand and this probable market penalty is not to be underestimated. Will distribution partners still be willing to handle Simplified Prospectuses instead of KIIs in July, and sell those funds in the market? Time will tell.

Urgency and opportunity
KII are one of the most significant issues facing asset managers this year. Regulation such as the Volcker Rule and FATCA has made headlines, but the deadline for KII compliance comes more quickly than any other, and there are no loopholes.

In addition, KII is not a one-off. Asset managers have an ongoing commitment to keep them updated. They may appear straightforward, but this is the domain of Content Management and all of the associated and specialised software and know-how that comes with it. Simply expecting to be able to produce and manage KII on word processing systems is not realistic.

Once produced, the KIID must also find its way into the hands of the end investor prior to signature, otherwise all the hard work is for nothing. Therefore, it is important that production and distribution do not distract asset managers from their core business, and it is also highly advantageous for them to get them right and on schedule.

Martin Bock
Senior Manager, Fund Markets Products & Client Segments

Here you will find extensive coverage of the latest issues and trends impacting asset managers, pension fund managers and the financial sector.

The implementation of the Alternative Investment Fund Managers Directive (AIFMD) will reach another milestone in July 2012 when the European Commission publishes the final details of this far-reaching legislation. Member States will then have a year to transpose AIFMD into their national laws.

We assess why it is important for European Union governments to embrace the AIFMD and implement it on schedule, while also setting out some of the issues that non-EU fund managers may face when attempting to access this lucrative market.

In addition to AIFMD, asset managers also face regulatory changes from the United States. The proposed Volcker Rule, which is part of the sweeping Dodd-Frank reforms, could have a profound impact on the European fund industry. Under this rule, any large retail bank with US interests may be stopped from running UCITS funds, Canadian mutual funds or Japanese investment trusts.

However, opportunities are also suggesting themselves as a result of regulatory change. Real estate funds which find it difficult to raise new capital from banks withdrawing from the lending markets, may instead find new avenues of financing from insurance companies. Insurers are expected to increase indirect exposure to real estate to mitigate the impact of Solvency II, which imposes stricter capital requirements on real estate investments they own.

As the west resets its regulatory regime after a challenging period, the growth of opportunity and innovation in Asia continues apace. At the centre of this story is the promotion of Renminbi as an international currency from an offshore launch pad in Hong Kong. We analyse how the growing availability of Renminbi-based product is changing investor appetite for China.

We hope you enjoy this edition of 360 and look forward to your feedback and comment.

RBC Dexia’s recent webinar, featuring tax experts and FATCA specialists from KPMG (Luxembourg) and RBC Dexia, included commentary and discussion on these topics.

For your convenience, the recorded webinar and presentation are accessible here. A summary report is also available, which describes the session highlights and includes the aggregate results from participant poll questions conducted throughout the session.  

RBC Dexia will continue to monitor FATCA progress and will schedule a follow-up webinar when the regulations are more definitive. We’ll also be sure to keep you updated on the status of our readiness.

Hong Kong ranks in the top tier of global financial centres, competing with New York, London and Singapore. Analysts prize its growth in stock market operations and the management of IPOs on the back of the substantial flow of Chinese companies entering the market.

China’s liberalising of its currency has also spurred the development of a Renminbi deposit base. To facilitate this expansion Hong Kong’s designated clearing bank, the Bank of China (HK), is permitted by the Chinese authorities to trade RMB with other banks at the mainland exchange rate. Banks can use this so-called “Shanghai window” to support cross-border trade flows from its corporate customers.

Deposit jump
By the end of 2011, Renminbi deposits in Hong Kong reached Rm609bn, six times higher than at the start of 2010. China cross-border activity rose to USD 85.2bn in 2011, a 5.7% jump from a year earlier, with outbound volume reaching USD 49.4bn, according Thomson Reuters.

Mark Hogg, director, FX product development at RBC Dexia, recently told the Financial Times that China continues to demonstrate a willingness to take steps toward unrestricting its currency and capital flows.

“The Renminbi foreign exchange market is thriving,” he told the newspaper. “Full liberalisation is likely to still be several years away, but we can expect a future where the Renminbi is a globally traded reserve currency, commensurate with China’s status on the world economic stage.”

Various indicators of comparative advantage and competitiveness, including its rising share of the world equity market, point to Hong Kong’s strong position in equity-related business. Given China’s dominant position in regional and world trade, there is obvious potential to rapidly advance Renminbi’s role in trade settlements.

But there are also challenges on the horizon for Hong Kong. Until recently Beijing’s central concern was to control the inflow of “hot money” – investors seeking interest rate arbitrages – but now capital flight is a threat as China’s economy slows.

The amount of money exiting China appears to be small but has led to falls in the value of Renminbi and squeezed the stock market. The Shanghai Composite Index fell 10% last year.

In response, the Chinese authorities have opened further channels for foreign investors. Renminbi held offshore can now be used by foreign institutions to buy assets within China through the introduction of the renminbi qualified foreign institutional investor (RQFII) programme.

Foreign funds account for only 1% of total market value in China and while liberalisation is unlikely to impact significantly in the short-term as quotas remain low, it underlines Beijing’s desire to attract international capital.

Arguably, the creation of an offshore Renminbi market will also present a new conduit for funding China’s ‘go global’ strategy and for China’s next generation of investment and growth.

Alongside Hong Kong’s existing strength in the equity market and IPOs, the Renminbi bond market presents the financial centre with the opportunity to develop the framework for a corporate debt market that could become the broader template for the Mainland to expand its capital market base.

Delicate balance
The Chinese authorities now have a delicate balance to strike between ensuring the continued health of the offshore Renminbi market while controlling capital outflows.

For example, the Hong Kong Monetary Authority has said banks whose positions with the clearing bank cover more than Rmb200m in a single month must provide detailed evidence of their top 10 cross-border transactions. They will be forced to unwind deals if the underlying transaction is deemed to be “non-eligible”. Banks that regularly flout these rules will lose access to the Shanghai window.

Based on the measures that have been introduced in the last year alone, it is reasonable to conclude that China wants to further promote an offshore Renminbi market, probably as a precursor to the eventual launch of Renminbi as a fully convertible global currency. One recent step along this path was the unveiling of London to soon join Hong Kong as an offshore Renminbi trading centre.

This growth offers a significant role for Hong Kong’s financial sector, which is characterised by a high degree of liquidity and internationally recognised transparency and regulation standards. For example, Hong Kong forms part of RBC Dexia’s commitment to unrestricted 24-hour global trading coverage with dedicated FX trading and sales desks as well as access to liquidity in FX markets in the Asia Pacific time zone. Despite the growth of other financial centers seeking to service the business opportunities emerging from mainland China, Hong Kong’s proximity and cultural ties there means it will remain a dominant player in the region as the Renminbi story evolves.

Steven Braithwaite
Director, Global Head of FX Trading