Brussels, 16 February 2017:
EFAMA is disappointed that ESMA considers that share classes aimed at hedging factor-specific exposures are not admissible.
EFAMA does not share the ESMA Opinion issued on 13th February whereby for those UCITS offering different kinds of share classes with derivative overlays to hedge-out other factor risks (e.g. duration, volatility, etc.), these share classes will be deemed non-compliant.
ESMA’s opinion comes as a clear step back in the context of the Commission’s much welcomed attempts to remove barriers to cross-border fund distribution.
For years, the European asset management industry has suffered from a general lack of competitiveness vis-à-vis non-EU asset management companies. Where a broad array of share classes based on the same underlying asset pool is allowed, fund administration and distribution costs are mutualised across a larger population of investors, delivering significant savings in terms of economies of scale.
As the creation of share classes is essentially demand-driven, investors are faced with reduced choice when authorities decide to limit share-classes only to a few.
In parallel, ESMA’s choice to consider duration-hedging overlays is incompatible with its principles and will force investors, especially large institutional ones, to redeem their shares in existing funds, only to have to re-subscribe in brand new funds (or compartments thereof) ex novo. This will raise costs for managers and investors alike (especially the initial set-up and transaction costs).
Finally, despite the provision for transition periods in its Opinion, ESMA’s decision not to approve of duration-hedged share classes comes at an unfortunate moment, as we are more likely to witness rising rates in the future. We are also in a time when institutional investors – and not only them – have committed considerable amounts of their own and clients’ money to fixed-income portfolios managed through UCITS. Hence, lessening the attractiveness of such share classes by ESMA – with no apparent difference when compared to foreign currency ones – comes as a surprise, especially with interest rate risks becoming “real”.
In connection with better cost mutualisation and against the backdrop of the worldwide competitive landscape, EFAMA had pleaded regulators to help European UCITS managers:
I. Manage larger UCITS funds to effectively face‐off competition from non‐European providers, while helping to resolve the problem of excessive fund fragmentation noticeable in Europe;
II. Hedge duration risks in fixed-income portfolios as real and non-secondary to foreign-currency ones; and
III. Offer UCITS shares outside Europe to meet rising demand in non‐EU, third‐country jurisdictions (particularly Asia), thus drawing more non‐European investors towards the UCITS product brand.
EFAMA therefore regrets ESMA Opinion and trusts that the legitimate concerns of European asset managers will be duly considered looking forward.