UCITS: A Global Smash Hit

March 01, 2021
Established in 1985, the UCITS fund structure is two years older than Rick Astley’s hit “Never Gonna Give You Up.” Ever since, investors in Europe and beyond have never given up on UCITS. We explain with a selection of the "greatest hits" from UCITS funds.

Never Gonna Give You Up: Old-school UCITS Still Dominate New Kids on the Block
Rick Astley

Originally established in 1985, the UCITS fund structure is two years older than Rick Astley’s famous hit “Never Gonna Give You Up” which topped the charts in 25 different countries. Ever since, investors in Europe and beyond have never given up on UCITS. In fact, over the years it’s become a global smash hit.

According to European Fund and Asset Management Association’s (EFAMA) recent report, as at the end of 2020, the total assets under management for the European funds market totaled €18.8 trillion. UCITS comprised €11.7 trillion or 62.2% of this vast amount spread across close to 34,000 sub-funds who carry the UCITS moniker with pride.1


Chart showing the Net Assets for UCITS and AIFs during November and October and the percentage of change.

A thriving E.U. alternative funds market, primarily constituted under AIFMD, coexists and continues to grow and evolve within the European fund ecosystem, but it is the mixture of strong brand recognition, investor protection framework, and built in cross-border distribution mechanisms, that ensures UCITS remains number one in the net inflow charts year after year. It is clear that global investors sing to the same UCITS tune, since UCITS has also proved popular beyond Europe’s borders, with rising sales and distribution channels in Asia and Latin America. This is a newer dynamic, and one which more and more asset managers are looking to benefit from.

The growth trajectory of UCITS assets has largely mirrored that of the global stock markets generally, rising for the past decade with the sole exception of a small pullback during the last quarter of 2018 resulting in the only net asset decrease since 2011. However, by the end of 2019 strong growth saw the net assets of UCITS break the €11 trillion barrier for the first time, and continued growth through 2020 saw UCITS Net Assets stand at €11.7 trillion at year end.

Graph in EUR Trillions showing the Net Assets of UCITS from years 2009 through 2019.

The European marketplace is made up of a mixture of strong domestic funds and cross-border funds. Some funds sell just to investors within their national borders whereas other cross-border funds sell into multiple distribution markets. The EFAMA’s 2020 Factbook data shows that European funds that sell on a cross-border basis are in a slight minority (47%) compared to domestic funds. However, those that are sold across borders achieve higher asset growth rates, with this cohort of funds having almost tripled assets under management in the previous 10 years.i  There are also exciting regulatory improvements already in train to make fund distribution and passporting to more countries easier which may further spur UCITS’ growth.

The UCITS success story has also attracted managers from all corners of the globe hungry to leverage the UCITS brand and cross-border distribution advantage to grow their businesses.

Survivor: Europe’s Cross-border Funds Pass Their COVID Test
Destiny’s Child

Briefly glancing back at 2020, a year like no other, showed the cross-border funds’ marketplace to be hugely resilient in the face of unparalleled operational shifts married to market volatility. It was far from plain sailing for European cross-border funds. The onset of the global pandemic in March quickly resulted in market valuation challenges twinned with liquidity deterioration. Global managers all needed to address these challenges at the same time as the majority of staff across the globe were forced into a remote work environment. Simultaneously, investor outflows from funds rose sharply, and triggered a flight to safety which saw increased flows towards safer, more liquid assets and a “dash for cash,” a regular occurrence in such uncertain times.

The pandemic-fueled volatility paired with the necessary global economic shutdown resulted in the VIX index, the most utilized measure of market volatility, to close at an all-time high of 82.69 on March 16, 2020. This meant the markets were more volatile than the epicenter of the great financial crisis in November 2008. The word unprecedented was overused in 2020 with valid reason. However, in spite of the uncertainty investors did not run for the hills. With government supports underpinning confidence and sentiment, UCITS flows rebounded quickly with EFAMA noting €526m in net UCITS sales for the 8 months following March. Fund inflows went on to rally through the remainder of the year, maintaining confidence in their chosen strategies, while managers were able to maintain liquidity and preserve performance as markets rebounded.

Dedicated Follower of Fashion: What Sold Well in 2020?
The Kinks

Thematic investing was prevalent across the industry last year, heavily shaped by the prevailing pandemic circumstances the world found itself in. Strategies focused on areas such as clean and renewable energy, or innovative technologies like cloud computing, blockchain, online gaming (we won’t dwell on GameStop for now), and internet shopping and logistics all proved popular investment choices. Some themes provided investors with outsized returns. Another interesting nugget from the available data was that managers with concentrated portfolio composition and high active share (deviation from standard benchmarks) also had a bumper year both in terms of returns but also net inflows. This is notable as one industry trope that continues to exist is that investors are shunning active management for cheaper passive products. While passives continue to do well, there will always be space for active managers who get it right to grow in their own right. Some commentators hailed the global recession as a potential end to the passive funds’ sales domination last year. But what we have seen is that assets in exchange-traded funds (ETFs) have continued to rise and managers are increasingly exploring what it might mean for them to be in this space and bring a total investment solution to their investor base.

Another prominent success factor for cross-border asset managers continues to be honing a well-defined distribution strategy. Accessing the right platforms, distributors, and sales channels for their product was and continues to be crucial. Without question, having the product set, share class construction, and investor service model is the foundation to building success.

We are the Champions: Success Factors of Best-Selling Funds

Having navigated the stormy seas of last year, it appears that while things cannot be described as back to normal, more certainty abounds in the funds market. It appears that UCITS funds are primed to continue their winning streak with receipt of strong net inflows if the early months of the year are a gauge of what’s to come. UCITS’ geographic footprint continues to grow and BBH increasingly observes inflows from new or different channels including new countries who previously did not invest in UCITS funds.

While new markets are always attractive and exciting, fund managers should not neglect the core. European sales and distribution channels remain fertile ground and UCITS managers must focus both on the distribution platforms needed for the effective distribution of their funds in Europe and on assessing the countries and capital pools within which they are most likely to succeed. It is also a journey that may need third-party distribution partners to add competency that may not naturally reside within their own firm. Depending on country of distribution there are also often national champions or other influencers who can largely dictate flows. Navigating the entire European fund ecosystem is complex and successfully managing the complexities of cross-border UCITS distribution are at the heart of BBH’s business. We study the distribution market closely and provide clients with practical insights on product and flow trends, applicable regulations, operational, and connectivity requirements which each can influence the success of our client’s chosen distribution strategy.

We are proactive regarding engagement on our clients’ strategies. We engage with clients on matters ranging from consideration of multi-currency share classes, to ensuring the calculation and payments of retrocessions are allocated correctly to a funds’ sales channels. When it comes to offering hedge share classes, eliminating currency movements from the investment performance delivered in different share classes is now a necessity when considering cross-border distribution. Supporting the operational maintenance and ensuring a seamlessly positive client experience are other factors in how BBH partner with clients to ensure they can successfully deliver their chosen distribution strategy.

What’s Goin’ On?: Staying Up to Speed on Policy Change Is Vital
Marvin Gaye

The world of cross-border funds is heavily influenced by the actions and changes imposed upon it by regulators and legislatures. Understanding the impact of new and evolving regulations on your business is critical but identifying the practical impacts and consequences beyond the headlines is challenging. As asset managers with E.U. funds continue to grapple with the fallout of Brexit, the retirement of LIBOR, the imposition of hugely demanding ESG, regulatory challenges to global delegation models, intense focus on operational resilience and matters like foreign exchange best execution and transparency requirements, it can all get a little too much.

That’s why our team of Regulatory Intelligence experts help asset managers navigate the global regulatory landscape, protect clients against regulatory harm but also partner to harness the potential opportunities that such changes often bring. Through active industry engagement, our team help you to stay informed and provide thought leadership content and access to subject matter expertise that can assist asset managers to have practical dialogue on the shifting sands of regulation.

Everybody Wants to Rule the World: The Rise of ETFs Continues Unabated
Tears for Fears

Exchange-traded funds (ETFs) are significant and rapidly growing sub-set of the UCITS universe. Global assets in ETFs broke through the €7 trillion mark in mid-2020, and a recent Refinitiv Lipper report showed that assets held within European ETFs broke through the €1 trillion barrier2 showing how ETFs have proved their resilience in the face of turbulent markets.ii

An interesting point about ETFs is that while they started out as largely a low-cost passive product which simply provided beta exposure to various indices, they have continued to evolve to become far more than that. Notably many of the new market entrants to the European ETF space do not choose to compete against the passive ETF behemoths but rather have brought to market specific actively managed strategies. It appears certain that UCITS ETFs will continue to grow in popularity as they morph themselves to meet new investor demands.

ETFs are central in the shift towards ESG and sustainability and there has also been a raft of thematic ETFs come to market. Thematic investing focuses on long-term societal trends rather than specific companies or sectors. So, the growth in ETFs with exposure to healthcare, innovative technologies, cryptocurrency, artificial intelligence, or electric vehicle for example all being trends which ETFs can capture effectively for investors. Thematic ETFs in Europe emerged as one of the big winners of 2020 as eye-catching returns helped attract a record €9.5 billion in net new inflows.3

There are also certain regulatory innovations which make the ETF space very dynamic in Europe, with many pushing for approval of non-transparent ETFs like they have in the U.S. Permissions to invest in esoteric asset classes such as cryptocurrency and medicinal marijuana have contributed, as have ongoing assessments around the ability to launch either an unlisted (mutual fund) share class on a listed (ETF) sub-fund or vice versa, adding a listed (ETF) share class on an unlisted (mutual fund) sub-fund.

This commingling of ETF and traditional mutual fund share classes is a cost-effective way to cater for different investor types without duplicating investment strategies, and affords asset managers many advantages:

  • Benefits of scale and efficiency in the pooling of assets for a common strategy
  • The ability to leverage existing distribution channels and platforms
  • Helps utilize existing performance history when selling a new launch
  • Allows funds to come to market sooner
  • Caters to investor preference and widens investor reach

Money’s Too Tight to Mention: The Rise of Tax Transparent Funds
Simply Red

There is a growing amount of interest across Europe in Tax Transparent Fund (TTF) structures particularly for asset managers to best serve investors, for example like pension schemes, who may be tax exempt on equity dividends. A TTF set up as UCITS allows tax exempt investors to pool their investments and avail of tax treaty benefits which means they do not suffer direct taxation on certain portfolio holdings ‘automatically’. Instead of automatically taking ‘withholding tax’ from equity dividend incomes, on the presumption that all investors will need to pay income tax, TTFs are able to avoid collecting these taxes in return for offering ‘look-through transparency’ to the authorities.

With cost of investment now a central focus to large asset owners, efficient fund structuring to ensure the minimum amount of tax drag is increasingly important and it is where TTFs come into their own.

The structures are most popular in Luxembourg, where you have the Fonds Commun de Placement (FCP), and Ireland, where you have the Common Contractual Fund (CCF) and are often authorized as UCITS. More recently, the U.K. launched its own version in 2013 — The Authorised Contractual Scheme (ACS).

The funds’ rise in popularity is down due to a number of reasons:

  • Investors are becoming increasingly tax savvy and continue to look for ways to manage pooled investments while trying to avail of double taxation treaty benefits.
  • Increasing numbers of investors are looking to TTFs, such as insurance companies, institutional investors, traditional pension funds and government bodies.
  • Margin pressure continues on managers and they cannot afford to leave money on the table, reducing tax erosion on investment returns is as good as adding performance.
  • If structured correctly, and depending on the strategy and Investor base, managers can leave up to 60 basis points annually on the table because of ‘tax drag’. It is this magnitude of uplift that has focused managers minds on the benefits TTFs present.

Ch-Ch-Ch-Ch-Changes: The Ability to Adapt to Change Is Now
David Bowie

Year on year we’re seeing an increased interest for global cross-border asset managers to continue to develop their UCITS offering. This often results in new fund strategies being added to their offerings, and in recent times the shift to launch new or retrofit existing funds to be ESG compliant is widespread. This trend is driven both by upcoming Sustainable Finance Disclosure Regulation (SFDR) requirements but also by a growing investor demand.

Also, and of increasing importance, is ensuring the effectiveness of their existing distribution footprint and how they can best develop new distribution opportunities for their products. Whether it’s a manager historically focused on European distribution seeking to expand into the Americas or Greater China, or an Asia manager entering the European market for the first time, finding the optimal distribution partner and platforms is key to a successful distribution strategy. A great product without a good distribution strategy will not be as successful as it should be, and positively reacting to the ever-changing ecosystem is crucial for continued success.

Though no asset manager or product set are the same, the same simple questions arise and must be answered with confidence to ensure growth:

  • What’s our product?
  • What does our target investor profile look like?
  • Where are our intended investors located?
  • What sales and distribution channels should we use?
  • What can we do alone and what do we need third party assistance with?

This is where BBH Distribution Intelligence assists our clients by providing insights on the fundamentals of cross-border distribution ranging from regulatory considerations, to discernible distribution trends and helping with operational considerations across a spectrum of areas including:

  • Product design
  • Regulatory adherence — i.e. registration/marketing
  • Distribution opportunities — trends, research reports and data
  • Trailer fees and share class construction
  • AML understanding
  • Data dissemination
  •  Oversight requirements

Video Killed the Radio Star: Digitization of Data
The Buggles

This is not a new phenomenon — the need for a full-scale evolution of current operational models in the funds industry has been ever-present and overdue for the past number of years. So, will 2021 be the year where we see a significant acceleration? We believe so.

The reason is that history has shown that major world events (wars, plagues and, yes, pandemics) have led to positive changes in society, because these events challenge us to question the norm and look for new solutions. There are several ways in which new technologies could benefit fund managers, enabling them to differentiate themselves, provide more efficient solutions, increase transparency, and improve customer experiences.

One example is in the investor onboarding process.

These are currently largely manual, lengthy, and not user-friendly. It is a very iterative, opaque process. It requires clients to deal with a significant amount of paperwork, including collecting and providing numerous documents evidencing personal details as proof of identity, address, and financial soundness.

Now think about the impact COVID-19 has had globally — almost every consumer on the planet has adapted behaviors and expectations with regards to online interactions. So, can asset managers and the providers afford not to change? We think not.

There is increased regulatory scrutiny on managers and their ability to perform adequate oversight of all delegated activities. But, as importantly, the ability to seamlessly onboard and offboard your investors is a crucial interaction to ensure they have a positive experience and continue to invest or become return customers. The funds market is not so far removed from the general consumer market and the adage that a customer with a satisfactory user experience might tell a few people, but if they have a bad experience, they will tell lots of people holds true. BBH is focused on ensuring the investor experience is optimal, this is achieved by offering unparalleled transparency via our Infuse Transfer Agency Platform.

Standing in the Way of Control: Oversight is Crucial

The oversight and control that asset managers need to demonstrate is increasing, and working with providers that can provide the correct level of transparency is key, whether you are calculating funds’ net a-sset values (NAVs) or applying FX activity across a complex range of asset classes. The most effective way that asset managers demonstrate proper oversight and control as they look to grow market share in Europe is by partnering with the right industry participants.

Partnering with providers who have market-leading data management and the most up-to-date tools for connecting various stakeholders to the data at the heart of their business is key to scale your business. The BBH operating model is that clients have control over, and visibility into, their operational environment providing management, investors, board, and regulators with the assurance they expect and require. We believe that there is trapped value in our clients’ operating models. We work with them to unlock it. An optimized operating model tailored to their needs is vital to commercial success. Finally, BBH is a service partner committed to supporting our clients’ growth. We are fully committed to asset servicing, supported by a streamlined, scalable technology infrastructure and highly connected client service teams globally, to position our clients for future growth.


1 EFAMA 2020 industry Fact Book https://www.efama.org/Pages/Submitted%20after%202018-03-12T16%2022%2007/EFAMA-publishes-2020-industry-Fact-Book-.aspx
2 ETFGI, January 2021
3 ETFGI, January 2021
i EFAMA 2020 Industry Fact Book https://www.efama.org/Pages/Submitted%20after%202018-03-12T16%2022%2007/EFAMA-publishes-2020-industry-Fact-Book-.aspx
ii ETFGI Research https://etfgi.com/news/press-releases/2020/09/etfgi-reports-assets-invested-etfs-and-etps-listed-globally-broke#:~:text=LONDON%20%E2%80%94September%209%2C%202020%20%E2%80%94,at%20the%20end%20of%20August.

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