Be Unconventional: M&A, ETF and UCITS

At the recent SunStar Strategic Client Conference for Mutual Funds: Energizing Your Growth Strategy, attendees were privileged to hear from Tony Baker, Consultant at Exchange Traded Concepts, Brad Hearsch, Senior Advisor at UBS and Rafael Perez, Global Relationship Manager at BNP Paribas for a panel presentation on unconventional ways to grow your business.

Baker explained how Exchange Traded Funds (ETFs) could serve as another way to distribute your strategy. “ETFs are one of the fasting growing areas in the fund space,” he said. ETFs have experienced tremendous growth, with $1.3 trillion invested by the end of 2012. Their advantage lies in their convenience and access for investors, with changes easily made in minutes. For the fund firms, they offer lower costs and tax relief. Baker suggested using an ETF turnkey solution for ultimate ease, and anticipates most mutual fund houses will turn to ETFs in the near future.

Another opportunity for growth can be found in M&A, as Hearsch explained. He said most of the focus today is on mid-sized transactions due to limited capital available; larger money managers have instead turned to the IPO market. “There’s always a place for M&A for a solid firm with good people,” Hearsch said. The desire to monetize is the driving force behind these transactions, with many buyers seeking five year contracts for their key people, often serving as incentive for staff to stay on through the transition.  In the mutual fund world, Hearsch said it’s common to see “fund adoption” transactions, when a fund or group of funds is sold but the seller retains the contract to subadvise.

Perez suggested another option, using Undertaking for Collective Investment in Transferable Securities vehicles, or UCITS. UCITS are funds that can be marketed within all countries within the European Union, provided that the fund and fund managers are registered within the domestic country. Each country may differ on their specific disclosure requirements. “These are the only vehicles that allow broad international distribution with just one registration,” he explained. UCITS are mostly retail-driven and are meant to be flexible with a wide range of investments. There has been significant growth with these vehicles, with 2012 pulling in more than $200 million in inflows. “In particular, Latin America has a ferocious appetite for UCITS. Sweden and Finland should also see big growth in UCITS,” Perez added. However, he cautioned that there is no universal distribution technique—you must study this on a country by country basis to determine the best partner. “Without a local partner, it’s virtually impossible to get any traction, no matter how good your product is,” he added.