Investment Management Update
HM Treasury has published the Investment Management Strategy II, setting out the government’s long-term approach to enhancing the UK’s position as a centre for asset management.
A follow up on the first strategy for the sector, published in 2013, the Investment Management Strategy II targets a broader range of policy areas. In particular it sets out the following six policy initiatives that the government, in collaboration with the industry and the regulator, will take forward to:
• enhance the government, regulator and industry dialogue;
• maintain stable tax and regulatory environments;
• strengthen the asset management domestic skills pipeline;
• advance the development of asset management FinTech solutions;
• support UK asset managers to be global leaders in developing innovative investment strategies (such as green finance and social impact investment); and
• continue a coordinated programme of international engagement to attract overseas firms to locate in the UK and promote UK firms overseas.
The overarching objective is to ensure that the UK asset management industry continues to thrive and delivers the best possible outcomes for consumers, businesses and the UK economy.
Verena Ross, Executive Director of the European Securities and Markets Authority (ESMA), has given a keynote address at the ICI Global 2017 Capital Markets Conference in London. ICI Global carries out the international work of the Investment Company Institute.
The speech reviewed some of the key developments in the asset management sector over the past year and looked ahead to some of ESMA’s priorities in this area in 2018, notably on costs and charges of investment funds.
The speech covered work on supervisory convergence in the run up to Brexit and ESMA’s work on Money Market Funds, including technical advice on Level 2 measures, implementing technical standards on reporting requirements, and guidelines on stress testing.
Looking forward, Ms Ross stated that the MiFID II regime for payment for research (paying hard, or via a research payment account) will push portfolio managers to identify more clearly the research they need and the value it adds in informing their investment decisions. This should help ensure better use of the research budget instead of firms (and ultimately their clients) paying for low-quality, duplicative research. The new regime should also provide better opportunities for independent research providers to compete on the quality of the research provided and should prompt portfolio managers to acquire research from a wider variety of research providers.
In relation to costs and charges of investment funds, aside from ESMA’s work in the context of capital markets union, ESMA plans to tackle cost issues on several fronts:
• Closet indexing: ESMA will collect information from national regulators in order to get a clearer overview of what has been done at national level.
• ESMA intends to carry out more detailed analysis of the performance of active and passive funds. The precise outcome of this work will depend on the results of the analysis but there could also be scope for further guidance on the relevant legal requirements given some differences of practice ESMA has seen with regard to benchmark disclosure.
• ESMA will also look into performance fees. ESMA is aware of different approaches across the Member States as to what constitutes a permissible performance fee so it will consider scope for supervisory convergence work in this area.
The International Organization of Securities Commissions (IOSCO) has published its Final Report on the Fourth IOSCO Hedge Fund Survey, which provides regulators with new insights into the global hedge fund industry and the potential systemic risks the industry may pose to the international financial system.
The survey makes the following observations:
• In the two years since the previous results, global assets under management (AUM) of hedge funds captured by the Survey rose 24 per cent to US $3.2tn.
• The Cayman Islands continues to be the fund domicile of choice, making up 53 per cent of the global total by net asset value (NAV).
• According to the data from the Survey, equity long / short was the most widely used investment strategy, followed by global macro and fixed income arbitrage.
• Gross leverage of the hedge funds in the Survey was 7.1x NAV. This figure includes the notional values of interest rate and FX derivative contracts. Removing these figures from the data, gross leverage was 3.1x and net leverage was 1.1x.
• At an aggregate level, there is a considerable liquidity buffer, suggesting that in normal market conditions hedge funds should be able to meet investor redemptions.
• As of the measurement date, 3.8 per cent of hedge fund assets had constrained redemptions through the use of liquidity management tools, such as gates, suspensions, or side pockets.
The International Organization of Securities Commissions (IOSCO) has published its Final Report on Good Practices for the Termination of Investment Funds.
The report outlines fourteen good practices that can be adopted during the voluntary termination of a fund. Such terminations often occur when a fund is no longer profitable or cannot carry out its desired objectives. These practices aim to promote investor protection issues.
The fourteen good practices are organised into five categories:
• disclosure at time of investment;
• decision to terminate;
• decision to merge;
• during termination process; and
• specific types of investment funds.
The good practices highlight the importance of keeping the investors well informed. This aim is supported by practical advice which includes transparency on the ability to terminate in the fund documents and the importance of a termination plan.