Introduction to Investment Funds - Link'n Learn - Deloitte
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Introduction to Investment Funds Link’n Learn 31 May 2018
Speakers
Brian Jackson Julie Farren
Partner– Financial Services Manager – Financial Services
Deloitte Ireland Deloitte Ireland
Derina Bannon Paola Draper
Senior Manager – Financial Services Senior manager – Financial Services
Deloitte Ireland Deloitte Luxembourg
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 2
Agenda
1 Introduction
2 General principles
• How an investment funds works
• Different structures
• Parties involved
3 Regulatory evolutions
4 Market trends
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 3
Introduction © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 4
Asset Management Industry
“The asset management industry plays a distinctive role in capital markets by pooling the
savings of investors and investing them strategically in financial instruments and other
assets with the aim of generating returns.”
Economic function of asset management industry:
Facilitate participation of small investors in financial markets (and sometimes offering a form of capital protection)
Participate in both primary and secondary equity markets
Providing short and long term credit to corporates, financials institutions and governments
Participate in price discovery
Asset managers interact with banks and insurers in different ways, e.g.:
Through commissions for managing their portfolios
Presence in banking groups and corporate ownerships
Sourcing of leverage through prime-brokerage agreements
Distribution agreements
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 5Introduction
Role of investment funds in the Asset Management industry
Investors
Retail Institutional
Insurance
HNWI Households Pension Funds Banks Other
companies
Invest Invest
Private
Banker
Investment ManCo
Discretionary fund
Mandate
Investment
management
company
Depositary Bank Fund
Administrator
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 6General Principles © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 7
How an investment fund works
Who creates investment
funds?
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 9What is a Investment Fund ?
The term “Fund” covers a number of terms including mutual funds, collective
investment undertakings, collective investment schemes or pooled investment
vehicles and these terms are generally used interchangeably.
A fund can be classified in various ways e.g. by its structure, its investment
strategy or its regulatory status.
• An investment fund is an entity that pools investors’ money to provide the investors with
professional investment management.
• Typically an investment fund sells its shares to the public, invests the proceeds, mostly in
securities, to achieve the investment objectives, and will either retain or distribute to its
shareholders the net income and net gains.
• Diversification of investment risk of the individual shareholder (spreading the risk of a fall
in value of a single investment amongst a number of investors, and also has the benefit of
reduced broker costs (transactions or buying/ selling costs, due to the economies of
scale).
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 10Investment Funds are
designed to meet various
investor needs:
• Income maximisation
(funds that pay high
dividends)
• Capital appreciation
To sell shares to To invest the proceeds in a (growth funds)
investors way that provides a good • Balanced (combines both
return to investors while capital appreciation and
at the same time income maximisation)
complying with • High Yield
investment objectives • Geographical markets (
global funds, emerging
market funds )
• Speciality Funds ( invest in
a specific industry ,
commodity or security )
• Short-Term V Long – Term
• Leverage ( getting the max
benefit from an upturn in a
particular market)
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 11Terminology
Prospectus:
Contract between investor and mutual fund
Publicly available
Determines:
• Parties involved
• Investment strategy of the compartment
• Fee structure
Key Investor Information Document (KIID):
A stand-alone, pre-contractual, 2-page document containing the
essential features of the fund and is to be systematically provided to
investors before they decide to invest
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 12Terminology
Net Asset Value (NAV):
• Intrinsic value of fund
• Usually expressed per share outstanding
Assets
Investments 1,000 Importance of the NAV:
Cash at Bank 200
Debtors 50 All open-ended Investment funds must
stand ready to redeem shares upon
Liabilities demand by the shareholder. The fund
Creditors 30 may also want to accept new capital. In
order to complete either of these
Total Net Assets 1,220 transactions without disadvantaging
Number of shares outstanding 100 either the existing shareholders
NAV per share 12,2 (be they continuing or cashing out) or
the new shareholders, the NAV per share
must be calculated.
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 13Different structures
Different structures
Many distinctions are possible between types of investment funds,
based on:
Legal criteria
• Mainly dependent of country of origin
Organisational criteria
• Fund of funds, Master/Feeder, closed ended funds, …
Regulatory regimes
• UCITS, AIFMD
Investment policy
• We refer to the next slides for further details
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 15What would be examples of categories of investment?
Fixed Income: Deposits,
Equities: including
Bonds, Money Market
shares
Instruments
Others: including
Derivatives: including Futures,
currencies and
Options and Swaps
commodities
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 16Risk and reward potential for types of funds
Three basic types can be identified: stock (also called equity), bond
and money market
Depending of the underlying investments of the fund, the risk and
reward profile will also be different (at least in theory)
Lower Risk Medium Risk High Risk
and Return and Return and Return
Money Market Aggressive
Funds Growth Stock
Funds
Short and Growth Stock
Intermediate- Funds
term Bond
Funds Long-term Bond Growth and
Funds Income Stock
Balanced Funds Funds
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 17Types of Regulated Funds in Ireland and Luxembourg
The two main types of regulated fund
which can be set up are:
Both are authorised and supervised by the financial
regulator in Ireland the Central Bank of Ireland (“CBI”)
Undertakings and in Luxembourg the financial regulator the
Commission de Surveillance du Secteur Financier
1
for Collective (“CSSF”)
Investment in
What is the difference between a UCITS and an
Transferable Alternative Investment Fund ?
Securities
(“UCITS”) This is dummy • Investment Restrictions
text it is not
2
here to be read. • Borrowing
Alternative
This is dummy
text it is not • Marketing
Investment
here to be read.
Funds
This is dummy • Reporting
text it is not
here to be read. • Open / Closed Ended Funds
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 18Parties involved
Parties involved
Sales/
Relationship Investment Executes trades Prime
Investors
Managers Broker/Custodian
Manages Earns fees Regular
Subscribe/ AML/ funds Reporting
Redeem Communications
Holds Cash &
Investments
Manages Subs
& Reds
Transfer Agent Fund Board of Directors
Maintains Governance
Shareholder and oversight
Register
Calculates Reporting/
NAV Financial Regular
Statements Reporting
Regulator
Administrator
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 20Roles of key participants
Authorisation
Regulator
Supervision
To ensure the safe-keeping of investments
Ensures that the sale and the purchase of shares is made
Custodian in accordance with the investment policy
Execute the requests of the management company or the
management of the fund in relation to the above
The services provided under prime brokering are securities
Prime Broker lending, leveraged trade execution, and cash management
Global custody
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 21Roles of key participants
Responsible for establishing the fund
Often located in fund centres such as London and New York
Vary in size from boutique firms to global players
Investment
Markets the fund to investors (often works with distributors
Manager
to market funds across multiple jurisdictions)
Manages portfolio of investments and makes investment
decisions (portfolio management may be undertaken by a
separate investment advisor)
Calculation of Net Asset Value (NAV).
Maintaining and updating the portfolio of investments
Administrator Pricing of assets
Calculating fees and expenses
Preparing interim and annual accounts
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 22Roles of key participants
Processes subscriptions and redemptions including the
collection and payment of cash
Completes Know Your Client (KYC) and Anti-Money
Transfer Agent Laundering (AML) procedures
Maintains shareholder register
Manages shareholder communications
Processes dividends/distributions
Ultimate responsibility for the governance of the fund and
for safeguarding the interests of investors
Board of Directors Also responsible for approving the fund documents, the
financial statements and the appointment of the service
providers
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 23Parties in Investment Fund Industry
Inter-Relationship between the parties
OVERSIGHT ROLES OPERATIONAL ROLES
Depositary Investors
Directors Distributors
Regulator Transfer Agent
Trustee Investment Manager
Stock Exchange
Management Company Counterparty
Custodian
Auditors Fund Administrator
Prime broker
Note : depending on the
fund structure not all
parties will be involved
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 24Regulatory Evolutions © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 25
General topics regulatory horizon
2018-2023 Agenda confirmed
Expected
2018 2019 2020 2021 2022 2023
AML V: Expected finalization and transposition of the directive for 2019 1
BMR: Applicable to user as of January 2018; Applicable to all benchmarks as of January 2020 2
BREXIT: Transitional period planned to start as of March 2019 3
Cross-border Distribution: Expected finalization of the regulation proposal by Q2 2019 4
CSDR/ Internalized settlements: Reporting start date for settlement internaliser is 10 march 2019 5
EMIR II: Estimated Start of EMIR II reporting requirements for Tier 2 Financial Counterparties based on the assumption
that EMIR II is adopted in Q2 2018
6
GDPR and ePrivacy: GDPR application starts by mid-2018 - Expected finalization and transposition of the e-privacy directive for 2019 7
Green Finance: Commission expect to modify guidelines on DNFI for Q2 2018 and adopt regulation on taxonomy for climate change activities (incl. measures on
prudential requirements for Q3 2019 8
SFTR: Transaction reporting for investment firms & credit institutions estimated to begin Q2 2019 9
SHRD: Transposition deadline for member states & application of the text set for June 2019 10
CMU: Implementation of the CMU program by end 2019 11
IDD: Application starts by end of 2018 12
PRIIPs review: Expected finalized proposition for a review of PRIIPs regulation by end of 2018 13
MMF: Applicable to new funds as of July 2018 – Applicable to old funds as of January 2019 14
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 26Focus on cross-border distribution of collective investment funds Regulation proposal Agenda confirmed Expected © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 27
Beyond regulatory trends horizon
What does the future hold?
With the forthcoming changes at the European Commission at the end of 2018, there is uncertainty as regards some major EU financial policy package
despite the paramount importance of these initiatives
EPT European work on post-trade Capital Market Union
This initiative to harmonize post-trade activities in the EU aims to remove the remaining
barriers to cross-border financial activities.
ESAs EU Commission Draft Regulation on new organization and powers of
European Supervisory Authorities
review
ESMA will be given increased powers to regulate directly certain sectors of
capital markets across the EU.
EU EU initiatives on European digital single market
In addition to the digital frameworks launched in 2015, new issues are now on the EU radar:
• FinTech
Digital • Cryptocurrency / Initial coin offerings (ICOs) / Blockchain
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 28Market trends © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 29
Worldwide Fund Distribution Landscape
Luxembourg and Ireland are the top 2 European domicile
Top domiciles of worldwide Total AuM (€ Bn) and market share of
investment fund assets European domiciles
(As of Q4 2016) (As of Q4 2016)
Luxembourg
Others
3,229 3,701
22.8% 26.2%
United
States
47.6%
33.2% Europe
United
1,457
Kingdom 10.3%
19.2%
2,085
14.7%
1,784 Ireland
12.6%
France 1,886
Other Domiciles
13.3%
Germany
- Australia - Canada - India
- Brazil - China - South Africa
- Japan - South Korea - Etc.
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 30Luxembourg and Ireland are leading domiciles for cross-border
distribution with funds distributed worldwide.
The number of funds and registrations overall is … and they are primarily domiciled in Luxembourg,
growing… followed closely be Ireland.
Domicile share of authorizations for cross-
Number of cross-border funds and registrations in Europe border distribution, Q4 2016
120,000 11,222 11,732 14,000
Number
100,000of 9,436 9,869 10,430 United Kingdom 2% Others 4%
cross-border 8,511 Jersey 3%
80,000
funds 9,000 France 3%
60,000
Number of 83,505 91,027 96,548
40,000
cross-border 65,931 72,264 76,500 4,000
registrations
20,000
Ireland
0 -1,000
24%
Average 2011 2012 2013 2014 2015 2016 Luxembourg
registrations per
true cross- 64%
7.7 7.7 7.8 8.0 8.1 8.2
border fund
Additionally, Luxembourgish and Irish funds are … with the world’s biggest fund managers using
distributed in every corner of the globe… Luxembourg and Ireland as their distribution hub.
Top 5 countries of distribution outside Europe Origin of fund promoters established
with Luxembourg or Ireland as domicile, Q4 2016 in Lux and Ireland Q4 2016
Singapore
60.00% 60.00%
Luxembourg
Hong Kong
Chile 50.00% 50.00%
Taiwan
Korea 40.00% 40.00%
Singapore 30.00% 30.00%
Hong Kong
0 1000 2000 3000
Ireland
Macau 20.00% 20.00%
Chile
Taiwan 10.00% 10.00%
0 1000 2000 3000 0.00% 0.00%
Number of cross-border registrations with Luxembourg as domicile US GB DE CH IT US UK IT GE CH
Number of cross-border registrations with Ireland as domicile Luxembourg Ireland
Number of cross-border registrations with other European countries as domicile
(Not available for Ireland)
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 31There are several macro trends are impacting the cross-border distribution
landscape…
Macro Trends New international New Asset Classes
Impacting New distribution platforms
pools of wealth (e.g.. PE/RE)
Demand
Demand trends AM Distributor Local specificities
• New pools of wealth Breakdown of distribution channels per country of distribution for
(e.g.. Asia, LATAM) the retail investors1
Type of Actors
• New asset classes Retail Wealth Insur. IFA Instit. Others
(e.g.. PE/RE) France 28% 12% 21% 4% 26% 11%
• Direct distribution Germany 47% 12% 18% 12% 4% 3%
and proximity to end Italy 67% 7% 13% 9% 1% 7%
client (web Spain 68% 5% 4% 5% 11% 10%
distribution, etc.) UK 8% 6% 16% 48% 12% 12%
Access to mass retail
•
(cfr. Robo-Advisory)
• Market infrastructure (e.g.. CSD model)
Other • Approaches towards KYC/AML handling
• Rationalization and
• Investor support
simplification of fund
ranges
• Regulatory cost
Demand trends impact the nature of cross- …whereas local specificities remain a
border fund distribution… challenge for fund distribution
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 32… especially the emergence of a new world of distribution
platforms…
Macro Trends New international New Asset Classes
Impacting New distribution platforms
pools of wealth (e.g.. PE/RE)
Demand
Old world New world
• Asset Managers stand in direct contact with end investors
Business • Disconnect between Asset Managers • Asset Managers re-appropriate distribution management
situation and end investors
• Asset Servicers wishing to expand their Distribution Services
by acquiring or launching distribution platforms
• Fund distribution through D2C distribution platforms
• Fund distribution through
Operating intermediaries (distributors) • Disintermediation through use of DLT
model • Client relationship monopolized by • Social media presence of Asset Managers
distributors
• Launch of Robo-advisers to optimize costs
• Low leverage on branding
• Active brand management and review of competitive
Result for • Little insight into distribution positioning
Asset dynamics
• Access to distribution analytics
Managers • No direct distribution network
• Active distribution channel management
management
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 33Disruptive technologies © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 34
The Asset Servicing Industry today Approximately 200,000 people worldwide in asset servicing today Many providers are still constrained by the legacy of acquisitions, poor integration, multiple technology platforms, and a high level of customised manual activity Some of the technology platforms still in use date back twenty years or more! Investment managers and asset servicers still receive tens of millions of instructions by fax, and cut thousands of cheques every year Investment management and service providers continue to perform manual, repeatable tasks The value of assets under management have been rising over the past two years However the market hasn’t always been able to keep expenses under control which are on the rise again While technology has evolved, the industry has failed to keep pace New technologies can replace back and middle office repetitive, manual and cost-inefficient processes, with improved process automation - delivered on a continuous basis © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 35
Secular Trends Driving Transformative Change
New generation of investors Complex and evolving regulatory
• Shifts in product mix
landscape
• Tailored & multi channel advice Now Tomorrow
• Digital front-end • MIFID II • Shared ledger
• Stay in control (do it yourself) • GDPR • Smart contracts
• Peers and social networks • AMLD IV • Online payment
• Downside protection, hedging • IMR • Cybersecurity
• Yield and service of WM clients • PRIIPS
• Socially responsible investing • Solvency II
Technological innovations Data surge
• Growing quantity sources and data
• Blockchain
• Need for powerful data processing
• Robo-advice
• Allow for real-time information
• Robotic process automation
• Shifting mix of required analytical
• Machine learning
capabilities
• Digital payments
o Algorithmic
• Digital platforms
o Predictive
• P2P lending
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 36Disruptive Technologies – RPA, Cognitive & Blockchain
Three disruptive technologies that have the potential to disrupt and
transform areas of the industry value chain
Robotic Process Automation Cognitive Technology Blockchain
• RPA could replace much of the manual • Natural language processing, computer • The World Economic Forum has forecast
work involved in processes such as vision, speech recognition, OCR, ICR that by 2025 at least 10% of global GDP
transaction processing, reconciliation • Investment management firms use will be stored on Blockchain platforms
and reporting intelligent automation to review and • A highly secure, tamper proof, shared
• The average cost savings expected is analyse portfolio data, documentation online ledger enabling the exchange of
between 30-40%, with growth and contracts to determine meaningful value, storage of data and usage of
absorption / capacity creation of metrics and generate natural language smart contracts with no third party
between 50-70% reports for their clients and stakeholders involvement
• There are also non-financial benefits too • Assets under management by robo- • Typically contains a validated list of
– RPA is designed to be more advisers are estimated to increase 68% digital assets and instruction statements
predictable, consistent and less prone annually to about $2.2trn in five years such as transactions made, their
to errors thus reducing operational risk • 55% of Investment Managers recently amounts and the details of the parties
• Whether this is a threat or an surveyed said Robo and AI technologies to those transactions
opportunity for low cost offshore service will have the greatest impact on their • Focus beginning to narrow down e.g.
providers remains to be seen business KYC, distribution and reporting
Activities Impacted
Front Office: Investment Ops: Accounting & Admin: TA and Fund Distribution Solutions
Product Management Trade Support NAV Dissemination Document Management
(Product pricing) Onboarding / KYC
Market and Reference Data Valuation & Pricing
Distribution (Contracting) Risk Management
Derivatives / Collateral Fee Billing
Trading (Pre-trade Management Asset Accounting
Regulatory Reporting
compliance) Trade and Cash Management
Governance:
Client On-boarding
Risk Management (Market MIS
Data Management and BI
and Credit) Client Reporting Client and Regulatory Reporting
(Data Admin, Delivery, QA)
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 37Disruptive Technologies – Possible Outcomes
Scenario A Scenario B Scenario C
Incremental Change Disruption to value chain Disintegration of value chain
• Slow and incremental change • The value chain will be • The value chain in its current
disrupted by new technologies state will disintegrate with
• It is thought that blockchain is significant disintermediation
not disruptive because it’s • Costs will be reduced because
occurring
going to take time and as of streamlining the older
such cannot be classified as processing costs through • Leading asset management
“disruptive” automation firms will reallocate operating
capital aggressively from
• Improved customer • New entrants to the arena such
outmoded business lines
experience, efficiency and as start ups will likely change
the industry as we know it • New workforce tailored to
cost savings will be felt across
today and create a more varied maintaining this technology.
the industry
and disrupted industry blockchain will replace the
• Robots and back and middle- need for intermediaries
• Back and middle-office tasks
office workers work in unison, • Self-sufficient investors will no
will no longer be offshored,
however robots will not longer require asset servicers
rather taken back in-house and
entirely replace humans to meet their investment
replaced with new technologies
• Asset managers will continue needs, consequently service
• Senior executive members
to develop advice capabilities providers will need to enhance
possess a strong understanding
to be delivered both B2B as their offerings in order to
of current technology
well as D2C retain clients
developments in this area
Most likely outcome is whereby the industry will be disrupted, but will not disintegrate entirely
In order to capitalise on the upward growth trend and increase profits, firms will need a clearly defined
technology strategy and invest in new technology to meet the need of their evolving client base
© 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 38Q&A © 2018 Deloitte. All rights reserved Link’n Learn | Introduction to Investment Funds 39
Document title | Section title Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. At Deloitte, we make an impact that matters for our clients, our people, our profession, and in the wider society by delivering the solutions and insights they need to address their most complex business challenges. As one of the largest global professional services and consulting networks, with over 220,000 professionals in more than 150 countries, we bring world-class capabilities and high-quality services to our clients. In Ireland, Deloitte has over 2,000 people providing audit, tax, consulting, and corporate finance services to public and private clients spanning multiple industries. Our people have the leadership capabilities, experience, and insight to collaborate with clients so they can move forward with confidence. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2018 Deloitte. All rights reserved 17
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