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UCITS & corporate governance

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Mark Sinsheimer, Director - MS Conseil - France

Mark Sinsheimer, Director - MS Conseil - France

Published in Economy & Finance , Business
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  • 1. UCITS & corporate governance TBLI Conference Paris November 10, 2006 Mark Sinsheimer, CFA
  • 2. UCITS, the leading category of shareholder
    • French company ownership :
    • Individual 8% (30 % in 1990)
    • UCITS 28 %
    • Other institutional 24%
    • Foreign (inc. Mutual funds) 40%
    • Holding period :
    • Non financial companies 10 years
    • Individuals 5 years
    • Foreign and UCITS 5 months
      • >90 % of stock exchange transactions
    Source: ANSA 2005
  • 3.
    • Dual nature of UCITS
    • The conflicts of interests linked to asset management
    • The various control mechanism
    Who controls UCITS and how do they exercise their duty?
  • 4. What is the economic reality of UCITS?
    • Company/trust/co-ownership offering
      • Access to institutional asset management service
      • Cost reductions
      • Risk diversification
      • > controlled by governance
    • Financial product enabling
      • Efficient investing on financial markets
      • Following a defined investment policy
      • With tax advantages possibly
      • > Controlled by regulation of product, manager and advisor/distributor
  • 5. Conflicts of interest linked to asset management
    • Investment process
    • Direct costs
    • Indirect costs
    • Valuation procedure
    • Marketing policy
    • Performance presentation
  • 6. The investment process
    • Indexing
      • Mostly administrative service
      • Cheap / mostly fixed costs
    • Active management
      • Definition of added value objective (return/risk)
      • Costly
    • Closet indexing
      • Minimize marketing / reputation risk
      • Generic UCITS at generic costs
    • Formula UCITS (structured)
      • Description of promised result
      • Comes as a substitute for transparency
  • 7. From management fees to total expense ratios
    • Management fees (flat + performance)
      • Investment management
      • Administration (custody, admin, structure)
      • Includes marketing expenses (trail commissions)
    • Commissions linked to transactions
      • Compensates concentration of orders at BO/MO
      • Soft dollars
      • Custody
    • Second level management fees
      • Master-feeder: marketing segmentation / yield management
      • Fund of funds : manager of managers / fees on fees
  • 8. Valuation procedure
    • Arbitrage proof UCITS while providing best service
    • Fair value pricing may/should be used
      • Illiquid securities, OTC derivatives
      • Closed markets, stale prices
    • Management fees authorizes smoothing
    • Control
      • Internal pricing model and audit by compliance
      • Control by custodian
      • Statutory auditors
      • Consultants (statistical audit)
  • 9. Marketing and full disclosure
    • Candid presentation of
      • Investment service provided
      • Fee structure
    • Incentives of advisor / distributor
      • Disclosure of trail commissions
      • Other promotional agreements
      • Soft commissions to brokers
      • Bank, insurance networks
  • 10. Performance presentation
    • Survivorship / backfill bias
      • Incubator funds
      • Funds’ creation and mergers
    • Comparison to benchmark or peers
      • Style bias
      • Bias within category
    • Expenses
      • Change in total expense ratio
      • Front end or Back end load paid to the fund
      • Smoothing of risk
  • 11. The US approach, the board as fiduciary
    • Huge abuses
      • Late trading anf market timing
      • Soft commissions and distribution by brokers
    • Congress answer inspired by SOX
      • 2/3 of independent directors
      • Increased disclosures and audit committees
    • Which proves difficult to implement
      • Cost and complexity
      • Confusion
      • Can asset management be outsourced?
  • 12. SICAV boards in Europe
    • Directors 72% promoter
      • 19% stakeholders
      • 7% independent
      • 2% distributors
    • Average directorship : 3.9
    • Average board size : 5.7
    • Estimated fees : € 10.000
    • Professional indemnity : 16% letter
      • 19% Insurance
    • Source: CAIS, Fitzrovia and PwC presented by P. Zurstrassen
  • 13. International centers: Luxemburg, Ireland
    • From fund administration
      • Among largest markets (>€ 1.000 Bios)
      • >50% of subscriptions in Europe (2004)
      • Distribution hub: call center, transfert agent
    • To UCITS control (UCITS III: substance requirement of investment companies)
      • Control and supervision of risks
      • Control and supervision of outsourcing contracts
      • Principles of good governance
    • Promotion of ‘best practices’ for pan-European distribution aiming the US market
  • 14. External controls
    • Fund custodian/administrator
      • Compliance to regulation and investment strategy
      • NAV computation
      • Subscription/redemption procedure
    • Fiduciary ratings
      • Lipper-Fitzrovia computation of Total Expense Ratio
      • RCP et Fitch focused on risk in Europe
      • Morningstar, S&P in US after scandal
      • Third party audit? (California, Pennsylvania)
  • 15. UCITS in DC plans
    • Good governance principles for FCPE
      • Representation of beneficiaries and stakeholders
      • Union membership
    • But practical difficulties subside
      • Large boards
      • Limited fiduciary training
      • No standard for reporting format
      • Specific policies to deal with M&A
  • 16. Conflicts of interests when voting
    • Business relation with issuer
      • Asset management (DC plan)
      • Commercial of investment banking
    • Sell proxies for what they are worth
      • Security lending especially “hot shares”
      • Save on proxy research
    • Special situations
      • House UCITS
      • DC plans
  • 17. The French example
    • AFG provides a service consistent with recommended principles
      • Recommended position on resolution of French companies
      • Proxinvest / Deminor-ISS
    • Then monitors and benchmarks application
      • Principles mostly applied (80% quest AFG)
      • Compares favorably with most countries