The SICAV is a reassuringly credible structure for risk-cautious pension funds. But the Luxembourg SICAV faces competition from an ambitious Belgian alternative. Shayla Walmsley reports
As capital becomes more global, barriers to international investment are lifted and capital markets become better connected. The investment world is becoming flatter.
Rapid cross-border investment activity has led to convergence of economies and, increasingly, property markets. As markets converge, the greater the need for diversification. The further we diversify the more convergence we see as a result.
As wrappers go, the SICAV has much going for it. It's a well-tested structure: tax-efficient, easily understood and broadly trusted by pension fund investors.
Until recently, SICAVs were effectively Luxembourg SICAVs. Not that other markets lack their own versions. Comparable vehicles include the Dutch FBI, Belgian and French SICAVs, German Sondervermögen and Italian SIIQ. But these don't necessarily travel across borders and some impose their own restrictions. The Dutch FBI, for instance, requires the fund to distribute within eight months of year-end and imposes gearing restrictions; it also restricts investment categories.
Luxembourg's appeal has been - well, Luxembourg. SICAVs registered there are subject to prior authorisation and the mandatory appointment of a local custodian. The corporate structure may offer reassurance that the fund manager is backed by an operation weighty enough to be willing to meet the regulatory cost of setting it up, but in theory it also gives investors more to worry about. Because it exists as a discrete corporate structure - that is, a separate company- investing in a SICAV could demand the same kind of due diligence as an equity investment, including corporate governance and custody.
In practice, the regulatory seal of approval operates as a proxy guarantee. Luxembourg-registered property SICAVs include those launched by fund managers including SEB, Aberdeen and Generali. But they are not solely the vehicle of global-brand fund managers with significant operations. Although set-up costs might be prohibitive for unknown fund managers, SICAVs also include the Alpina Real Estate Fund and Natixis's Cube Infrastructure Fund - neither of them global, high-profile names.
In some cases, the credibility-imparting logic of acquiring SICAV status is evident. Cordea Savills, for instance, in June last year set up its Italian Opportunities Fund II as one. The fund manager's only Luxembourg-registered SICAV, the fund targets a return of 20% in a market described by Diana Choyleva, the Lombard Street Research economist, as "going down the drain".
"Italy lost competitiveness on a massive scale - on a gigantic scale - and don't expect a recovery any time soon," she said at a recent IPD event. Opportunistic strategies won't factor in macro factors in the way core funds might - in fact, otherwise negative market characteristics such as opacity could work to savvy real estate investors' advantage - but economic meltdown is still likely to make investors nervous.
Arguably, the regulator's imprimatur, rather than the corporate structure, is what's important. A fonds commun de placement (FCP), in contrast to a SICAV, has no legal personality; but which of the two structures fund managers choose is a matter of local taste, according to Diana Mackay, managing director of fund intelligence firm Lipper FERI.
Mackay claims few investors made the distinction between SICAVs and FCPs on the basis of relative costs and benefits.
"It's a cultural thing," she says. "An FCP is far better understood in Germany than a SICAV is - though a clear distinction isn't always made between the two. In France, fund managers setting up a niche fund will set up an FCP as the lower-cost route. Adopted by Luxembourg, they're recognised vehicles everywhere else but, in some markets, there's a local understanding of a contractual or a corporate structure [that is, of FCP rather than SICAV structure]."
In fact, FCPs significantly outnumber SICAVs. The Commission de Surveillance du Secteur Financier (CSSF), Luxembourg's financial regulator, lists 389 FCPs compared with 297 SICAVs.
"It's mainly been FCPs in the Luxembourg marketplace because of tax transparency," says Stéphane Ries, head of business development for funds at custodian Kredietbank Luxembourg (KBL). "From the Luxembourg point of view, an FCP is a transparent company. The tax administration will see it as non-taxable, for instance if a Belgian pension fund becomes an FCP, and the FCP invests in UK-listed equities." With SICAVs, around 30 double-tax treaties provide exemptions.
From property to pensions
Beyond property, Ries could point to Nestlé pension fund, which moved its assets to Belgium, with the idea that it would build the infrastructure for the wholesale transfer of its pension fund. Regulations introduced at the beginning of last year allow pension funds to shift both their assets and liabilities to Belgium.
The hype was that it would accelerate the idea of the pan-European pension fund - an idea to date more appetising to regulators than pension fund managers.
With odd exceptions - the European Parliament pension fund, for instance, which is registered as a Luxembourg SICAV - there has hardly been a deluge of pension funds looking to convert to either SICAVs or FCPs.
Ries, who set up the original Suez Tractebel pension fund SICAV back in 2004, says one reason for the slow uptake is that local pension fund managers have much to lose from conversion. "You have to build the right contacts in these multinationals - you need to speak to decision-makers," he says. "If I went to Shell in Belgium and spoke to the manager of the pension fund there, I know they have no power to decide on it. If you speak to local pension fund managers, you're speaking to people who stand to lose their jobs. You need group-level decision makers with the authority to decide for the group."
He adds: "In France, unions and others will have their say. In several countries, they'll need to secure agreement from local managers to give up their influence. You need persuasion and a good business case. You'll be dealing with different markets, different mentalities."
Add to this a second potential reason for the slow uptake: conversion doesn't happen overnight. "You can't do it in three weeks. It takes between two and three years to make it happen," says Ries.
Around 10 new Luxembourg pension fund SICAV structures are rumoured to be in the offing - or at least in negotiation. Behind them is a train of pension funds not ready for conversion but potentially interested in pooling assets.
They're latching on to a growing trend, according to Andrew Smith, head of fund management at Aberdeen Property Investors. One likely accelerator of the SICAV market is the increased uptake of innovative structures aimed either at increasing pension funds' clout on specific deals or pan-European asset pooling.
"Asset pooling will increase, driven by demand for real estate as an asset class, even though the market has slowed. There's a wider range of options than there was even a few years ago," says Smith. He points out that, whereas continental Europe has had cross-border vehicles for a good while, UK pension funds have only in the past few years started to become used to indirect investment outside their domestic market.
Pension funds want to pool because it gives them exposure to larger deals, more clout in the market, and acquisitions on better terms. "It's happening in the direct market, too," he says. Apart from the alignment of interest between the partners, Smith identifies the other big issue for potential poolers - the choice of a suitable wrapper.
In other words, vehicles need to keep pace with the increasing sophistication of investors in them. Smith points out that, rather than experiencing a sudden spurt of innovation, property investors are catching up with other asset classes, looking at options such as derivatives, and arbitrage between derivatives and the fund market.
"It's a measure of property becoming a mature asset class," he says. "Other markets did it 20 years ago. Now real estate is fast-forwarding. The derivatives activity we've seen over the past few quarters in real estate happened years ago in other markets."
For some pension funds, pooling assets is a pit-stop en route to pan-European pension fund status.
"Of course, the number of pension funds converting to SICAVs will increase," says Ries. "Many multinationals are running several pension funds and setting up international funds is still far away. The intermediary step is to have pension schemes in different countries and to pool their assets, and there's more confidence that it will work than there was before Suez Tractebel."
In fact, you can see a family resemblance between Suez Tractebel and Folksam, the Swedish insurer that last year set up the first bespoke property pooling structure designed for four separate pension funds within the same group. Instead of running pension scheme portfolios autonomously, Suez Tractebel divided its investments into high, medium and low risk and fed assets into them accordingly.
Aberdeen, the fund manager behind the Folksam scheme, included two sub-funds for Asian and European property, intending to invest in a fund for each sub-fund each quarter towards a target of 10-12 funds in each region over three years.
It was the first time the fund manager had established a separate Luxembourg structure that enables investment from companies operating in different markets. The obvious advantage - even of less radical pooling options - is better alignment of portfolio structures across schemes.
Belgium takes on Luxembourg
Hence the appeal of a vehicle recently established in Belgium that allows pension funds to pool assets. Introduced a year after the Belgian Pan-European Pension Fund (OFP), the framework covers both FCPs and SICAVs. It effectively exempts them from the regulator's prudential oversight, requiring only that they be registered with the tax authorities. Although investment within the framework is currently restricted to liquid assets, this is likely to change. In short, Belgium makes asset pooling easy.
Kris Lievens, a director at KPMG Belgium, claims it will help make Belgium "the location of choice" for European pension funds, putting Belgium and Luxembourg on a level playing field. "This is to be seen in the context of all the measures taken in Belgium," he says.
"It's a step further towards a pan-European pension fund. The pension fund will be administered outside Belgium in the Netherlands or France but this vehicle makes possible a European pension fund because, even if you don't want to transfer the entire scheme to Belgium, you can still transfer the investment assets there.
"Belgium has recently focused on the pensions sector with the introduction of the OFP. It was a first but pension funds are unlikely [like Nestlé] to transfer to Belgium overnight. It'll go slowly, step by step."
Could Belgium rival Luxembourg as Europe's SICAV centre? Not according to Smith. "As a regime, Luxembourg has in place a fair set of circumstances and investor-favouring regulations. It's a flexible, favourable environment," he says. But even he acknowledges the pace of growth has left the duchy struggling for resources - especially because regulations require SICAVs to be administered by a third party. (In an interview with IPE's George Coats in March, Belgian pensions regulator Henk Becquaert pointed out that Belgian rules allowed pan-European pension funds to arrange their own compliance.)
"Administrators are struggling to keep people because of the weight of demand. It's the flipside of successful growth - that you need to keep financial experts. They're poaching from each other." Aberdeen set up its own Luxembourg administration "to try to counter some of that. You have to have third-party administration under the SICAV rules but we also have staff working with them."
Luxembourg-registered funds in the past year have seen growth measured by assets under management (AUM) decline by 0.15% - from €1,967bn in April 2007 to €1,964bn in April 2008, according to the Association of the Luxembourg Fund Industry (ALFI). So is the centre of SICAV gravity shifting away from Luxembourg? Will the duchy lose its caché - and its SICAVs - to Belgium? Hardly.
But Belgium is at least fighting on the right tax turf. When it converted to a Luxembourg SICAV, Suez Tractebel cited Belgium's tax structure at the time - which would have meant it paying 7-8 basis points on total assets under management - as its primary reason for its decision. When it converted, Nestlé cited Belgium's tax regime as the clincher. Crucially, Belgium's new institutional SICAV/FCP structure is tax-neutral.
"These structures tend to work if they have tax efficiencies involved," says Mackay. "Their attractiveness will depend on several things - but tax will be a big part of it."