SICAVs have long been the investible UCITs structure of choice for property fund managers. Now some pension funds are finding a new use for them. Shayla Walmsley reports
Select at random any recently launched real estate fund and there is a good chance it will be a Société d'Investissement à Capital Variable (SICAV). These UCITs-enabled Luxembourg-domiciled vehicles, established as limited companies with variable share capital, rival similarly-styled Fonds Commun de Placement (FCPs) mutual funds.
Unlike FCPs, SICAVs are subject to corporate as well as contract law. Oversight by a custodian bank is a regulatory requirement, as is a central administration located in Luxembourg. It is this onerous regulatory burden that makes the vehicle appealing to pension fund investors, according to John Hammond, head of European real estate securities at RREEF, the Deutsche Bank real estate subsidiary.
"For pension funds, the important thing is that European vehicles are well established, and SICAVs offer a robust structure in a market with strong regulatory oversight," he says. "Registering as a SICAV involves close scrutiny not only of the fund but - because SICAVs are separate companies - of their governance and directors, auditors and custodians."
Yet for pension funds a SICAV acts effectively as a vote of confidence in the fund manager. Most are less interested in the finer points of corporate governance than in the assurance that the fund manager has been checked out by the regulators.
"The vehicle won't take up too much time in the investor's decision making," Hammond acknowledges. "Pension funds are most concerned with selecting fund managers and teams - not operational issues. They want to know how it's run, not what the fund structure is."
Diana Mackay, CEO of the UK arm of fund research firm FERI, is somewhat blunter. "Most investors won't have the foggiest idea which structure they're invested in," she says.
Numbers that might indicate a trend are hard to come by, Mackay says. According to the most recent figures published by the Association of the Luxembourg Fund Industry (ALFI), SICAVs made up 44.2% of all funds domiciled in the market, compared with 55.2% FCPs. An FCP is more often used for direct investment and a SICAV is a more complex structure requiring more administration - but it is also more marketable in more places. SICAVs tend to suit more liquid investment strategies.
But Mackay explains that there are more nebulous, subjective reasons why pension funds prefer one vehicle over the other. In France, for instance, smaller pension funds prefer to invest in FCPs, their larger counterparts in SICAVs. In the Netherlands, the FCP structure is more familiar. In short, she says: "It depends on the market."
In a recent interview, Michael Weischer of Danish public sector pension fund PenSam, pointed out that few smaller pension funds have the in-house resources to make informed decisions on funds of any description - let alone to choose between, say, a SICAV and an FCP.
"Pension funds have two choices," says Weischer, outgoing investment manager of the €6.3bn fund. "They can build up expertise internally or seek external help. It's hard to find someone with expertise in this field, even if the area is significant enough for the fund to fill the position. Pension funds need more expertise and sophistication in indirect real estate. New funds are always being launched - some extremely serious, some set up by newcomers."
Other than for reassurance of good governance of the funds they invest in, where SICAVs are useful for pension funds is in the move from direct into indirect real estate - and, more broadly, into alternatives.
Standard Life Investments (SLI) launched the Select Opportunities fund in October 2005 to gain exposure to global direct and indirect (REITs) assets at a time, says Barry Maclennan, investment director at Standard Life, when few investors had indirect exposure. "It was an interim solution for investors optimally exposed to direct investment, especially in the UK," he says. "There was a recognition that returns would slow and it offered an opportunity to diversify in a liquid and efficient way."
The fund manager followed up with its global REIT SICAV in January this year. One reason was because the structure had "marketing potential" for investors in markets where the structure is understood and accepted, says Maclennan. "The idea was to remove as many barriers as possible. It isn't a resource-¬intensive option, and it's proved successful." He claims European pension funds, super¬annuation schemes and pooled pension funds have expressed interest in the structure; SLI is also in discussion with an unnamed Canadian pension fund as a potential investor.
More innovative investment strategies are likely to boost SICAVs' appeal. "With REITs in more markets, there is a large and growing market for SICAVs invested in listed real estate securities," says Cathy Hales, chief operating officer of client relations and marketing at Deutsche Bank real estate fund management subsidiary RREEF. "The fact that [Luxembourg] SICAVs are UCITs funds mean they carry restrictions but also that they're becoming more flexible, for instance, for use in hedge fund strategies."
If pension funds are at best tangentially interested in SICAVs, the serious interest is coming from their fund managers. These have two primary concerns: cost and tax.
For small operations, the corporate governance requirements associated with setting up as a SICAV could well be prohibitive. Not so for major fund managers, endowed with scale-related cost-economies and processes. The larger the fund manager, the more cost-effective the SICAV because large fund managers have the processes in place to create them cost effectively.
"SICAVs are interesting for international investors because they offer liquidity at the share level," says Nico Tates, manager of the Aberdeen European Shopping Centre fund, a SICAV. Asked whether the additional scrutiny involved in setting one up could prove prohibitive, he replied: "We're for quality so it doesn't matter."
In a sense there is no fund hierarchy measuring good, better and best. Rather, it depends on the fund manager's investment strategy. The decision between a corporate structure (SICAV) and a mutual fund structure (FCP) depends on the type of funding they want to raise, the investor base, the type of investments they plan to make, and tax considerations.
For pension schemes, SICAVs benefit from 25 tax treaties, with all distribution and allocations to investors free of withholding and capital gains tax. In contrast, vehicles set up as FCPs are treated as tax transparent with no access to tax treaties, although pension funds can claim treaty benefits from their home country.
Interest in SICAV structures is coming from fund managers rather than pension funds. But there is one area where pension funds may have more than a passing interest in the SICAV fund structure: when they become one.
In November 2004, KBL acted as custodian for the first pension fund SICAV - that of Belgian utilities firm Suez-Tractebel. The idea was to pool the investments of pension schemes in several markets to achieve efficiencies in investment management, administration, custody and taxation. (Luxembourg introduced tax exemption from its taxe d'abonnement for pension pooling vehicles in 2004.) In fact, says Stéphane Ries, head of relationship management for investment funds at KBL, the custodian bank for Suez-Tractebel pension fund SICAV, the move helped the fund avoid double-taxation on cross-border contributions and payments.
"Were it not located in Luxembourg but in Belgium, the Suez SICAV would pay more than €1m a year in tax," he claims.
But he adds that the benefits were not exclusively to do with tax and other cost-benefits. By pooling its pension fund assets in a SICAV, Suez retained its distribution networks and customer relationship, local marketing and compliance with local regulatory requirements.
Since Suez set up as a SICAV, Unilever has set up a pension-pooling FCP. But, if it is such a good idea - as Ries claims - why are not more pension funds doing it, at least large companies running several pension schemes in diverse locations? After all, setting one up in Luxembourg obviates the need to create a new legal vehicle, and allows pension funds to create sub-funds with different asset allocations and investment objectives (and risk profiles) and ring-fenced liability.
In theory, fund managers can invest in SICAV-style structures in a number of different markets, including Belgium (SICAFI), France (SICAV) and Italy (SIIQ). In practice, real estate funds targeting international investors are Luxembourg funds. Political support for the financial services industry, investor awareness, transparency and tax efficiency have made it the SICAV domicile of choice.
Simply, Luxembourg tries harder - and not just for SICAVs. Last year Luxembourg was the European centre for regulated real estate funds, with 50 registered and operating there. Their assets are worth €6.8bn, a 38% increase over 2005. "Luxembourg wants to be seen as an efficient domicile for funds business," says Hales.
In fact, a better question is: why would a pension fund planning to set up as a SICAV not set up in Luxembourg? Given the rigour and cost of the registration process, doing so would only make sense for multinationals with multiple funds in multiple markets - in other words, where there is a cross-border imperative and tax to avoid.
There is an exception. In 2005, the Belgian medical professionals' pension fund, Amonis, registered itself as a Belgian SICAV.
The €990m fund - which the previous year had served as the model for the introduction of a government-initiated pension scheme for the self-employed - comprises 10 mainly externally managed subsidiary funds. Because it is a SICAV, the fund is accessible to members, which means they can acquire units of the SICAV outside their membership of the pension fund.
The fund's conversion to a SICAV did not otherwise indicate a particularly adventurous outlook. At conversion, it was still debating moving a portfolio dominated by equities and bonds into alternatives. It was not until the following year that the fund ploughed just over €34m into hedge funds after a two-year process of deliberation - and then at the expense of its 9% property allocation rather than equities. In its most recent figures, that real estate equities portfolio, managed by Brussels-based Houlihan Rovers, delivered more than 50%.
In the case of both Suez and Amonis, the point is that SICAV-isation makes sense when it makes sense. According to Ries, it is above all a sophisticated approach to pension pooling.
Until you have cross-border pension funds, then SICAVs, especially those domiciled in Luxembourg, will present themselves as options. In 1999, Luxembourg was the first European country to introduce initiatives (SEPCAV and ASSEP) for pan-European pension schemes. However, despite a 2003 European directive on institutions for occupational retirement provision (IORP) that would in theory allow for pan-European schemes - added to what Ries describes as "a huge market" for them - there are no pan-European pension funds.
Optimally, Ries points out, multinationals running pension schemes in multiple jurisdictions would use a single scheme for all employees. Pooling - for instance, by setting up a SICAV - offers a partial solution.
"In an ideal world, you would have a multinational company running several pension funds in several countries setting up one single cross-border pension scheme in one country. The problem is that pan-European pension funds aren't ready in terms of tax, legal and administration and operational barriers."
So why are more pension pooling funds not becoming SICAVs? "The barrier is that they're not sure about it," says Ries. "Before, pension funds didn't want to be first-movers."
There is one seemingly insurmountable barrier to pension funds' take-up of the SICAV option - or any mode of pooling: pension fund managers. Effectively, consultants who suggest it are asking pension fund managers to volunteer to make themselves redundant.
"In multinationals, there are usually too many people involved in the decision process. If you talk about pooling to those responsible for the UK pension fund, they'll try to defend their interests - and it's the same for those responsible for the French and Belgian pension funds," says Ries.
"The pressure needs to come from the consultants, who are already working with the pension funds. They usually have a good vision of all pension matters within one group."