Understanding the US fund market
28 Nov 2018
Ryan Dargis of Northern Trust discusses the growing trend for European funds looking to accept US investors
Image: Shutterstock
What does your role at Northern Trust involve?
I am a product manager supporting our global fund services (GFS) business in North America. Although GFS supports a range of services for various aspects of an asset manager’s operation, my focus is mainly back-office—custody, fund administration and investor services—for US asset managers and non-US managers who are running unregistered US fund products.
Part of my role as a product manager is to help on- and offshore asset managers understand the US funds market, the landscape of different fund vehicle options and how they can coordinate their distribution strategies.
Supporting our clients’ collective investment (CIT) funds is also a big part of my role. I educate clients on how CITs work and I also have a relationship management role with trustees that we work with to offer CIT structures.
What current trends are you seeing in fund distribution channels. How and why are they becoming global?
Cost pressure is a universal trend, which is happening for various reasons but mainly because of evolution of the market, including the institutionalisation of defined contribution (DC) plans. Asset managers facing increased fee pressure are in turn looking at their service providers for cost saving solutions.
Another major trend we see that impacts the CIT space and the fund vehicle decision-making process is growth of the US retirement market, the fastest growing component of which is the DC side. Employers are just not offering defined benefit plans like they used to. So the growth and the importance of the DC-world within the US retirement market is a huge trend. Many asset managers outside of the US, who aren’t as familiar with the US market, want to understand how they can penetrate that market.
The CIT structure is one that I spend a lot of time talking to managers about. I help UK managers understand how the CIT operates, how it’s different to a mutual fund, and how it could conceivably play a role in their distribution strategy in the US by taking advantage of that growth in the DC space. It can be daunting to those who don’t understand it.
Can you explain the growing trend for European funds looking to accept US investors?
The size of the US retirement market—$28 trillion—is an obvious attraction for European funds. The first question for those funds should be: “are they leveraging a platform already in the US?”
Those in the retirement space may look to platform providers in the mutual fund world to access these markets, whether that is purely in a sub advisory role, or by leveraging available fund structures more robustly.
If not, a basic question is: “how can I conceivably get US investors into my European funds?”
We continue to have discussions with managers around how best to do that. It’s probably not impossible, it can work, but it’s not the most streamlined process, and requires a lot of consideration for the manager.
For managers grappling with this cost environment, from a fund structure perspective, there is no one vehicle that can do everything everywhere. We have had conversations with managers about allowing US investors into one or more European fund structures. Again, the mechanics are tricky and create new obligations, including notably tax law compliance. The introduction of a US investor into a CCF or UCITS vehicle for example likely forces that fund to operate within the US Internal Revenue Service or Securities and Exchange Commission (SEC) rules when that probably wasn’t part of the asset manager’s original blueprint when they were building that European-based fund.
Managers are trying to crack it, but it is complicated as it creates challenges around disclosure and reporting, which may have a knock-on effect for non-US investors. It’s not causing serious concern, but it is an additional consideration and one that we always encourage managers to seek formal legal and tax guidance on.
Does this growing trend have anything to do with regulation and/or the current state of economic and political volatility?
Indeed, the growth and change in regulation in the decade since the global financial crisis has forced asset managers to focus on issues outside of their core investment and business strategy. For service providers like us, it is an opportunity to contemplate what additional services we can provide to help lighten that regulatory burden.
I wouldn’t say we have seen any trends that correlate explicitly with the current political situation, aside from new rules and regulations such as the Alternative Investment Fund Managers Directive and the second Markets in Financial Instruments Directive.
The guiding trend within developed markets should be to expect more regulation and everyone’s trying to keep up with those changes.
How are asset managers gaining access to the largest retirement market in the world?
Having a singular focus to execute a strategy is important to success in a new market. Getting that clear strategy in front of institutional investors and their gatekeepers is not an easy feat: you have to spend time evangelising your strategy in front of senior managers and (just as importantly) the consultants who assist them. Having access to local expertise on issues like governance, marketing, sales and distribution can be crucial.
The CIT route should be part of any review of the US retirement market. A CIT can look and act like a mutual fund but it can often operate at a relatively lower cost. But an advisor can’t just go out and create a CIT and launch it—a bank has to sponsor the vehicle which requires the manager to fall under that bank’s due diligence and oversight regime.
I am a product manager supporting our global fund services (GFS) business in North America. Although GFS supports a range of services for various aspects of an asset manager’s operation, my focus is mainly back-office—custody, fund administration and investor services—for US asset managers and non-US managers who are running unregistered US fund products.
Part of my role as a product manager is to help on- and offshore asset managers understand the US funds market, the landscape of different fund vehicle options and how they can coordinate their distribution strategies.
Supporting our clients’ collective investment (CIT) funds is also a big part of my role. I educate clients on how CITs work and I also have a relationship management role with trustees that we work with to offer CIT structures.
What current trends are you seeing in fund distribution channels. How and why are they becoming global?
Cost pressure is a universal trend, which is happening for various reasons but mainly because of evolution of the market, including the institutionalisation of defined contribution (DC) plans. Asset managers facing increased fee pressure are in turn looking at their service providers for cost saving solutions.
Another major trend we see that impacts the CIT space and the fund vehicle decision-making process is growth of the US retirement market, the fastest growing component of which is the DC side. Employers are just not offering defined benefit plans like they used to. So the growth and the importance of the DC-world within the US retirement market is a huge trend. Many asset managers outside of the US, who aren’t as familiar with the US market, want to understand how they can penetrate that market.
The CIT structure is one that I spend a lot of time talking to managers about. I help UK managers understand how the CIT operates, how it’s different to a mutual fund, and how it could conceivably play a role in their distribution strategy in the US by taking advantage of that growth in the DC space. It can be daunting to those who don’t understand it.
Can you explain the growing trend for European funds looking to accept US investors?
The size of the US retirement market—$28 trillion—is an obvious attraction for European funds. The first question for those funds should be: “are they leveraging a platform already in the US?”
Those in the retirement space may look to platform providers in the mutual fund world to access these markets, whether that is purely in a sub advisory role, or by leveraging available fund structures more robustly.
If not, a basic question is: “how can I conceivably get US investors into my European funds?”
We continue to have discussions with managers around how best to do that. It’s probably not impossible, it can work, but it’s not the most streamlined process, and requires a lot of consideration for the manager.
For managers grappling with this cost environment, from a fund structure perspective, there is no one vehicle that can do everything everywhere. We have had conversations with managers about allowing US investors into one or more European fund structures. Again, the mechanics are tricky and create new obligations, including notably tax law compliance. The introduction of a US investor into a CCF or UCITS vehicle for example likely forces that fund to operate within the US Internal Revenue Service or Securities and Exchange Commission (SEC) rules when that probably wasn’t part of the asset manager’s original blueprint when they were building that European-based fund.
Managers are trying to crack it, but it is complicated as it creates challenges around disclosure and reporting, which may have a knock-on effect for non-US investors. It’s not causing serious concern, but it is an additional consideration and one that we always encourage managers to seek formal legal and tax guidance on.
Does this growing trend have anything to do with regulation and/or the current state of economic and political volatility?
Indeed, the growth and change in regulation in the decade since the global financial crisis has forced asset managers to focus on issues outside of their core investment and business strategy. For service providers like us, it is an opportunity to contemplate what additional services we can provide to help lighten that regulatory burden.
I wouldn’t say we have seen any trends that correlate explicitly with the current political situation, aside from new rules and regulations such as the Alternative Investment Fund Managers Directive and the second Markets in Financial Instruments Directive.
The guiding trend within developed markets should be to expect more regulation and everyone’s trying to keep up with those changes.
How are asset managers gaining access to the largest retirement market in the world?
Having a singular focus to execute a strategy is important to success in a new market. Getting that clear strategy in front of institutional investors and their gatekeepers is not an easy feat: you have to spend time evangelising your strategy in front of senior managers and (just as importantly) the consultants who assist them. Having access to local expertise on issues like governance, marketing, sales and distribution can be crucial.
The CIT route should be part of any review of the US retirement market. A CIT can look and act like a mutual fund but it can often operate at a relatively lower cost. But an advisor can’t just go out and create a CIT and launch it—a bank has to sponsor the vehicle which requires the manager to fall under that bank’s due diligence and oversight regime.
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