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Holly LaFon
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Cobas Asset Management Commentary: Spanish Funds or Luxembourg Funds?

We investors often wonder why an asset manager offers funds subject to Luxembourg law and others subject to Spanish law, by Gema Martín Espinosa

May 08, 2018 | About:

What any investor absolutely must realise is that, when a manager offers both funds under Luxembourg law and funds under Spanish law, the product on offer is actually the same. In other words, the same management team, same philosophy, same investment process and same portfolio.

The differences relate to the other actors a collective investment vehicle necessarily has to rely on. Both cases call for a depository bank; however, faced with political uncertainty or instability in their own country, some investors choose to invest in a fund whose assets are deposited in a bank in Luxembourg, instead of in a local bank.

Another important aspect of a fund is the entity charged with managing the fund, its participants, the representation of the fund and ultimate accountability to the regulator. These services are generally handled by local managers, given that they possess the technical and human infrastructure in their own country, yet relying on external providers in Luxembourg, with the additional cost that this entails. Moreover, in both cases, the fund receives services from auditors and lawyers.

When a Spanish asset manager decides to manage a fund in Luxembourg, making use of the European passport and prior authorisation from the regulator in Luxembourg (CSSF), more often than not it chooses not to set up a company in that country, but rather manages the fund from Spain, outsourcing the other services. Such outsourcing of various services results in additional costs for the fund, which is reflected in the net asset value of the fund and, therefore, somewhat lesser returns for participants.

However, funds in Luxembourg enable managers to diversify their client base and respond to the needs of international investors thanks to an operationally efficient fund, under the international jurisdiction which, nowadays, offers greater confidence and professionalism in Europe.

Luxembourg is the undisputed leader in cross-border fund distribution

With the European passport, it is true that you can choose to set up funds in Ireland, Malta and other EU countries; however, over the years, Luxembourg has become the standard-bearer when it comes to cross-border distribution of funds, not just in Europe, but also in Latin America and Asia.

So, what are the differences? Both Spanish and Luxembourg funds are governed by the same European directives applicable to fund management. In both cases we are dealing with UCITS funds; however, unfortunately, marketing Spanish funds to investors outside Spain by way of global or “omnibus” accounts is not possible.

What are these omnibus accounts and why are they so significant?

The holder of the omnibus account is the fund’s promoter, rather than the end client. It enables one single account to be used for all the subscription and redemption orders from clients, without the need for their details to be known or shared. The manager receives a global order and is unaware of the identity of the end clients. These end clients do not open an account with other managers and, through their fund promoter and from their own account, are able to access third party funds. Given that Spanish funds are not marketed via omnibus accounts, international investors are obliged to open an account with a promoter in Spain or with the fund manager itself in order to be able to invest in them. This operational barrier makes Spanish funds rather unattractive to international and institutional investors beyond our borders. For this reason, several asset managers are choosing to manage the same fund in Luxembourg and thus gain access to foreign – mostly institutional – clients, but also to private banking clients, through their banks and global accounts.

How do foreign clients operate? Access for international customers is usually facilitated by international platforms, the vast majority of which do not contemplate an operational set-up with funds under Spanish law, as they are unable to comply with the demands to furnish details of the end investors. As well as these platforms, the European central depositories and custodians provide direct access to institutional clients operating directly with Transfer Agents or fund managers.

Moreover, the absence of omnibus accounts in Spain has a negative impact on asset managers in our country when it comes to marketing their funds through other entities in Spain. And this is mainly for two reasons.

The first – and most powerful – reason is that the leading Spanish fund managers form part of banking groups with distribution networks (branches) where it would be impossible to contemplate offering a competitor’s product.

Secondly, even if this question of selling a competitor’s product could be resolved, another factor would come into play, namely that marketing a Spanish fund necessarily entails passing the basic details of the participants on to the asset manager.

Despite the fact that it is the fund administrator which would receive these details and be subject to the strictest obligations regarding confidentiality and non-use of the data, generally speaking the fear surrounding client data transfers, often definitively rule out the marketing of Spanish funds by third parties in Spain.

Because of this, some Spanish independent fund managers choose to manage only Luxembourg funds. These are then marketed in Spain at a cross-border level through third parties by means of marketing agreements with platforms and distributors. They thus resemble international fund managers which, curiously enough, the Spanish distribution networks do not perceive as “competitors”.

It is also important to dispel persistent legends and myths. A Spanish fund is neither better nor worse than its equivalent in Luxembourg. They are both options that fund managers offer to respond to the needs of all their clients; they have nothing to do with tax havens, high-net-worth individuals or the “glamour” the Spanish sometimes perceive in their English nomenclature.

In short, investors should first decide with which fund manager to invest; then, according to their nationality, tax residency, the currency in which they wish to invest or where their money is, they must opt for a fund in its Spanish or international version. One fund is no better or worse than the other, but rather they have different nuances. Therefore, investors must make a decision based on this personalised analysis, according to their specific circumstances.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


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