James Williams, news editor, hedgeweek

Fitch does not expect ESMA repo guidelines to materially impact money market funds, F&C launches real estate equity long/short fund…

Sun, 16/12/2012 - 10:38

Geneva-based Alix Capital, provider of the UCITS Alternative Index Global, is publishing a report that suggests ESMA proposals will impact EUR3billion of CTA UCITS assets. ESMA proposals on limiting the use of indices by UCITS funds – something that CTA UCITS funds in particular rely on to gain their exposure to commodity markets – will require CTA managers to re-assess how they trade to ensure compliance with the proposals. The paper examines the options available to these managers. The ESMA consultation, entitled “Guidelines on ETFs and other UCITS issues: Consultation on recallability of repo and reverse repo arrangements”, was published in July 2012 and proposes new guidelines governing UCITS eligible indices.

ESMA recommends that an index should be transparent, replicable to be UCITS-compliant, and that rebalancing on more than a weekly basis will no longer be acceptable. Seven of the 10 largest UCITS CTA managers use the index structure said Alix Capital. Louis Zanolin, CEO of Alix Capital, said that ESMA’s recommendations would have a “major impact on the alternative UCITS sector”, although he added that are options available to CTA managers.

Said Zanolin: “
We expect a large portion of UCITS CTA managers with commodities exposure will choose to replace indices with certificates, a type of debt instrument, as this will allow them to maintain the desired commodity exposure while avoiding the upcoming index constraints. Commodities are an important asset class for investors seeking to build a diversified portfolio and for ESMA regulations to force managers to use complex methods to gain exposure to this asset class makes little sense. In our view it would be more beneficial to consider allowing UCITS funds to invest directly into commodity instruments.”

Other than abandoning commodity exposure altogether, the other option highlighted in the report would be for managers to continue using an index. However, by doing so, managers would have to fully disclose both their methodology and positions, and limit the rebalancing frequency to weekly.

Continuing with ESMA, Fitch, the ratings agency, released a statement on Reuters this week that said ESMA’s guidelines on repo agreement maturity limits would not have a material effect on money market funds (MMFs) as they predominantly enter into overnight repo contracts as a liquidity management tool. ESMA guidelines, issued on 4 December 2012, restrict UCITS funds to repos with a fixed term of seven days or less. Given that almost all repos used by MMFs are overnight, the term restrictions should have a limited impact according to Fitch. The firm said: “Longer-term repos will likely be kept to maturity and not renewed or made callable to comply with the revised guidelines. Fitch does not expect this repositioning to have a material effect on any of its rated MMFs since term repo exposures are limited.”

F&C has announced the launch of the F&C Real Estate Equity Long/Short UCITS Fund with EUR63.4million of day one capital
. Raymond Lahaut and Marcus Phayre-Mudge are managing the new fund, which is designed to offer investors cost efficient access to the pan-European property market. The fund will invest in a portfolio of between 20 and 40 pan-European listed real estate securities, both long and short, and maintain a net exposure ranging between -30 per cent and +30 per cent.

Phayre-Mudge commented:
“Through an absolute return approach, we seek to harness inefficiencies in the real estate market, as we believe that the price of European real estate securities may not always reflect the true underlying value of the assets. Using our ability and flexibility to take active positions using both long and short positions, we look to take advantage of the excellent opportunities for relative value trading that the low correlation between sectors, countries and companies in real estate provides.”

The real estate securities team at F&C, which manages more than EUR1billion of pan-European real estate equities, combines rigorous bottom-up analysis with its expectations of the performance of the underlying local property market (i.e. a macro overlay).

Lazard Asset Management’s Arif Joshi believes emerging market corporates will rival the US high yield market over the next two years
reported Citywire Global this week, as institutional investors clamber to raise their exposure to EM debt. The strong sovereign position of emerging market countries, compared to Western governments, is also acting as a catalyst. Joshi co-manages the USD602million Lazard Emerging Markets Total Return Debt Fund with Denise Simon: an open-ended UCITS fund domiciled in Ireland.  

Investor interest, said Joshi, was helping fuel a “dramatic increase” in the size of the EM corporate debt market, stating that it was now where EM sovereign debt was “10 years ago. There is a significant amount of paper coming in the future and there are very strong technical’s for the asset class in terms of a sustainable high yield and investor flows into EM corporates.”

He said that EM market corporates now comprise 55 per cent of the EM debt universe, compared to 45 per cent for sovereigns. On the growth of this market relative to US high yield, Joshi was further quoted as saying: “We are on pace, over the next two or three years, to be the exact same size as the US high yield bond market.”   


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