The Fund Industry: a look into global trends and Cyprus - Cyprus Profile

Articles | 12 September 2017 | Deloitte Cyprus

The Fund Industry: a look into global trends and Cyprus

The funds industry has become very popular amongst investors as it provides a broader selection of investment opportunities. Overall the regulated open-ended fund assets increased by c.18% during the first quarter of 2017 compared to the same quarter of 2016, reaching c.€43tln in value.

During the first quarter of 2017, the worldwide regulated open-end fund net assets were dominated by c.41% of equity, followed by c.21% of bonds and c.18% of balanced-mixed investments while the remaining 20% was allocated to real estate, guaranteed and other investments. The allocation remained stable since 2012.

The European funds industry has been growing since 2008 and during 2016 has reached c.€23tln of assets under management and c.€14tln of net assets. As per EFAMA, the ratio of assets under management to European GDP has reached 138% by the end of 2016 signalling confidence in the financial markets.

One of the biggest investment trends of the last years which keeps growing, lies in passive investment. ETF investments are on the rise especially those which are tied on indices. They offer easy access to any sector, asset class or region with lower fees compared to mutual funds.

In 2017, many investment management companies have strengthened their position in ETFs compared to previous years. As a result the ETF trading has been spurred and it now accounts for c.30% of US trading by value and c.23% by share volume.

Smart-beta funds have become very popular in 2017 and they now account for c.14% of the global ETFs value. Many investmentmanagement companies rushed to launch such funds to meet the growing demand from investors. Noteworthy, during the first quarter of 2017, the new money allocated to smartbeta fund strategies rose by around 24 times compared to the first quarter of 2016 (from c.$1bln:1Q2016 to c.$24bln:1Q2017).

On the down side, the momentum of European equity and bond funds are now exhibiting signs of weakening, following the asset class’s strongest money inflow since 2015. As per EPFR, in July 2017, c.$480mln have been pulled off by investors from funds that were investing in European securities.

Following the recent financial crisis, investment in AIFs is becoming even more complex and challenging for AIF managers. Along with technological advancements, investors have become more sophisticated and more well-informed.

The investment appetite has therefore changed and a greater diversification in terms of non-traditional asset classes is demanded. As a result, investments in hedge funds have become more demanding, whereby most of the investors require a customisation of their investment plan according to their needs.

Increased cross-border competition, never ending pressures and negotiations to reduce fees and at the same time maintain and constantly improve operational infrastructure has recently led to sophisticated robotics. Hedge fund managers are passing the reduction of fees onto the back-office departments and administration with the replacement of time and cost consuming operations with high-tech automated systems.

Cyprus funds industry

The Cyprus funds industry in recent years has undergone a significant transformation, with the regulatory framework being significantly upgraded both (i) to harmonise with EU directives – such as the AIFMD, UCITS IV and V, MiFID II; and (ii) to offer investment fund products that are competitive to those of other more established jurisdictions.

The major milestone of recent years was the enactment of the AIF Law in 2014, which replaced and repealed the existing ICIS Law initially enacted in 1999. These developments have assisted in growing our industry during the last two years, and in the efforts to establish Cyprus as a jurisdiction of choice for asset managers both within and outside the European Union. The Cyprus regulatory authorities are continuing to work on further enhancements of the regulatory framework, which will further boost the growth of the industry going forward.

The number of funds in Cyprus is increasing year-on-year at a compound rate of c.18% per annum since 2014, reaching a total of 21 home-domiciled UCITS and 148 home-domiciled AIFs as of year-end 2016.

The authorisation of UCITS in Cyprus only began in 2013. The share of UCITS remains small compared to the total funds in Cyprus in 2016, representing c.12% of the number of funds and c.5% of the total net assets. The net sales rose from c.€18,73mln in 2014, to c.€45.03mln in 2016 largely driven by equity funds which accounted for c.86%. The net assets of UCITS increased by 83% in 2016 to c.€0.11bln, evenly allocated to equity, bonds and multi-assets funds.

In 2016, AIFs represented 95% of total net assets of the Cyprus funds industry. In the same year, a significant number of new funds were authorised and activated. The new funds boosted the net sales of the AIFs in Cyprus reaching an all-time high of c.€129,18mln largely driven by multi-asset funds.

Net assets of AIFs on the other hand remain at stable levels which in 2016 amounted to c.€2,07bln compared to c.€2,02bln in 2014 and c.€2,31 in 2015.

Overall, the funds industry has evolved over the last decade to become a vehicle of investing in selected sectors of the global economy with a well-diversified risk. Its popularity is increasing amongst investors who are continuously adding pressure to fund managers for cost reduction and access to more diversified investments. Cyprus is adapting to the transformation of the funds industry and it is expected that it will become a bigger player in EU, as evidenced by the encouraging net sales value in 2016. The harmonization of the legal framework governing the funds in Cyprus with the EU regulations, along with the transition brought by the AIF law enactment has played a significant role in the evolution of the funds industry in Cyprus.

Author: Mr. Christoforos Stylianou Assistant Manager, Financial Advisory Service, Deloitte Limited.

Mr. Christoforos Stylianou joined Deloitte since 2016 as an Assistant Manager in Financial Advisory Services. Before joining Deloitte, he was providing assurance services to local and international companies both in Cyprus and abroad. He is a qualified Chartered Accountant and he holds a Bachelor degree in Accounting and Financial Management from the University of Hull.

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