by Jake Moeller.
For sophisticated investors, a fund’s domicile may be a material factor in the due-diligence of a potential collective investment. It is important because it has implications for fund structure, regulation and governance, transparency, taxation and a host of ancillary fund-related functions such as custody, depository obligations, and data exchange.
Many countries in Europe have a good proportion of funds created for domestic consumption. For cross-border funds (i.e. funds available for sale across a number of regions), fund managers are attracted significantly to Luxembourg (€4.4 trillion assets under management (AUM) as a domicile and 8% of the global fund market) and Ireland (€2.5 trillion as a domicile and 4.6% of the global market).
Other non-EU domiciles in the region, such as the Channel Islands and Malta, have carved out a niche for trust investments and more complex, non-regulated funds or alternative investment schemes, but for many investors, there is a particular attraction for an EU-based domicile.
The Republic of Cyprus is making a strong and coordinated effort to attract funds-related business from both investors and fund managers. Currently compared to the domiciles above, it is a minnow with AUM of only €6.8 billion as of June 2019. However, the rate of change is considerable. In 2012, its AUM was €2.1 billion and the Cyprus Investment Funds Association (CIFA) predicts AUM of some €20 billion by 2023.
Cyprus offers considerable potential as a future fund powerhouse. It is member of the European Union and compliant with EU laws and regulations, it is a Eurozone member, has a favourable EU and OECD approved tax regime, has a robust legal system, and has a very sophisticated fund infrastructure. It is also conveniently located in the eastern Mediterranean, with English being widely spoken.
Ostensibly, I feel that Cyprus isn’t trying to pitch in the already saturated UCITs market, although it will undoubtedly pick up some business there. It looks to specialise in some of the alternative types of funds and is making a mark in more complex Registered Alternative Investment Funds, with assets such as shipping, where it already has a strong global presence. However, I suspect that there will be some opportunities for Cyprus amid the fallout of Brexit and possibly even with the political unrest in Malta, which is a domicile competitor.
The Republic of Cyprus’s ambition with respect to funds is evident. Its fund industry is open, approachable and all the industry and governmental arms are aligned. There is a unified effort across institutions such as its stock exchange (CyEX), industry bodies such as the CIFA, and its government to welcome new fund managers and investors.
Since the global financial crisis, it is true that the Cyprus finance industry has not always been in the news for the right reasons, even recently gaining poor headlines with respect to its “golden passport” scheme. However, Cyprus is making good on important reforms, (e.g. non-performing loans are down 68% from peak to €9.5 billion as of November 2019) and is undoubtedly aware of the importance of dealing promptly with any issues that compromises its reputation.
Cyprus is building a formidable foundation of expertise across all areas of fund management and administration. It is also creating a strong network of highly educated financial and ethical professionals. The Chartered Institute of Securities and Investments stated that it had 212 members in Cyprus at the end of 2018, growth of 86% from 2017. The CFA Institute is also building up representation on the island. Ethics both underpin these organisations and growth here augurs well.
I recently chaired the CIFA 5th International Funds Summit in Nicosia. It was a very impressive affair indeed, with a large concentration of big industry players, and importantly a large proportion of non-Cypriot delegates. It really provided an outstanding showcase of the fund expertise Cyprus has built. I highly recommend it for anybody looking for a new fund hub.
Just as a “boutique” fund manager may have an attraction to some investors who prefer the nimbleness of a smaller operation, Cyprus has many as a boutique domicile. It is currently very easy with which to do business. In a single visit, you’d be able to see pretty much any key player in its fund market, making a due-diligence visit straightforward.
Also, the weather is great!
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