Time for Ireland to evolve
While other industry sectors fret about the impact of Brexit, for the funds industry there is opportunity
More than 40 per cent of global hedge fund assets are now serviced in Ireland, making it the largest fund administration centre in the world. Photograph: Getty Images
Relative to its flyweight size, Ireland punches well above its weight in the global funds industry. “Ireland has ranked consistently as the strongest growing major fund domicile in Europe over the past 10 years with over €4 trillion of assets under administration,” says Sarah Cunniff of law firm Arthur Cox.
More than 40 per cent of global hedge fund assets are now serviced in Ireland, making it the largest fund administration centre in the world. Irish-domiciled exchange traded funds (or ETFs) account for about 50 per cent of the total European ETF market. Ireland is also the premier location in Europe for establishing and servicing money market funds, with about €1 trillion in assets under management.
This success was not achieved overnight. “It has taken almost 30 years for Ireland to establish its market dominance,” says Cunniff, of Arthur Cox’s Asset Management and Investment Funds Group.
“It started with creating the right infrastructure for an international fund domicile consisting of regulation, fund products and an attractive tax regime. However, Ireland quickly developed its reputation as a leading funds domicile through its commitment to service and innovation. With the growth of the Irish funds industry, the Central Bank of Ireland also developed a reputation as one of the leading experts on investment-fund regulation in Europe – one of the cornerstones of its being a world-class funds domicile.”
While other industry sectors fret about the impact of Brexit, for the funds industry there is opportunity.
“The problem for UK financial services industry is not knowing whether there will be a soft or hard Brexit. That problem is compounded by the fact that in order to plan for a hard Brexit, those UK firms who do business in the EU will have to establish a regulated firm in the EU, which can take up to 12 months to be authorised. Working back from a Brexit date of March 2019, that means those UK firms have to decide now on whether they are establishing a regulated firm in the EU as they run a very significant business risk if they take a view there will be a soft Brexit and that turns out not to be the case,” she says.
But Brexit is also an opportunity for Ireland to move from being a back- or middle-office international fund domicile to being a full-service domicile with front-office investment management capabilities. “It would complete the evolution of Ireland’s funds industry from an aspiration 30 years ago to a world-class full-service investment funds domicile. Completing that evolution is a once-in-a-lifetime opportunity and therefore has to be a priority for Ireland,” says Cunniff.
But there are challenges ahead too for Ireland’s funds industry. The year began with IDA boss Martin Shanahan warning against complacency in creating jobs in Ireland through foreign direct investment. As cautioned by Shanahan, “all jobs must be fought for and won against increasing international competition”.
This equally applies to the investment funds industry in Ireland. “Ireland needs to ensure that its investment funds infrastructure, which has enabled it to become a world leader, continues to be fit for purpose,” says Kevin Murphy, co-head of Arthur Cox’s Asset Management and Investment Funds Group.
“We have to ensure that our product ranges at least match those of our competitor jurisdictions and that we continue to enhance our reputation as a centre of excellence and innovation and a world-class funds domicile. If we don’t do that, not only will we lose out to other EU countries on Brexit, but we will lose new business to those other EU countries.”
Globally, there are other challenges too, not least that asset managers generally are operating in an increasingly competitive and cost-conscious market environment. “That has led to recent M&A activity within the industry as firms seek to consolidate and achieve greater economies of scale,” says Nicholas Blake-Knox, partner and head of Investment Funds, Ireland at Walkers, who believes it is a trend likely to continue.
Costs and charges
The regulatory environment has also contributed to the increasing focus on the costs and charges which are passed on to investors. This pressure is likely to continue with the new costs disclosure requirements which have been introduced under MiFID 2, whereby additional transparency will be required in relation to the underlying transaction costs that are incurred.
“New rules relating to the payment of inducements, such as rebates, to fund distributors, enhanced transparency requirements as well as various other investor protection requirements, including the requirement to disclose an identified target market for each investment fund, will result in greater pressure being placed on fund manufacturers to engage with their underlying distribution network in various areas,” says Blake-Knox.
“We expect the growth in less liquid asset classes and alternative investment funds to continue as investors seek higher investment returns in such a low-yielding market environment,” he says.
“Parallel funds employing dual structures involving US and Cayman funds are also a trend that we expect to continue and which enables European asset-raising in a more scalable and efficient manner. Irish investment funds work very well within these types of structures and offer a base to raise assets across Europe utilising the AIFMD passport. We expect managers to continue to establish onshore investment funds utilising this framework in 2018.”
Technology is another factor that will continue to play an increasingly important role in the investment funds industry during 2018.
“The asset-management industry has been a relatively slow adopter of technology compared to many other industries but this is likely to change over the coming years. The number of fintech firms is rising exponentially and there are significant opportunities for the asset-management industry to utilise the benefits of artificial intelligence in conjunction with large-scale data analytics or big data in the management of portfolios.”
Within the investment funds industry, there are opportunities to harness blockchain technology, particularly in areas such as transfer agency, which could facilitate new and innovative approaches to the purchase and sale of fund units and could dramatically change the global distribution model for funds.
Says Blake-Knox: “Ireland should be very well-placed to take advantage of these developments given its thriving technology sector and mature financial services industry.”