THE GFX GLOBAL PORTFOLIO SM SYSTEM BREXIT SOLUTION EXECUTIVE BRIEF

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Derick Randall
5 years ago
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THE GFX GLOBAL PORTFOLIO SM SYSTEM BREXIT SOLUTION EXECUTIVE BRIEF Asset management firms can meet the product line challenges from Brexit through the adoption of the GFX Global Portfolio SM System

1 THE GFX GLOBAL PORTFOLIO SM SYSTEM BREXIT SOLUTION EXECUTIVE BRIEF Asset management firms can meet the product line challenges from Brexit through the adoption of the GFX Global Portfolio SM System for their UK, Luxembourg and Irish umbrella fund ranges. The GFX SM System is the next generation solution for those firms to efficiently operate a single portfolio with assets from sub-funds sold publicly in the UK (CIS), Europe (UCITS) and elsewhere with the same investment objective and strategy. These ranges of existing or newly-created sub-funds are thus able to replicate and enhance the functionality of a UCITS passport without the limitations of a traditional mirror or parallel fund, a fund re-domiciliation, or reliance on a revocable equivalency designation. The GFX SM System is also used across domiciles for different types of traditional or exchange-traded investment funds as well as taxable and tax-exempt separate accounts and banking, insurance, and other investment products, including asset allocation funds. Although an asset management firm may adopt the GFX SM System as a Brexit solution, many of the benefits discussed below would apply to other types of investment products and to applications of the GFX SM System other than Brexit. 1

2 The Brexit Challenge to Pan-European Fund Distribution On March 30, 2019 or at the end of any transition or implementation period thereafter, UK CIS and their sub-funds will cease to be UCITS and thus can no longer be sold to new EU27 retail investors or accept additional investments from current EU27 retail shareholders. Similarly, Luxembourg/Irish UCITS will no longer be automatically available for sale to new UK retail investors or be automatically able to accept additional investments from current UK retail shareholders. Also, at that same time, UK and EU27 asset allocation and other fund-of-funds which are currently UCITS will need to evaluate their continuing ability to invest in the sub-funds of EU27 UCITS or UK CIS, respectively. GFX SM Brexit Solution The GFX SM System enables the same portfolio to be available on a cost-effective basis to investors across the UK (through a UK CIS) and the EU27 (through a Luxembourg or Irish UCITS) post-brexit. This is achieved by creating a new GFX SM Portfolio for each existing sub-fund of a UK CIS and Luxembourg/Irish UCITS. In situations where there are existing sub-funds in each range with the same investment objective and strategy, this result is achieved directly through the conversion of each subfund to the GFX SM System. In situations where there is no existing sub-fund in one of the ranges, a new sub-fund with the same investment objective and strategy is created in that range using the GFX SM System to achieve this result. Current shareholders would maintain their current investments in their current sub-fund and continue to make additional investments in that sub-fund if able to do so. If unable to do so, they would make those additional investments in the corresponding sub-fund in the other range. Thus, all of their investments would be made through the same GFX SM Portfolio and aggregated for convenience in shareholder statements. The GFX SM System can be adopted without any required shareholder vote and without any mandatory conversions of prior fund holdings. Shareholders would also not incur any tax liability with respect to either their current or additional investments as a result of transition to the GFX SM System. GFX SM System The GFX Global Portfolio SM System involves the separation of the portfolio components of the investment fund (or sub-fund) from the administration and distribution components. Once separated, other existing or new investment funds (or sub-funds) can likewise separate investment components and invest through that same investment portfolio. This single investment portfolio is referred to as a GFX SM Portfolio and each of the investment funds (or sub-funds) investing through it is referred to as a participating Fund. As the portfolio components are separated, so are the expenses (e.g., management fee, custodial fee) 2

3 associated with them. These expenses then, in turn, form the basis for the expense ratio of the GFX SM Portfolio. The GFX SM Portfolio operates as a single portfolio with a single investment manager, a single custodian, a single auditor, and a single portfolio compliance platform. Likewise, the GFX SM Portfolio has a single investment objective and strategy, and a single set of investment policies and restrictions. The operations taking place through the GFX SM Portfolio comply with the laws and regulations governing each of the participating Funds. Each GFX SM Portfolio is tax transparent. The following diagrams illustrate two traditional parallel investment funds (or sub-funds) (Fig. 1), and those same two participating Funds in a GFX SM Portfolio (Fig. 2). These diagrams also illustrate the similarities between the strategic goals of the GFX SM System (minimize the number of portfolios and maximize the number of markets) and those of a class of shares structure or a master-feeder structure, although share class and master-feeder structures are unable to provide a solution to the Brexit issues. Fig. 1 Fig. 2 Economies of Scale As additional participating Funds invest through that GFX SM Portfolio, the expense ratio of the GFX SM Portfolio becomes lower as break-points in the management and custodial asset-based fee schedules are reached and transaction-based expenses (e.g., trading, settlement and holding expenses) are spread over a greater number of participating Funds. As a result, the aggregate expenses of each participating Fund are less than they would be if it operated as a traditional investment fund (or subfund). Although the extent of these economies of scale depend on the asset size of the GFX SM Portfolio and participating Funds, their significance is greatest for a small or newly-created participating Fund investing through a relatively large GFX SM Portfolio. The greatest impact of these economies of scale is reflected in the significantly lower breakeven asset level of a small or newly-created participating Fund as compared to its breakeven asset level if operating as a traditional mirror or parallel fund (or sub-fund). A participating Fund s breakeven asset 3

4 level is dependent on its ability to cover Fund-only operating expenses, e.g., registrar fees, as opposed to all operating expenses, including management and custodial expenses, if it were operating as a traditional mirror or parallel fund (or sub-fund). These economies of scale are similar to those achieved in a class of shares structure or a master-feeder structure, as confirmed by the EU by adopting UCITS IV. Seed Capital Since the assets of each participating Fund are invested through its corresponding GFX SM Portfolio, a participating Fund does not require any seed capital to establish a viable portfolio of securities prelaunch or thereafter while public assets are small. This is the same result as for a new class or a new feeder. A range of new mirror or parallel sub-funds can thus be established without any seed capital when each new sub-fund operates as a participating Fund investing through its corresponding GFX SM Portfolio. Performance As the portfolio components of an existing investment fund (or sub-fund) are separated from the other components to become a GFX SM Portfolio, that portfolio retains its performance track record, adjusted for expenses. Further, at the time of its organization, a newly-created participating Fund may adopt the same track record as its corresponding GFX SM Portfolio, adjusted for expenses. Although performance is analytically portable to a new sub-fund, there may be some practical limitations on its use as portability was not specifically contemplated when the KIID was adopted. Performance portability for new participating funds within the GFX SM System should be substantially the same as for a new share class or a new feeder. Legal/Regulatory Considerations The GFX Global Portfolio SM System is a co-management and co-safekeeping system that (1) replicates the daily operational efficiencies and economies of scale of a master-feeder or class of shares structure, (2) is created and operates pursuant to the provisions of an additional set of inter-related contracts, and (3) is a type of virtual pool, but is contractually not a legal entity or a fund or a pool as there is no joint beneficial ownership. There is also no cross liability or contagion as among the participating Funds, which distinguishes the GFX SM System from a class of shares structure, which was limited in its activities by ESMA in January 2017 because of its potential for cross liability or contagion as among the classes. The general legal, fiscal and regulatory issues underlying the GFX Global Portfolio SM System were presented to the relevant authorities in the U.S., UK, Luxembourg and Ireland. The authorities in the UK, Luxembourg and Ireland confirmed that funds organized in those jurisdictions and operating as UCITS could participate in the structure. GFX believes that the issues raised in the U.S. have also been adequately addressed. However, as with other fund structures including traditional ones no 4

5 assurance can be given that, in the context of any specific application or filing, additional issues may not arise which would lead the applicable regulatory or fiscal authority to deny, reject or significantly modify that application or filing. More Information Global Fund Connections LLC (GFX) is a multi-disciplinary FinTech firm that has developed the knowhow and software for this innovative GFX Global Portfolio SM System. For more information concerning the GFX Global Portfolio SM System, including GFX s know-how and software licensing program to implement and support it, or to be added to our mailing list, please contact us at info@globalfundconnections.com. Copyright 2018 Global Fund Connections LLC. All Rights Reserved. GFX, GFX Global Portfolio and Global Fund Connections are service marks of Global Fund Connections LLC. 5

Legislation was recently enacted in Ireland providing

Legislation was recently enacted in Ireland providing The Investment Lawyer Covering Legal and Regulatory Issues of Asset Management VOL. 22, NO. 6 JUNE 2015 ICAV - the New Irish Collective Asset-Management Vehicle By Mark Browne Legislation was recently