Does it matter where a fund domiciled?

Date: Thursday, September 8, 2011
Author: Joy Dunbar, Editor of Absolute UCITS

The fund industry is one of the benefactors of an increasingly globalised world. If you take the example of a UCITS fund: it can have its domicile based in any European Union country; administration and legal work can be carried out in Ireland or Luxembourg and some of its operations can be outsourced to workers in Poland. Portfolio management can potentially be carried out in a street café in Rio or a skyscraper in New York City; people who deliver back office and IT functions can carry out their work in air conditioned offices in India or the Philippines; and global custodians keep assets safe in multiple jurisdictions.

When Ireland’s economy was pulled down by its sovereign debt crisis last year, its rating went down from a sturdy A to a less than impressive B, barely investment grade status. Earlier this year Ireland was then assigned a junk status rating by Moody’s, although it maintained its BBB+ rating from S&P and Fitch’s.

The pensions regulator in Chile downgraded Irish-domiciled UCITS funds because the country no longer has an A rating, which means it no longer qualifies for the general investment category. The country in which the fund is domiciled, its manager or holding company should have a registered A rating, according to Chilean pension fund rules. So Irish funds are  now in a ‘restricted investment’ category after the country’s debt was downgraded by Moody’s.

It is important for the pensions authorities in Chile to be cautious – after all, they are responsible the contributions of individual pensions savers. As more and more countries face sovereign debt issues, and are therefore downgraded by ratings agencies, the potential risks of individual countries should be reviewed on a case-by-case basis. But is the way Irish-domiciled UCITS funds are treated by the Chilean authorities not a bit excessive?

The fund industry in Ireland is completely separate from the country’s sovereign risk woes, according to Gary Palmer, chief executive of the Irish Funds Industry Association (see earlier story).

In fact, the fund industry may also have been one of the few industries in the jurisdiction to benefit from the sovereign debt crisis (see earlier story).

In the past three decades, Ireland has also carved out a reputation for being one of the best places to provide fund administration services. It also had the highest level of net inflows to funds in Europe in the first half of the year, according to the latest European Fund and Asset Management Association statistics.

The funds industry in Ireland has a strong reputation internationally. And it seems most unlikely – almost preposterous – that, as a result of its financial problems, the Irish government will seize the assets of funds domiciled in the country or impose punitive taxes to try and boost a failing economy. Rather, it seem that renewed growth in the funds business would be more the kind of development that would help the country climb out of the credit-fueled mess it currently is in.