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Ucits-induced financial crisis possible, Alfi report warns

A Ucits-induced financial crisis would destroy the brand and could be born out of a flash crash in some relatively illiquid sector, according to an Association of the Luxembourg Fund Industry (Alfi) commissioned report.

The report, produced by Broadridge Analytics Solutions, found that Ucits assets were on course to quadruple to around €42trn over the next 30 years at a compound growth rate of 5%.

By 2048 inflows could be running at €860bn a year and if Luxembourg retained its 36% market share of Ucits assets, it could be host to €415trn of assets under management.

However,  Broadridge managing director of global distribution solutions, Diana Mackay, warned the success of the Ucits brand could be destroyed if there was sudden crisis in one sector of the market, and she pointed her finger at the rapidly expanding ETF market.

Speaking at Alfi’s Global Distribution Conference in Luxembourg on Wednesday, Mackay said: “A Ucits induced financial crisis could happen. The last crisis was bank related and we have to be sure that we do not engineer a crisis that links to Ucits, because if that happens the brand will be destroyed”.

The report said there could be a flash crash in some relatively illiquid sectors, particularly those that have attracted a lot of ETF attention.

“The imposition of a temporary gate to limit redemptions would severely damage Ucits if done on a wide scale,” the report said.

“The response from regulators could be draconian and potentially restrict retail investors to plain vanilla products. Ucits would probably survive but in a considerably curtailed form,” it said

Mackay told conference delegates: “We cannot be complacent about the value of the brand. Not just for our businesses but for the global savers that have believed in the message”.

She noted that other challenges other the next 30 years would include Brexit isolating the UK, a return to high interest rates where funds would have to beat those returns to remain attractive, pricing pressures leading to industry consolidation, and export limitations of the Ucits brand.

Future assets

Mackay also noted that future assets would come from an ageing population, deposit accounts in response to the EU’s Capital Markets Union initiative, the launch of the Pan-European pension plan, new distribution structures including AI and robo-advice, and improved financial education.

Alfi chair, Denise Voss, said this growth in assets had the potential for solving the challenge of changing demographics as the dependency ratio was expected to double over the next 30 years to reach 51%.

“We can also expect Ucits to be a key beneficiary of the launch of the Capital Markets Union, which aims to increase investment and the choices available to retail and institutional investors and migrate some of the vast pool of deposit savings into managed investments,” Voss said.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

Part of the Mark Allen Group.