The master-feeder structure, which allows asset managers to set up feeder funds to gather assets in individual EU member states, has been gaining more traction lately, with a number of prominent EU asset managers rolling out master-feeder vehicles.

A UCITS master-feeder structure has the following UCITS specific features:

• A minimum of 85% of the assets of the feeder UCITS must be invested in the master UCITS.
• The master UCITS may neither itself be a feeder UCITS nor invest into a feeder UCITS.
• There must be an agreement between the master and the feeder UCITS or internal conduct of business rules where the UCITS have the same manager.
• If the master and feeder UCITS do not share common depositaries and/or auditors, information sharing agreement(s) must be entered into between the relevant parties.

The master-feeder structure is subject to the authorisation of the feeder’s home regulator only. If the master and feeder are domiciled in different jurisdictions, the only role played by the master’s home regulator is to confirm that the master complies with the investment restrictions applicable to UCITS.

An existing UCITS may convert to a feeder UCITS but it must first apply for a derogation from the restrictions on investment by one UCITS into other UCITS and must also provide certain information to its shareholders, including the key investor information document and risk profile of the master fund.

Benefits of the UCITS IV Master-Feeder Structure

Distribution
The UCITS IV master-feeder structure can be used to distribute products into new target markets and client segments.

A feeder can be established in an EU member state that suits the particular requirements of the distributor in that jurisdiction. The structure is also useful from a branding perspective as the feeder fund can be named according to the preference of the fund promoter or distributor while following the same investment policies as the other feeders in the master-feeder structure.

Another advantage of the master-feeder approach is that there is a preference for local products in some EU markets for cultural reasons. For those markets or segments that have a preference for local funds the master-feeder structure would allow the generation of cost savings through the pooling of assets in the master while still providing a local fund.

Master-feeder structures also offer significant potential to penetrate pensions markets as feeder funds can be adapted to meet a range of local tax and regulatory reporting requirements.

Tax
A number of asset managers have opted to utilise the master-feeder structure to rationalise their fund range because different tax arrangements across EU member states mean merging cross-border funds can be an expensive exercise.

Centralisation of Asset Management
The UCITS IV master-feeder structure makes it possible to centralise asset management activities thereby achieving economies of scale and the simplification of daily fund procedures. In addition, smaller European markets have low management capabilities, including central European countries, and require import of asset management know-how.

Avoidance of Fund Duplication
Fund duplication often results in significant cost inefficiencies and it should be possible for asset managers to achieve significant savings in core operations and custody costs by replacing duplicate (clone) funds with 1 master and a number of feeders.

Contributed by Niall Crowley