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27 March 2015

EFAMA response to ESMA’s Discussion Paper on share classes of UCITS

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EFAMA welcomed ESMA’s initiative to consider the development of a common understanding across the European Union of what constitutes a share class under the UCITS Directive.

Share classes meet investor demands by customizing the UCITS product on the basis of multiple investor preferences, e.g. their location (within or outside the base currency area of the investment strategy), holding periods, investment amounts, management and subscription/ redemption fees, revenue distributions, market developments, nominal vs. real returns, etc., without needing to redeem or purchase shares in another fund (or different compartment thereof).

A significant advantage from an investor’s perspective derives from the efficiencies that are generated from the economies of scale tied to the management of a larger underlying pool of assets and visible in lower administration and transaction costs. EFAMA would note that share classes usually permit a significantly smaller initial asset base (or seed capital) to launch if compared to the opening of new fund vehicles. Considering the different varieties of share class types as listed in the ESMA Discussion Paper, EFAMA would consider these to be broad enough for the purpose of elaborating a future common position around the notion of UCITS share class.

More generally, EFAMA would also include those share classes that provide a systematic hedge against the realization of one generic market risk, inter alia an equity market drawdown, a risk of sudden interest rate hikes, of widening of credit spreads, inflationary pressures, etc.  It is precisely this sort of systematic hedging overlay that provides investors with an additional advantage beyond the rewards generated by the fund manager’s specific expertise in terms of alpha generation. The fact that the overlay also allows investors to flexibly adjust their risk profile by switching from one share class to another (or by allocating more to one class over another) without needing to exit the UCITS altogether is an evident demonstration of the advantages from maintaining separate share classes.

Among the drivers for UCITS share class differentiation, one that would deserve greater elaboration is the need for efficient hedging. EFAMA would in this regard emphasise that share class hedging is an important functionality for investors, allowing efficient protection against unwanted risks (e.g. currency, interest rate ‐ related, equity or other). As such, EFAMA believes that share class hedging – beyond mere currency and duration ‐should be allowed 

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© EFAMA - European Fund and Asset Management Association

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