ICVCs

Do you know your OEIC from your SICAV, your FCP from your KAG?

Do you know your OEIC from your SICAV, your FCP from your KAG?

All these structures are forms of European collective investment vehicles (funds) and all can be compliant with the region’s UCITS rules. UCITS sets common standards for retail funds across Europe, and a UCITS-compliant fund domiciled in one European country can be sold freely in another (in theory, at least—UCITS may have to go through a registration process to be “passported” elsewhere).

Do you need to know the differences between the various types of vehicles? Probably not, but there are some details worth being aware of, particularly when it comes to taxes.

Fundamentally, there are two types of retail fund structures common in Europe: corporate vehicles; and trusts/contractual funds.

UK and Irish investment companies with variable capital (ICVCs), UK open-ended investment companies (OEICs), French or Luxembourg Sociétés d’Investissement à Capital Variable (SICAVs) and German Investmentaktiengesellschaften (InvAG) are all forms of corporate structure. This means that an investor in any one of these fund types is a shareholder and has rights to the fund’s assets. The directors of the corporate vehicle are responsible for managing the company's investments, buying and selling shares on demand and ensuring accurate pricing of the shares.

UK unit trusts, French and Luxembourg Fonds Communs de Placement (FCP) and German Kapitalanlagegesellschaften (KAG) are run under trust deeds or common contracts. Investors in such funds are co-owners of the fund’s assets.

Amongst European ETF providers, you will find all these structures. Lyxor, for example, runs French FCPs and SICAVs and Luxembourg SICAVs as part of its ETF range. iShares has both Irish ICVCs and German KAGs.

There are differences in stewardship and governance among different fund structures. UK OEICs tend to use a single corporate director (the authorised corporate director or ACD). ICVCs and SICAVs in other European countries often use individual directors, many of whom may have links to the parent company issuing the fund.

The role of fund directors in safeguarding investors’ interests has always been a topic of interest to regulators and to the investment public. In US fund law, for example, under the 1940 Investment Company Act, at least 40% of a mutual fund’s directors must be unaffiliated with the fund issuer. This rule was brought in as a response to perceived abuses and self-dealing.

If a fund follows a trust or common contractual structure, the fund unit holders may have no votes and therefore no direct ability to change those charged with oversight. All decisions are formally delegated to the fund board or trustee. Note, however, the compulsory reporting requirements imposed on all UCITS funds, which ensure a significant level of accountability and transparency to investors.

A UCITS fund’s legal structure may have implications for the tax efficiency of the investment policy. Those funds structured as FCPs or KAGs may not be able to access double-taxation treaties, whereas funds structured as corporations may do so. This can affect the dividend stream received by the fund (for more information, see “Domiciles”).