UCITS could be the investment theme for 2021 and beyond. As the returns on fixed deposits continue to be diminishing in the current low-interest rate environment, retail investors are asking for alternatives to traditional bank products. UCITS could be the answer, says Alexios Kartalis, General Manager of GMM Global Money Managers Ltd.
Can you tell us a bit about GMM, its beginnings and your operations today?
We started in 2013 when UCITS management, and funds management in general, was considered something really exotic in Cyprus. In fact, we were the first UCITS management company that started working in the country. We obviously started small, but our operations have grown in tandem with the entire industry. Today, we manage around €100 million in assets and employ 10 people. As a fund jurisdiction, Cyprus has matured and evolved in the past years. We have witnessed significant growth in the Alternative Investment Fund (AIF) space, but the UCITS segment has also expanded, albeit not at the same level. However, today, we are part of a small cluster of UCITS management companies, and the market is still growing and expanding.
How was 2020 for your company and how did the Covid-19 pandemic affect your operations?
It was an unusual year – that’s for sure. The Covid-19 crisis has affected the entire industry. UCITS are listed instruments, and we have experienced many ups and downs due to the extreme volatility of the global stock markets. Overall, as a firm, we have managed this period relatively well. I am confident that the market will stabilise once we leave the pandemic behind us. However, I also believe that until a substantial part of the global population is vaccinated, it will remain an issue. But I hope that by mid-2021 the situation will be a lot better.
What are your expectations for the UCITS segment in Cyprus and why has Cyprus not yet managed to establish a greater foothold in this market?
I think UCITS will play a greater role in Cyprus in the future. Globally, UCITS are a much more popular product than AIFs. In Europe for example, the net asset value (NAV) of UCITS is around €10.5 trillion, while the NAV of all AIFs amounts to just €6.5 trillion.
In Cyprus, however, AIFs are a lot more popular. There are historical reasons for this. Cyprus has long been a corporate management hub, and many companies have turned to AIFs, so for companies in Cyprus it was a lot easier to gain market share by targeting this segment. But more importantly, Cyprus was a rather late entrant to the investment funds sector. By the time Cyprus sought to position itself in this industry, the other European fund centres, namely Luxembourg and Dublin, were already well-established players in the UCITS space. While costs are certainly lower in Cyprus compared to Luxembourg or Dublin, UCITS are a well-regulated but also very standardised product. This makes it a lot more difficult for an emerging fund centre such as Cyprus to differentiate itself from a product perspective.
What are the key advantages of UCITS and why should UCITS be on the radar of the investment community?
UCITS are a mature product and an established brand. They are considered one of the most effective asset management tools available, thanks to their relatively lower investment risk and high level of investor protection. UCITS have been embraced by both institutional and retail investors. Especially compared to AIFs, UCITS are much more suitable for retail investors. Naturally, no investment is risk free, but UCITS are appealing to investors with a lower risk appetite. This pool of investors is growing globally and locally due to the low interest-rate environment. Not only are interest rates at historic lows, but they are expected to remain there for the foreseeable future. This means that bank deposits are no longer an option for many investors who follow conservative investment strategies, so UCITS are coming into sharper focus.
What could be done to expand the UCITS segment in Cyprus?
Especially locally, the issue is that many potential investors are not yet familiar with the product, some might even be afraid of investing in financial markets. For the sector to grow, financial education is key. We were planning some major initiatives in this regard, which we had to put on hold due to the pandemic, but we are aiming to follow up on our plans once the situation improves. Then, from an industry perspective, I’d like to see a more balanced promotion. In Cyprus, we keep on pushing AIFs almost exclusively when there is also so much potential in UCITS.
What are the most important trends that you are noticing in the industry at the moment?
One important trend is the outsourcing of the fund administration element. It is simply faster and cheaper for fund managers to outsource the back-office work, which means this is another growth area for Cyprus. On the investment side, we are seeing increasing demand for products related to the green economy. A growing number of investors are today considering environment, social and governance (ESG) factors when making investment decisions, and as an industry we are responding to this trend.
There is interest in investment funds focused on the cryptocurrency market. What is your opinion about this development?
Well, UCITS cannot invest in cryptocurrencies. I think that’s a good thing because it is a product also for retail investors. I acknowledge that cryptocurrencies are a trend, but I am also a bit sceptical as I consider them as quite risky investments. GMM also owns 50% of a company managing AIFs, which are allowed to invest in cryptos, but we have not entered this market till today. It remains though an option.
How do you expect the sector to develop in the coming years and would you like to share a personal message with the investment community?
I expect it to grow further locally and globally. While there is more room for growth in the alternative space, as a jurisdiction we should embrace everything UCITS can offer: increased transparency, attractive liquidity and regulatory oversight. I often get asked: what is better – an alternative investment fund or a UCITS? The answer obviously depends on a person’s investment plans and risk appetite. However, personally, I prefer listed instruments. Some say UCITS are a boring product, but I think that’s the beauty of it. Yes, they are more conservative than AIFs, but that also makes them an easier-to-understand product for investors. I am a long-distance runner; I like running at a steady pace. Professionally, I also prefer products that have the potential for steady growth compared to high-growth, high-risk investments. Besides, my background is in banking, and I have worked for some of the most conservative banking institutions. Perhaps the saying is true: You can’t teach an old dog new tricks.