Andrey Narutskiy explains how Cyprus’ AIFs help to meet the specific needs of ultra-high-net-worth investors and says Cyprus could win more fund business as offshore fund centres remain under attack from global policy-makers.
Can you give us a brief introduction to Leon MFO Investments Ltd and explain the company’s role in the wider Leon Family Office network?
Leon MFO Investments Ltd is an integral part of Leon Family Office network, which was founded in 2013. Leon MFO Investments Ltd is a regulated Cypriot AIFM that provides fund management and portfolio management services to ultra-high-net-worth individuals (UHNWIs). Other entities in the Leon Family Office network deal with general coordination services, investment research, tax, legal and compliance services. All together Leon Family Office network firms are able to provide a full spectrum of wealth management services to UHNWIs. Our main business focus is investment management services in global capital markets. This is the area in which we can really add value to clients and where we generate most of our revenue. Other services are of ancillary and supportive nature to make sure the clients’ assets are properly structured and are in full compliance with all applicable tax and legal obligations across all jurisdictions.
What is the profile of your typical client?
Our typical client is a first-generation entrepreneur who is still active in operating business. We take care of all liquid assets of the clients outside of their main businesses. For such clients, the biggest challenge is usually the transfer of wealth to the next generation; therefore, we deal extensively with succession planning and family governance issues. The mission of our company is to help entrepreneurs preserve and increase their families’ wealth and pass it smoothly to the next generation.
How are Cyprus investment funds utilised in today’s wealth management strategies?
Most private clients cannot tolerate market volatility, and they are looking for a stable return on investments. Such a goal is very difficult to meet in the current environment of almost zero return on high-quality bonds. It can only be achieved by expanding one’s portfolio from bonds and equities into other asset classes such as gold, hedge fund and commodities. Cyprus’ Alternative Investment Funds (AIFs) provide a regulatory framework that allows fund managers to use very flexible investment strategies. The managers can build a portfolio with a wide range of assets and adjust its structure pro-actively in response to fast-changing market conditions.
We see a huge interest in Cyprus’ AIFs in the last few years due to the exodus of private investment companies of wealthy individuals from offshore jurisdictions. This trend first started with the introduction of FACTA/CRS and only intensified when most offshore countries introduced local substance requirements. A significant advantage of establishing AIFs in Cyprus is their full compliance with EU and OECD requirements.
Cyprus AIFs, especially registered alternative investment funds (RAIFs), are quite attractive investment vehicles to UHNWIs due to their clearly defined parameters, flexible governance, strict risk management, reasonable level of regulatory oversight, tax efficiency, excellent image and reputation.
What new and unique opportunities does your firm offer HNWI investors?
We found that quite a few UHNW investors have a problem with developing a proper investment strategy, and they lack discipline while executing such a strategy. Very often their portfolio is represented by contradicting strategies, funds and private investments located in too many banks. We help clients build a truly bespoke investment strategy that incorporates the interests of several generations. Clients get a clear and fully transparent picture of their wealth based on consolidated reports and proper day-to-day professional management of their investments. Our role is to generate a stable and predictable income for the client. In order to achieve this, we use a wide range of assets from equities and bonds to hedge funds and gold.
Investors today expect a high degree of transparency over both performance and costs. From a client perspective, what are the main benefits of Cyprus investment funds and how does Cyprus’ offering compare internationally?
Cyprus, as an EU regulated fund jurisdiction, offers a high level of investor protection. In addition, Cyprus has a developed professional services sector, which supports fund managers in tax, legal, accounting and audit matters. Finally, the costs of setting up and operating a Cyprus domiciled fund are significantly lower – roughly one third of the costs in other EU countries such as Luxembourg and Ireland. This makes Cyprus quite an attractive fund jurisdiction for managers of small and medium-size funds.
What are the key challenges of operating in and out of Cyprus that you are facing at the moment?
Apart from general economic challenges posed by the global pandemic and lockdowns, there are some specific challenges that hinder the growth of the fund sector in Cyprus. A key challenge is the small number of global fund depositaries in Cyprus. It creates a massive competitive disadvantage for Cyprus as an international fund hub compared to other fund jurisdictions such as Luxembourg. An easy interim solution to this problem could be an exemption for Cyprus RAIFs from the mandatory requirement to use only depositaries in Cyprus. We know of a few cases where large fund promoters had to choose another EU fund jurisdiction just because they were not willing to commit to holding fund assets in custody with small local bank depositaries. The memories of 2013 bail-in crisis in Cyprus are still there.
Sustainable investing has gained considerable traction over the past several years. What are your views on this trend and are your clients showing interest in sustainable assets and green funds?
Investments in ‘green assets’, such as electrical vehicles, alternative energy, waste management and the like, were among the best performing in the market over the last two to three years. This trend is likely to continue thanks to strong support from governments and an increasing inflow of investments from sovereign funds and retail investors into ETFs dedicated to sustainable assets.
Most of our clients run their own businesses, and they are particularly interested in the new emerging themes with long-term growth potential. We have already invested in equities of alternative meat producers, suppliers of electrical vehicles, as well as companies utilising AI in electricity consumption.
What are your firm’s plans and priorities for the next two to three years?
We plan to develop our fund management business targeting professional investors in Cyprus and in emerging markets. Later in 2021, we are going to launch a RAIF that will invest in corporate bonds in developed and in emerging markets with the target expected return of 3-4%. In addition, we have a strong expertise in the selection of external credit funds and hedge funds, and we are considering launching a RAIF that will invest in actively managed portfolios of such funds.
How has Covid-19 affected the asset management industry and what is your investment outlook post Covid-19?
Large direct cash distributions from governments coupled with zero interest rates led to a massive inflow of small retail investors into financial markets. This new group of investors makes decisions based on sentiment and popular themes that led to an active inflow of capital to thematic equity ETFs and to an outflow from bond and actively managed equity funds. We believe this trend will continue.
We also think that the massive stimulus packages will accelerate inflation coupled with high economic growth particularly in China and other Asian economies. This environment is particularly beneficial for commodities and emerging markets.
We expect the further reallocation of funds into equities as bond prices are likely to decline this year. Equities are relatively expensive and might see a price correction in the second half of the year when central banks will likely start withdrawing excessive liquidity from the capital markets. However, the long-term uptrend in equities should remain intact in line with the global economic recovery.
How do you believe the investment fund sector will evolve in Cyprus in the coming years?
At the moment, Cyprus is lagging behind established fund jurisdictions such as Luxembourg and Ireland. For global fund managers, Cyprus is a small fund jurisdiction without significant competitive advantages. However, there is still a niche for Cyprus in the business of small and medium-sized funds especially from the UK (post Brexit), Israel, Middle East and China.
In addition, the ongoing fight against offshore jurisdictions, including the Cayman Islands and the British Virgin Islands, creates opportunities for Cyprus to receive a slice of a huge pie of offshore fund business. Due to the introduction of substance requirements in most offshore jurisdictions, it has become economically, let alone reputationally, more beneficial to setup such funds onshore than offshore. We have been witnessing this trend in the past three years. Besides, more and more family offices are becoming professionally managed investment firms; and therefore, they are choosing to operate through alternative investment fund structures including through Cyprus domiciled funds.