How can Common Contractual Funds improve tax efficiency, cross-border distribution, and performance outcomes for asset managers and institutional investors?
26 January 2023
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We were delighted to welcome over 150 attendees to our recent webinar on Common Contractual Funds (CCFs). Over the course of 45 minutes, we looked at why the Common Contractual Fund is increasingly a must–have structure for institutional fund managers and investors with cross border investments, particularly global equity products. Here we summarise some key points – please see below for details of how to view the full webinar and speak to one of our experts about ways your organisation might benefit.
In 2019, a total of £56bn was invested in less tax-efficient funds by UK pension schemes, leading to lost income of up to £256m for DB pension schemes that year alone.
Our speakers and host
We were pleased to be joined by three expert speakers: Marie Coady, Tax Partner at PwC Ireland; Timothy Heffer, Managing Director at Storebrand Asset Management in the UK; Kevin Duggan, a Tax Director at Carne Group. Our host was Ryan Tully, a Business Development Manager with Carne Group.
Ryan opened by articulating how tax transparency is about ensuring that investors receive the beneficial tax treatments to which they have rightful entitlement under double-taxation treaties. These are investors who would otherwise suffer an unnecessary and unrecoverable tax penalty if they invested through a tax opaque pooled fund.
Our speakers then looked at the differences between tax transparent and tax opaque pooled funds. They highlighted the key benefits that tax transparent structures, particularly CCFs, bring to asset managers and owners. They also identified which institutional investors stood to gain the most from tax transparency: pension funds, sovereign wealth funds, insurance funds and, increasingly, family offices.
As they pointed out, asset pooling for cross-border efficiency is not new – we have had OEICS / SICAVS / ICAVS for many years – and various jurisdictions have authorised tax transparent fund structures. However, Ireland (along with Luxembourg) has become a leading centre for tax transparent fund registrations. Its Common Contractual Fund structure, which the Central Bank of Ireland (CBI) introduced in 2003, has proved so popular that there are now 48 umbrella CCFs with 200 sub-funds and around €130bn in AuM.
We are pleased to say that Carne Group is the largest operator of CCFs in Europe. The AMX fund platform manages 16 independent sub-funds for third–party asset managers within CCF umbrellas.
Why does tax efficiency matter?
As Marie explained, this is about investors getting the same tax treatment that they could get if they invested directly in an underlying asset. In essence, a tax transparent fund allows tax authorities and fund administrators to ‘see through’ the fund to the underlying beneficiaries and apply the correct tax treatment to each one individually. This is an essential benefit for legally tax-exempt investors, such as UK pension funds.
A UK pension fund investing through a tax-opaque pooled vehicle could suffer 30% WHT on US dividends but would be entitled to a 0% rate in a tax transparent fund under the US/UK double-taxation treaty.
The benefits of tax transparency apply particularly to withholding tax (WHT) on dividends. However, Marie pointed out that it applies in some circumstances to capital gains tax (CGT). Kevin added that it could also apply to VAT, which portfolio managers often have to charge for services to segregated mandates.
It was interesting to see the results of our online polls during this webinar. You can see the full results when you watch the recording. However, the first one showed that Distribution and Tax were two of the major considerations for the audience when choosing a pooled fund structure.
Growing institutional interest in CCFs
Tim confirmed that Storebrand had recently seen increased interest in tax transparency from consultants and institutional investors. “The industry’s understanding of the potential tax savings has not always been so high. However, the growing pressure on fees and expenses is driving the search for efficiencies in fund structures. As such, we find the potential savings are well received by investors.”
Storebrand has seen this particularly in their Global ESG Plus strategy designed for a low carbon economy. The strategy has low fees, so tax efficiency is really important. Tim expects tax transparency to become an essential hygiene factor for managers looking to launch products for tax-exempt institutional investors, particularly where there are significant taxes on relevant asset classes.
Marie pointed out that CCFs, like other cross-border pooled-asset structures, provide efficiencies in terms of economies of scale, by reducing costs and risks. Kevin added that they also provide high standards of governance and that this was increasingly important for consultants when looking at ESG mandates.
There are now 51 CCFs with over 200 sub-funds and c.€130bn in AuM registered with the Central Bank of Ireland.
As Marie explained, one reason CCFs have proved popular is that CBI regulations restrict them to institutional investors (although you can link a retail feeder fund to them). This makes it operationally more efficient for custodians to apply the right tax rate. It also increases multi-jurisdiction distribution opportunities because tax authorities can see a clear link between the underlying assets and beneficiaries.
Setting up a CCF can be a complex process but there is a simpler way
Marie and Kevin set out the five basic steps to set up an Irish CCF. Essentially, the Central Bank of Ireland must approve the investment manager, the management company, the directors, the depositary and administrator, and the documentation. While it is possible for asset managers to host a CCF through their own umbrella, many understandably find it more convenient to partner with a third-party who has the suitable expertise and experience of the process, such as AMX.
Running a CCF is “operationally heavy”, as Marie put it, because it involves all the administrative functions, including legal and operational, as well as nuances of co-ownership. In particular, onboarding requires institutional investors to document their tax status and entitlements. It takes a good working partnership between the fund managers and the administrators for this to work effectively.
As Tim explained, Storebrand chose AMX to run its CCF because it was more resource and time efficient, accelerating their speed to market while controlling costs. “We did not want to deal with the process of launching a CCF and we were delighted we didn’t because it was not straightforward.” Tim also stressed that despite AMX handling the client onboarding, this doesn’t stand in the way of his team developing the relationships they want with their institutional clients.
Three key reasons for trustees and global equity managers to consider CCFs:
- Tax exempt investors don’t suffer an unnecessary tax drag on their portfolio’s performance
- Minimising tax risks and reducing costs for beneficiaries demonstrates good governance
- Tax transparency opens new markets by showing investors that they comply with local regulations.
Kevin concluded by pointing out that managers spend considerable time optimising operations to deliver better performance. It therefore makes no sense to ignore the opportunity for an easy win that can deliver a significant multi-year boost to performance. As more jurisdictions look at introducing taxes that target non-domestic investors and a wider range of assets, the need for tax transparency will only increase.
 Source: Research conducted for AMX and Northern Trust by Broadridge Financial Solutions https://theamx.com/press-release/uk-db-pension-schemes-lose-up-to-250m-a-year-due-to-use-of-less-tax-efficient-funds  Source Monterey Ireland Fund Report 2021  Source: Central Bank of Ireland Register, November 2022 https://registers.centralbank.ie/DownloadsPage.aspx For investment professionals only who are or who would be classified as (1) Professional Clients under the applicable FCA rules, and who, if they are US residents or citizens, are or would be qualified as “Qualified Purchasers” under the US Investment Company Act 1940 and “Qualified Eligible Persons” under the US Commodity Futures Trading Commission regulations and is specifically not intended for any other persons including persons who are or would be classified as Retail Clients under applicable FCA rules, or (2) current and potential investment managers of Carne Global Fund Managers (Ireland) Limited funds. For general information purposes only. Carne Global Fund Managers (Ireland) Limited and Carne International Financial Services (UK) Limited do not provide investment, legal, accounting, tax or other professional advice. The information is provided on a non-reliance basis; and no representation or warranty is made as to its accuracy or completeness. Carne Global Fund Managers (Ireland) Limited, registered in Ireland (No. 377914), registered with the Securities Exchange Commission as an Exempt Reporting Adviser (CRD 173794); and the Commodity Futures Trading Commission as a Commodity Pool Operator, member of the National Futures Association, The Asset Management Exchange, AMX and AMX by Carne are trading names of Carne International Financial Services (UK) Limited. Carne International Financial Services (UK) Limited (registered in England, No. 11555138; authorised and regulated by the Financial Conduct Authority No. 823316; Australian ARBN. 648 201 610, and exempt from the requirement to hold an Australian Financial Services License under ASIC Class Order [03/1099]). Copyright © 2022. All rights reserved.