27 April 2021
- This is the extra annual yield that the more aggressive products could earn
- The Ministry of Economy has not yet regulated this practice
Shareholders are losing out on the possibility of obtaining higher returns from the Spanish funds in which they invest due to a bureaucratic issue. Spain has not yet fully regulated the possibility of collective investment institutions domiciled in Spain, which also includes pension plans and SICAVs, engaging in securities lending, an activity that has been firmly established in the rest of Europe for fourteen years.
In fact, it is the only EU country where CII are not yet allowed to engage in said activity, in that the ministerial order permitting it is still pending publication, circumstance that prevents investors from benefiting from a practice regulated by a European directive and that currently prevents the most aggressive investment products from adding up to four tenths of a percentage point extra in annual returns, according to the most optimistic calculations, a percentage that is not negligible given the low interest rates and market volatility.
In practice, CII can indeed engage in securities lending in relation with non-performing assets, which the industry defines as those transactions in which there has been a shortfall in terms of the correct consideration, for example when a bond defaults. But they cannot transfer the underlying assets in their portfolios to obtain extra income from renting them out to a third party, which is what is still unregulated in Spain and from which the shareholders of the CII could benefit, with the consequent detriment to Spanish management firms that this entails with regard to the competition.
Management firms such as GVC Gaesco have already begun to engage in this activity with its funds domiciled in Luxembourg, while the large Spanish banks with products registered in the Grand Duchy claim that they do not.
Estimated income
Calculating the estimated income for Spanish CII from securities lending is complicated because it would depend on the market demand for each security that could be lent and the composition of the portfolio (the maximum percentages are regulated in other European countries) and the percentage that each management firm would be willing to transfer in order to engage in this activity, but taking into account, for example, Spanish stock market investors only, the loss of yield could be considerable, bearing in mind that the 10-year weighted average annual return for this category is 2.33%.
Taking a very conservative estimate of prices, 10 basis points, and very sophisticated in proportion, 100% of the portfolio on loan, the shareholder of a fund fully invested in Spanish equities, in ten years would have lost a revaluation of more than 1% on the value of its investment, according to Inverco's calculations, but this loss could be higher depending on the state of the market when the securities were loaned. 'This is clearly an activity that provides added returns to shareholders, and that opportunity should not be wasted', assures Elisa Ricón, General Manager of Inverco.
The calculations undertaken by this segment's main stakeholders, the depositary firms, increase this extra return to 40 basis points per year an average for products with a more aggressive strategy, bearing in mind that in the more conservative funds this added yield can range between 7 and 10 basis points. The higher the credit quality of the collateral, the higher the expected return and, the higher the risk of the asset type (equities or fixed-income), the higher the extra return.
No fear of the bearish
If in 2008, when European regulations were approved, the Spanish regulator was somewhat reticent about the possibility of favouring bearish investors, this dilemma is no longer among the sector's concerns. 'Securities lending is collateralised and in terms of risk has no justification. Spanish shareholders are disadvantaged with regard to the return of their funds, while Spanish management firms are disadvantaged when compared with their competitors. This is something that requires urgent regulation', assures Luis Francisco Jiménez Aragón, Director of Securities Custody and Settlement at Cecabank.
Miguel Sánchez Monjo, a partner at Cuatrecasas, says that he does not understand this delay in regulating securities lending because 'there is zero risk for investors'.
'We need to provide the different stakeholders the tools with which to compete on a level playing field, otherwise the departure of certain Spanish funds to Luxembourg to engage in this activity may only be the beginning. All it takes is an increase in market demand for certain assets, and those with such assets, if it is profitable to them, will move their portfolios to the Grand Duchy. And in the statistics we are always going to underperform in terms of overall profitability', says the head of a major international custody firm operating in Spain.
The Ministry of Economy has not responded to several requests from elEconomista to offer its version.
