1. COLLECTIVE INVESTMENT SCHEMES IN OECD COUNTRIES
MENA-OECD Investment Programme
COLLECTIVE INVESTMENT SCHEMES IN OECD COUNTRIES
Sustainable Capital Markets Development in the Gulf, Middle East and Northern Africa
London. 24 July 2006
John K. Thompson Senior Financial Sector Expert, OECD
MENA-OECD Investment Programme

2. Collective Investment Schemes (CIS): Background
Boom in Capital Markets
Individuals increasingly prefer institutional investment to direct investment
Pooling of savings by many small investors
Small investors cannot afford diversified portfolios
Small investors cannot make informed portfolio selection
MENA-OECD Investment Programme

3. MENA-OECD Investment Programme
Collective Investment Schemes (CIS)
Pooling of Savings by many small investors
Many opportunities in capital markets
Small investors cannot afford diversified portfolios
Small investors cannot trade efficiently
Access to professional management
Selection of strategy
MENA-OECD Investment Programme

4. Characteristics of CIS
Defined legal and governance structure
Special laws
Diversity of legal structure
Regulatory systems
Disclosure
Professional management
Investment policy
Low cost execution
Safeguards for investors
MENA-OECD Investment Programme

5. MENA-OECD Investment Programme
Growth of CIS Products,
OECD Europe
United States
Japan (right hand scale)
Billions of US$
Sources: FEFSI, ICI and the Investment Trusts Association, Japan
MENA-OECD Investment Programme

6. MENA-OECD Investment Programme
Worldwide Investment Fund Assets (Trillions of euros, end of quarter)
MENA-OECD Investment Programme

7. MENA-OECD Investment Programme
Geographical Trends in Investment Fund Assets in (Billions of euro, end of period)
MENA-OECD Investment Programme

8. MENA-OECD Investment Programme
Agency Dilemma in CIS
Large pools of assets under control of financial institutions investors with limited ability to monitor
Asymmetry of Power and Information
Investors (small, often unsophisticated, dispersed)
Investment Manager/Operator (control of information, sophisticated)
Outright Abuse: fraud / theft / misrepresentation
Conflict of Interest
MENA-OECD Investment Programme

9. ‘First Generation’ Legislative Reforms
Outright abuses of agency relationship
Theft
Fraud
Misrepresentation of portfolio
Improper valuation
Solution: National and international laws, regulation and standards
Investment Company Act of 1940 (USA)
OECD Principles 1971
EC/EU UCITS Directives 1985
IOSCO Principles 1994
Issues Covered: Funds segregation, Disclosure, Valuation, Investment Restrictions And Policies
MENA-OECD Investment Programme

10. Typology of Conflicts of Interest
Investment Manager vs. Investor
Affiliated Financial and Non-Financial Companies
Non-Affiliated Financial Companies
MENA-OECD Investment Programme

11. Abuses of Investor Confidence
Cross subsidization
Allocation of costs
Excessive trading (churning)
Use of affiliated intermediaries
Support of securities underwritten by affiliates
Support of securities of companies with banking relationships
Support of affiliated non-finance companies, i.e. ‘captive’ finance
MENA-OECD Investment Programme

12. Use of Ownership Rights
CIS are increasingly important owners of equity
Disinclined to be active investors
Uncertain demand from final investors (performance not governance)
Financial costs of activism
Hesitant to oppose management
Criticism: CIS represent final owners of capital but have not pushed hard enough for better corporate governance (‘Asleep at the wheel’)
MENA-OECD Investment Programme

13. The Ultimate Weapon: Transparency and Disclosure
Investors can liquidate positions at will
Investors now have access to a vast body of information to support informed decisions
Disclosure:
Mandatory
Voluntary
Information increasingly available on a comparable basis, standardized presentation, ratings for :
Performance
Fees and Expenses
Governance
MENA-OECD Investment Programme

14. Investor Access to Information
Popular press
Specialized press (ex: Money magazine)
Information service providers
Lipper
Morningstar
S&P
Use of information technology
Recent innovation ratings of CIS governance (Morningstar)
Database of companies accused of malfeasance
MENA-OECD Investment Programme

15. MENA-OECD Investment Programme
Standards for CIS
Issues Covered Under Standards
Account segregation
Valuation
Investment restrictions and policies
Periodic disclosure
Prospectus
Depositories
MENA-OECD Investment Programme

16. MENA-OECD Investment Programme
Standards for CIS
Domestic Standards
In-house policies
Industry standards
Law and Regulation
Market
International Standards
OECD Principles (1971)
EC/EU UCITS Directives 1985, 2000, 2001, 2002
IOSCO Principles 1994, 1997, 1999, 2000
MENA-OECD Investment Programme

17. Case Study: Strengthening Governance in the USA
Internal firm reviews of practice
Compensation
Firewalls
Compliance
Enlarged role for independent directors (voluntary and mandatory)
Stronger requirements for independent and adequacy of time and information
Governance information and ratings by Morningstar
Global settlement (SEC and state attorneys general)
SEC Requirements for disclosure of voting practices
Corporate governance policies on websites
MENA-OECD Investment Programme

18. Strengthening Governance
Firm level initiatives
Trust is an asset; firms must protect reputation
Industry Associations
Voluntary Codes and Best Practices
Official Regulation
Reviews of rules and practices
New rules
Sanctions
International Standards
IOSCO EU
MENA-OECD Investment Programme

19. Relevance for MENA Countries
Rapidly Growing Savings
Periodic Instability
Need for Investor Safeguards/ Professional Management
Adaptability to Islamic Finance
Issues:
Should there be international competition in CIS
Is there a Need for International Coordination (EU UCITS Directives?)
Which centers will become market leaders in the CIS sector?
MENA-OECD Investment Programme