Spain: Investment funds

A EUROMONEY SURVEY - MARCH 1996

After rapid growth of nearly 1000% from 1990 to 1994, the Spanish investment fund industry slowed in 1995 following generally poor market performance in equities, fixed income and currency. Still, the fund industry is a vibrant sector with funds accounting for 17% of GDP compared to 1.7% in 1990. Today there are over three million unit holders.

Regulations allowing investment funds in Spain date back to 1958. Although updated in 1994, the sector remained fairly undeveloped. The relative disinterest in collective investment was finally overcome with the introduction of a more favourable tax regime. Since 1991, in order to cater for its own deposit holders interested in funds, the banking community has promoted the benefits of this tax regime.

Consequently the amount of funds under management grew very rapidly, from Pta3.6 trillion in 1991 to Pta6.3 trillion in 1992, Pta10.2 trillion in 1993, Pta11.2 trillion in 1994 and Pta12.18 trillion by year end 1995. The increase from 1994 to 1995 was less dramatic at 8.45%. Indeed, if fund income is excluded, net growth actually decreased. The first few months of 1996, however, look very promising according to initial figures from the industry.

Collective funds

There are three types of collective financial investment vehicles in Spain. They are SIMs, FIMs and FIAMMs.

SIMs

SIM stands for Sociedad de Inversion Mobiliaria. There are two types: those with a fixed capital (SIM) and those with a variable capital base (SIMCAV).

SIMs have a minimum capital base of Pta400 million and are legal entities in which the capital is divided into shares giving the holders voting rights and, occasionally, dividend rights. The company is not required to have an asset manager or a custodian bank. The shareholders have total control of the company. The drawback is that they are illiquid as there is no official mechanism for the sale or purchase of shares other than via the stock market. There, the buyer or seller is likely to face a considerable premium or to suffer a discount due to the very thin market for the shares.

The SIMCAV shares the same structure as the SIM except that shareholders do not enjoy preferential subscription rights. Again the drawback of the SIMCAV is its illiquidity.

The SIMCAV's liquidity is, however, better than that of the SIM because the SIMCAV can vary in size and is obliged to buy or sell shares at a price either 5% above or 6% below the net asset value.

SIMs and SIMCAVs are no longer growing, whether in value or volume. They have been superseded by the FIAMMs and FIMs.

SIMs' and SIMCAVs' share of the investment fund market has dropped from around 3.8% in 1993 to 3.12% in 1994. It remained static in 1995.

FIMs and FIAMMs

FIMs and FIAMMs are very different to SIMs. They are not legal entities in their own right. Investors in the funds hold units rather than shares and do not have the legal status enjoyed by shareholders. The funds do not have a management board but have an external manager as well as a custodian bank responsible for safeguarding the interests of the unit-holder. The transparency of the market in terms of reporting on performance is expected to ensure that fund managers act in the interest of the unit-holder.

The funds are immensely liquid. Any unit-holder can request redemption at any time and must receive it within three days. The open-ended nature of the funds also contributes to their flexibility.

FIMs and FIAMMs are the similar in structure except that FIAMMs are restricted to investment in short-term money market instruments. They cannot be used for investment outside of the fixed-income markets, nor in instruments with a maturity of more than 18 months. The two also differ in that FIMs must have an asset base of at least Pta500 million and the FIAMMs of Pta1.5 billion.

Most FIAMMs are heavily invested in the treasury bill market. Spanish treasuries (letras del tesoro) are issued at three-month, six-month and one-year maturities. In 1989 there was Pta329 billion invested in FIAMMs which rose to Pta620 billion in 1990, Pta2.0 trillion in 1991, Pta3.3 trillion in 1992, Pta4.7 trillion in 1993, Pta5.1 trillion in 1994 and Pta7.0 trillion in 1995. FIAMMs represent about 57% of the total collective investment fund market whereas FIMs account for 43%. Participants in FIAMMs have increased in number from 1.3 million to 1.6 million while participants in FIMS have fallen from 1.44 million to 1.31 million. This shift was partly because of the poor performances recorded across all the Spanish markets and the interest rates in the short-term sector being more attractive than than longer term rates.

There are at present, four types of FIMs: fixed-income only; mixed variable rate; variable rate funds with an emphasis on equity; and currency funds. The largest group by far are the fixed-income funds which include a guaranteed income fund introduced in 1995. The fixed-income funds have over Pta4.1 trillion under management and already the guaranteed income funds account for Pta238 billion. The growth in the number of funds in 1995 was brisk, with 66 new FIMs of which 60% were the guaranteed income type, compared to the creation of only 26 new FIAMMs.

Derivatives

Collective investment institutions are allowed to invest in derivatives. Initially they were only allowed to take part in the derivatives markets for the purpose of hedging exposures. Now they are allowed to take positions. But there are strict controls on the extent of involvement in the market.

For instance, the total exposure of a FIM, FIAMM or SIM to the exchange-traded derivatives market must not exceed 16% of its assets. Involvement in the OTC market is forbidden. The reporting requirements are also stringent and funds must make a statement about their derivatives exposure in any information to unit-holders.

Participants and fees

Funds are typically promoted by a bank or broker. The investment fund manager, however, is a separate entity with a minimum capital base of Pta50 million. They are known as Sociedades Gestoras de Instituciones de Inversion Colectiva (SGIICs). There are currently 110 fund managers in Spain. Any bank, savings bank, brokerage or credit cooperative may act as a custodian.
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