Malta Collective Investment Schemes

One of the main growth areas in investment services in recent years, has been the licensing of Collective investment schemes (CIS). A CIS is characterized by the following characteristics:

  • The pooling of contributions of participants within the scheme;
  • The operation of the pool through the principle of risk spreading;
  • The request that units be purchased or redeemed out of the assets of the scheme continuously or through a blocks of short intervals;
  • The issuance of units within the scheme continuously or in blocks of short intervals.

Essentially CIS are therefore licensed entities which allow investors to subscribe to shares within the scheme (called units) for the pursuance of an investment objective. CIS may take several forms including the following:

  • Unit trusts;
  • Common contractual funds;
  • Investment company with variable share capital (SICAV);
  • Investment company with fixed share capital (INVCO);
  • an incorporated cell of a recognised incorporated cell, which cell may take the form of a SICAV or INVCO;
  • Limited partnership; and
  • Common contractual fund.

Nevertheless, the most common variation of the aforesaid is the SICAV form, which is essentially a public company, with variable share capital. The value of the share capital is in fact not tied to any nominal value, but is intrinsically tied to the value of the underlying asset being invested by the CIS (which valuation would be typically entrusted to the fund administrator).

In its simplest form, a CIS would be established with just one sub-fund, with such sub-fund being created by means of a separate class of shares. However, it is possible to structure the CIS as a multi-fund umbrella scheme, with theoretically an unlimited number of sub-funds constituted by means of different classes of shares. Each sub-fund is deemed to have its owns separate patrimony, albeit not a distinct legal personality and the assets and liabilities of each sub-fund being segregated from those of other sub-funds. Each sub-fund can therefore have different investment objectives, solicit different classes of investors, be denominated in different currencies, and have different subscription and redemption dates, all of this, having no bearing whatsoever to the final standing of the other sub-funds.

Principles of Investment

With the exception of private collective investment schemes, CIS can either be self-managed, whereby the investment decisions are undertaken by means of an internal investment committee (which must be pre-approved by the Maltese Financial Services Authority) or by means of an external manager, licensed for the purposes of managing CIS.

Irrespective of which avenue is undertaken, the management of a CIS, should be based on the following principles:

  • Risk spreading – diversification is one of the ways in which risk may be minimized. Retail CIS such as UCIT funds shall actually specify the percentage allocations to be attributed in each underlying investment. On the other hand, CIS open to professional investors, are subject to less stringent rules, since they are not soliciting the retail investor. As a general rule, the greater the knowledge and risk-appetite of the investor, the less stringent shall the diversification rules apply;
  • Pooling of resources – the very nature of the CIS implies a multitude of investors. It is for this reason that the most popular form for the CIS is the SICAV public limited company, since this would imply a multitude of investors;
  • Redemption of units – Investors should be free to acquire or transfer units in a CIS. Naturally, it is possible for the promoters of the CIS to lay restrictions on the number and frequency of redemptions, having in mind the underlying investment being pursued by the CIS. When for example the CIS is pursuing an investment objective in a particularly illiquid asset e.g. immovable property, the redemption of units could jeopardise the whole investment. Therefore, it is usual for such type of fund, to be a close-ended fund, whereby redemption would be occasioned only on the happening of an event, or a date. There are however, statutory safeguards in the protection of the investor. If for example, the investment objective pursued, is materially different to the one initially subscribed to by the investor, then the redemption option must be permissible to the investor. Furthermore, the MFSA has also introduced circulars, regarding the creation and maintenance of ‘side pockets’ aimed at creating liquidation and allowing redemption of units.
  • Participation by Units – the actual subscription into the CIS must be undertaken by equity – called units – which are one of the financial instruments recognized under the Investment Services Act.

Types of Collective Investment Schemes

CIS may be classified in the following sub-categories, with each category subject to its own specific sets of rules.

  • Alternative Investment Funds – various classifications possible in accordance to the type of investor ;
  • Retail CIS (non-UCITS);
  • Retail UCITS collective Investment schemes;
  • Professional Investor Funds (PIFs) – – various classifications possible in accordance to the type of investor;
  • Private CIS (non-licensable);
  • Pension Funds; and
  • Other forms of funds e.g. loan funds / joint venture funds etc;