Swedish boutique Lannebo Fonder has won a case against regulatory authority Finansinspektionen at Sweden’s Supreme Administrative Court, in a case that has defined implementation of the so-called 5-10-40 rule for Ucits funds, and which means that now, four years after first applying for authorisation, Lannebo will be able to launch a new actively managed fund.
The ruling establishes a benchmark that must be used by the regulator and the industry when establishing a Ucits compliant product, particularly around the issue of how concentrated a portfolio can be in terms of the proportion of the overall portfolio that any single holding accounts for.
The case centred on the rule that securities from the same issuer cannot account for more than 5% of a fund’s value; the maximum proportion can be 10% from the same issuer if the total value of any particular type of asset does not go over 40% of the fund’s value. What this means in practice is that a fund portfolio cannot constitute fewer than 16 holdings and also meet Ucits requirements, according to the Swedish Investment Fund Association, which has commented on the court ruling.
“The judgement is of great practical significance for the management of Swedish securities funds,” said Helene Wall, general counsel for the Association.
“It establishes that it is permitted for a fund to use the entire placement ‘space’ that the legislation allows. Therefore it can be concluded that the EU’s fund regime, the so-called Ucits Directive, has the same effect in Sweden as in other member states, which is of importance for the conditions within which Swedish companies operate.”
Lannebo first applied in April 2013 for approval by Finansinspektionen for a new securities fund in which the assets would be invested in 16 equities of 16 different companies: four holdings of 10% each, and 12 of 5% each of the fund’s value.
The regulator rejected the application on the grounds that the if the investments started at the prescribed limits there was a risk that the limits would be broken on a regular basis, as the market value of the holdings changed. Lannebo appealed and following rulings in lower courts the case reached the Supreme Administrative Court. It ruled that the way the law is written does not impose additional limits, because the law also allows for adjustments to be made as soon as practically possible, where limits are exceeded. It also ruled that there is no basis for rejecting authorisation of a fund that has completely adapted to legal requirements on the issue of spreading risk.
Lannebo CEO Martin Öqvist said that the ruling would benefit fund investors in Sweden, because it created better conditions for fund managers to generate value through active management.
“Through the ruling, we get improved opportunities to invest in the companies in which we most believe. We also get better opportunities to take part in the market gains in equities held, because we don’t have to sell off equities that are increasing in value in order to keep a margin of safety in regards to the limits. We therefore see the ruling as a great advance for active management. It concerns an important question on a point of principle for us and many others in the fund industry, and we have pushed this question for several years. We have all the time considered that the legislation in this area has been clear and it is therefore pleasing that the ruling is so clear and confirms our interpretation.”
He added that the earlier criticism from Finansinspektionen “was without merit”.
The full ruling can be found here (in Swedish): Supreme_Administrative_Court_Ruling_On_Lannebo
Lannebo Fonder was founded in 2000 by Anders Lannebo and Göran Espelund – currently chairman of the board. Lannebo has been called ‘Mr Fund’ in local media because of his involvement with the industry, including building up Robur, where he was managing director between 1981-1999. Lannebo ceased to be chairman of Lannebo Fonder in March 2016, when Espelund took over the role. The boutique has been best known for its Swedish smaller companies equity fund, but has grown to offer equity, fixed income, balanced and fund of funds products.