/ Portfolio Fund Management // Kinto, Investment & Securities

In this context, when referring to “portfolio investment funds” we mean “investment vehicles with varying levels of risk for investing in the stock, bond or money markets, typically more liquid and with shorter horizon than venture capital investment funds”. In practice, such vehicles can be both pooled and customized to the needs of a single investor.

With the introduction of a new (2001) law on collective investment institutions, economically, technically and safety-wise one of the best ways for portfolio investors to enter Ukraine is through setting up a local fund or buying into existing local funds.(Disclaimer[i]).

Safety
Shareholders in the funds are now very adequately protected by various checks and balances.

Any fund, even with the most liberal investment declaration, as well as investment advisors (asset management company) must be registered with the State Securities and Stock Market Commission. There is no “unregistered and unregulated fund" concept in the Ukrainian collective investment legislation.

Thus, by contrast to investing in individual securities directly, the investor of the fund will be additionally protected by the regulator, custodians, independent property appraisers and auditors who would check all the aspects of the manager’s actions for prudence, fair and consistent valuations and pricing. This oversight will also include such aspects as leveraging, short-selling, self-dealing, investing in derivatives, etc..

The asset manager would be required to provide to the regulator and publish periodic reports on the funds activities, portfolio, asset value, and expenses.

Further, in the case the fund has a corporate form (is set up as a public corporation), it can only be in the form of an open joint-stock company, and the shareholder is additionally protected by the applicable legislation.

As a result, many comments on the new legislation point out that investment through a fund may be the safest way to invest in Ukraine.

Direct and indirect economic benefits
Tax-wise, the funds are not subject to the company profit tax (e.g., on gains from selling the portfolio securities at a profit), thus providing very substantial and straightforward tax incentives for portfolio investment through the funds vis-à-vis entering the market directly. A fund investor’s profit is taxable on selling the fund’s shares or receiving dividends from the fund. By contrast, any income on-, or from selling individual securities would be taxable in Ukraine.

Besides, the fund’s non-resident investors would be spared extensive paperwork that must be followed every time when dealing in separate securities directly, resulting in significant reduction in administrative time required and associated cost.

Customized “sole-investor” funds
For clients with larger investment resources, KINTO can set up separate custom-tailored investment funds to accommodate for specific strategy preferences. A fund can be effectively owned by a single shareholder.

[i] OJSC KINTO is not engaged in business of rendering legal, tax, or accounting advice or services. Taxation, legal and accounting matters referred to in this site are of a general nature only, given for informational and reference purposes, and based on our interpretation of existing laws that were current on November 1, 2003. Those laws may change from time to time. Before making any investment decisions, KINTO suggests you seek relevant independent advice from appropriate professionals.

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OPEN-END, INTERVAL and CLOSED-END FUNDS
A fund belongs to an open-end type if it (or its asset management company, where applicable) undertakes, at any time at investors’ request, to redeem the securities issued by this fund.

A fund belongs to an interval type if it undertakes, at investors’ request, to redeem the securities issued by this fund during the term envisaged in the prospectus, but at least once a year.

A fund belongs to a closed-end type, if it does not undertake any obligations to redeem the securities issued by this fund until reorganization or liquidation[1].

LIFE TIME
Funds can be established for a fixed or indefinite term. Closed-end funds may be only “terminal”, i.e. they have a fixed life term.

DIVERSIFIED vs. NON-DIVERSIFIED FUNDS
Depending on applicable regulatory requirements and constraints on the composition of allowed, disallowed and prescribed asset classes, their weight in the overall portfolio and percentages in the securities of any one issuer, the funds belong to a diversified or non-diversified class, with diversified funds being most regulated and restricted in their investment choices.

A non-diversified fund also has certain restrictions and requirements, although much fewer of those. As a few examples, non-diversified funds may not invest in derivatives, securities issued by other collective investment institutions, etc., and a corporate fund of this type must have at least 70% of its assets invested in securities. The value of non-listed securities must not exceed 50% of the total asset value.

Open-end and interval funds may only be diversified, i.e. liquidity is a major regulatory concern for these funds.

VENTURE FUNDS [2]
Venture funds having the least regulatory constraints and quantitative limitations regarding diversification, ownership concentration, ceilings and floors on amounts in any given asset class, their securities may only be marketed and placed privately by directly offering such securities to a defined circle of investors. Only legal entities may own shares or investment certificates of a venture fund[3].

A fund falls under a “venture” fund category if it is non-diversified and real estate and non-listed securities constitute more than 50% of the total net asset value.

Since the closed-end fund is the only type of a non-diversified class, a venture fund may be established only as a closed-end fund.

CORPORATE vs. UNIT FUNDS
Corporate funds are established in the form of an open joint stock company - with the charter, governing bodies, statutory capital and all other attributes of a corporation – engaged exclusively in collective investment activities. Investors in the fund are its shareholders with all applicable rights of a shareholder as in any other corporation, including voting rights.

By contrast, a unit fund is not a legal entity but a pool of assets co-owned by the investors exercising rights of joint partial ownership, which is managed by the management company. The management company is the founder of the fund and the issuer of the fund’s securities – investment certificates.

ELIGIBILITY
There is an express prohibition for a collective investment vehicle to invest in the securities issued by other collective investment vehicles.

The other eligibility restriction is in connection to the venture funds – they may be marketed only to legal entities (companies). Natural persons (individuals) are prohibited to own securities issued by venture funds.

REDEMPTION RIGHTS AND TRANSFERABILITY
As mentioned above, securities issued by open-end funds are readily redeemable, while interval funds redeem theier securities within certain periods.

Securities of closed-end funds are not redeemable until winding-up of the fund’s operations, but are instead transferable in the secondary market.

Between the redemption periods, securities of interval funds may also be traded in the secondary market.

PROVISION FOR A SPECIFIC NUMBER OF INVESTORS IN THE FUND
The law does not provide for either a minimum or a maximum number of investors in a collective investment vehicle to qualify as such, to have differing regulatory requirements by this specific criterion, or for any other purpose. However, a corporate fund must have at least two shareholders.

SEGREGATION OF ASSETS
The fund’s assets, whether an incorporated or non-incorporated fund, are kept and accounted for by an independent (from the manager) custodian that is also to see to it that the managers adhere to legislative requirements, by-laws and the rules set in the investment declaration.

REPORTING
The law requires fund managers to provide annual and quarterly reports of the fund’s financials, portfolio, NAV and expenses. Additionally, open-end and interval funds value NAV daily and on the redemption periods, respectively.

ASSET MANAGERS’ REQUIRED CREDENTIALS
Fund asset managers must be licensed as such by the State Securities and Stock Market Commission. Asset management must be the sole business such an entity is engaged in.

[1] A note on the Russian practice: In today’s fund industry in Russia, dominated by open-end and interval funds, closed-end funds are seen mainly as vehicles for illiquid private-equity and direct investments. In Ukraine, this role is attributed to “venture” funds. Closed-end funds may be very suitable for portfolio investments as a vehicle that can have a secondary market for its shares and less portfolio constraints than open-end funds, e.g. they may be fully invested in listed blue chips but at the same time have less diversification requirements to follow.

[2] If applied to portfolio investments, Ukrainian “venture” funds would have as the closest equivalents both “venture capital” funds widely used for private equity investments and “hedge” funds, which is exemplified by the fact that such funds have few regulatory controls. But, unlike hedge funds, Ukrainian venture funds, as well as their managers must be registered with the local securities regulator.

[3] These two features – mode of marketing and placement and “qualification” of eligible investors may be interpreted as a loose reminder of the notion of “qualified buyers or “accredited investors”.

Discretionary
If portfolios of investment funds are managed by us on a discretionary basis, we take on the full responsibility for the fund management, investment performance and administration.

Being discretionary, we are able to react swiftly to any market changes requiring action, and to carry out adjustments to clients' portfolios and stock selections as appropriate.

Clients are kept fully informed as to the progress of their portfolio through valuation and investment reports.

Non-discretionary
In this case, the limits on the discretionary authority of KINTO over the fund’s portfolio can be discussed so that a client owning the fund would not need to “trust” us to make prudent trades on the fund’s behalf. To ensure the client’s comfort, we can fully engage him or her in the process. We would first provide rationale for adjustments in the portfolio. The client is then able to approve, modify, or reject the proposed action, and the transaction on the fund’s account will be only executed on such an approval. Typically, transactions above certain value or adding/excluding significant portfolio positions are made following this procedure. Finally, custody of your assets will be with an institution of your choice, with many of which, including renowned international Kiev-based custodian banks, we have long and positive relations.

Portfolio advisory
Still another option is letting KINTO only monitor the portfolio and provide advice on acquisitions for and divestments from this porfolio. In this case, the fund itself would me managed and administered by another manager of your choice.

Portfolio Fund Management

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Portfolio Fund Management