Investment funds

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.

BENEFITS OF INVESTING IN UKRAINE WITH A FUND

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.(Disclaimeri[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. 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. Thus, the 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.

If elected to the fund’s Supervisory Board, the investor may have additional authority to influence the fund's activities within the limits provided by the law.

In the case of a strategic decision to exit the country, the investor might be spared often long liquidating period of selling-out the position after position. If a closed-end or interval fund of yours is quoted at the local exchange, the prospective buyers will always see you firm “ask” for the whole portfolio. Thus, your chances of exit may increase. On the other hand, you would always see the bid prices for the portfolio.

In the case of the closed-end funds, the law allows for an early wind-up or, alternatively, extension of the fund’s pre-fixed life. There are no restrictions on new issues of the fund's shares after the initial offering, either. This provides additional flexibility.

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.

KEY CHARACTERISTICS OF INVESTMENT FUNDS IN UKRAINE

The law distinguishes among:

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

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.

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

REGULATION AND SUPERVISION
State Securities and Stock Market Commission.

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.