Last year was a big one for Luxembourg. The country continued to record large net inflows of various funds while the Association of the Luxembourg Fund Industry (ALFI) turned 30.
ALFI shares its birthday with UCITS, with Luxembourg being the first member state, on 30 March 1988, to transpose the UCITS Directive into national law—an important step that helped establish the country as a leader in the field of investment funds globally and build its reputation for reactivity.
On the backfoot of this milestone, Luxembourg continued to experience a high degree of success and growth in 2018.
At a recent breakfast meeting, hosted by ALFI, the association said it continues to report high levels of assets under management, ending the year 2018 at €4.1 billion.
Denise Voss, chairman of ALFI, explained: “In 2018, the Luxembourg fund industry held a steady course, despite volatile markets. Luxembourg thereby remains the largest fund centre in Europe, the second-largest in the world and the leading centre for cross-border investment funds. While we expect volatility to continue given the geopolitical environment, Luxembourg remains attractive as a domicile.”
In the meeting, ALFI said it expects UCITS and alternative investment funds to be key beneficiaries of the Capital Markets Union, which, it said: “Aims to increase investment and the choices available to retail and institutional investors in Europe and to migrate some of the vast pool of deposit savings into managed investments.”
ALFI added: “Looking outside of Europe, the global footprint of UCITS will surely serve us well in the coming decade as populations in many markets are encouraged by their governments to take on the mantle of pension provision.”
As David Claus, Luxembourg country executive of asset servicing at BNY Mellon, indicates: “It’s fair to say that UCITS are now considered the gold standard for collective investments. They are one of the recognised successes of the Single Market.”
However, he adds: “Having such a successful formula—with UCITS sold throughout the European Economic Area as well as into jurisdictions outside of Europe—means we need to be very careful with regulatory changes to the UCITS regime.”
“The average fund size is growing and it will need to continue to grow in order to be cost competitive, offer strong net performance to investors, and absorb increased regulatory costs.”
But if the first three quarters of 2018 are anything to go by, Luxembourg needn’t worry. Out of twenty registered countries, Luxembourg recorded the largest inflows (€76.1 billion) during Q3 2018.
This was followed by Ireland with €49.5 billion and France €19.7 billion. The figures show that Luxembourg is well ahead of the mark in this area. In Q3 2018, among the major domiciles, Luxembourg once again ranked as the third largest asset growth with 0.9 percent.
Discussing the growth and success that Luxembourg has seen, Chris Chancellor, senior director, Europe, the Middle East and Africa insights at Broadridge, comments: “Luxembourg UCITS funds gathered €13 billion, this was around half the flows of rival Dublin but Luxembourg remains the leader with almost triple the assets of Dublin.”
In addition to the UCITS product, “there is also a range of legal structures that can support any type of investment strategy, thus allowing speed to market and flexibility”, according to Jeremy Albrecht, head of global client coverage, Luxembourg at RBC Investor & Treasury Services.
He says: “We expect to see large Luxembourg UCITS funds continuing to attract new investors as well as growth in the real asset space over the coming years.”
But it’s not just its UCITS and AIFs results from 2018 that continue to show promise, it’s also the managers it attracts and where these managers hail from.
As Chancellor explains: “As a pan-European distribution hub, Luxembourg attracts managers who have interesting strategies that are often not replicated in local markets, while at the same time attracting investors not just from Europe but globally—especially from Asia and Latin America.”
Brexit
The UK is expected to leave the EU in March 2019, notwithstanding, any transitional agreements by the UK’s Prime Minister Theresa May and the EU. Until then, the rest of the world awaits the outcome of current negotiations.
The ongoing uncertainty around the UK leaving the EU has positioned Brexit as a top systemic risk concern for this year, according to a survey, published by The Depository Trust & Clearing Corporation published in late 2018.
Close to half of the survey’s respondents (49 percent) cited concerns around the significant risks attributed to Brexit as one of the top five risks for the industry in the coming year, as the Brexit date quickly approaches. But, even though the aforementioned reflects myriad scare-mongering surrounding Brexit, not just in the financial sphere, many in the industry are seeing its possible benefits and haven’t felt any negative effects, yet.
Chancellor affirms: “In 2018, we saw some Brexit related growth as some groups who were selling UK vehicles across the continent future-proofed their business by creating funds in Luxembourg.”
And as Steve David, Luxembourg country head at Northern Trust, states: “Brexit also represents a further opportunity for Luxembourg to grow its global fund industry across both traditional and alternative products with asset managers.”
He adds: “We’ve certainly noted an increase from fund managers looking to establish Luxembourg-domiciled funds as their gateway to European and global investors while running UK-domiciled funds to serve UK investors.”
Claus states: “Brexit is attracting new players to Luxembourg, both in asset management and insurance. There is a big opportunity to build on Luxembourg’s expertise and experience in private markets; the real economy needs funding, and the Luxembourg fund industry is well placed to capture that funding and allocate it.”
Voss said: “Most firms have been preparing for Brexit and have put in place plans for each scenario, over the past months including a ‘no deal’ exit. One thing to bear in mind is that, from the end of March, UK UCITS will qualify as AIFs in the case of a ‘no deal’ scenario. This is an additional challenge for fund management companies with UK products.”
She continued: “The Luxembourg fund centre has a long-standing relationship with the UK, evidenced by the fact that over 18 percent of assets under management in Luxembourg funds are managed by UK-based asset managers. UK fund initiators remain very active in Luxembourg, accounting for 41 percent of all new fund units created in 2018. Our efforts focus on how we can continue this constructive relationship even after Brexit.”
Technology
Buzzwords such as ‘automation’ and ‘robotisation’ seem to be a topic of every discussion within the asset management sphere through recent years. Claus indicates even though the subject has been discussed at length within the industry, its prominence has only really risen recently.
He affirms: “Digitisation and artificial intelligence are rising up the asset servicing agenda, along with the ongoing need for increased efficiency. Overall, I see a positive outlook for the long term—the funds industry in Luxembourg still has plenty of upside.”
David indicates the strength of technological innovation, especially distributed ledger technology (DLT) is transforming the financial industry.
He affirms: “New technologies such as DLT or blockchain have the potential to drive major industry-wide improvements, including around data security and transparency. The challenge and opportunity for Luxembourg is to keep at the forefront of these fintech trends to become an early adopter. With its pragmatic approach to regulation and the collaborative spirit of its financial industry stakeholders, Luxembourg is well placed to succeed.”
