Chairman: Simon Murray, Global Investor/ISF
Denise Voss, chairman, ALFI (Association of the Luxembourg Fund Industry)
Gilbert Schintgen, managing director, UBS Fund Management (Luxembourg) S.A.
Jon Griffin, managing director, JPMorgan Asset Management, Luxembourg
Sébastien Danloy, managing director, continental Europe & offshore, RBC Investor &
Nick Curwen, country head for SS&C GlobeOp, Luxembourg
What are the key trends in demand for Luxembourg-based solutions from your clients?
Danloy: More and more of RBC Investor & Treasury Services’ clients are closing down their different domestic fund ranges and concentrating assets into an offshore location such as Luxembourg.
We are currently talking to several clients who have decided to transfer assets towards Luxembourg, and clients are looking at master-feeder structures with the master fund being Luxembourg and the feeder fund being in their country of origin.
We also see clients filling in the gaps in their investment strategies by launching new sub funds with new strategies, including AIFs in asset classes like real estate, private equity and infrastructure funds.
Griffin: JP Morgan Asset Management in Luxembourg is both a UCITS management company and an AIFM. Out of €273bn ($303bn) in AUM, we have only two billion relating to alternatives, so our main activity is distributing our UCITS product around the world. The cross-border trends are well known; if you look at the overall flows they are not so much in domestic funds anymore, they are in cross border fund flows today.
Luxembourg and Ireland has around 50% of the total European fund market, and that is only going one way, as Sébastien says. UCITS continues to offer efficiency from a portfolio management perspective, and Luxembourg has all the infrastructure, ‘know how’ to produce, manage and export fund products around the world.
Curwen: SS&C GlobeOp are new to Luxembourg, we set up the office here two years ago. We’ve had a very strong presence in the US and the alternatives space, and we were seeing increased demand across Europe for alternative investment funds, as managers broaden their range of assets.
Non-European managers who historically have not been UCITS managers are looking to use a third-party administrator in somewhere like Luxembourg as a partner to help them get into Europe. Another trend, more unique to our firm since we are a technology group and own all of our own software, is a growing demand for the right technology to support clients’ business.
Voss: Luxembourg has €3.5trn of assets under management, and 2015 has been very good so far, with €252bn of new money coming into the funds. This reflects three positive trends. Firstly, the diversification of our industry, in terms of investment objectives across asset classes.
Secondly, the diversification of the markets in which Luxembourg funds invest. And thirdly, diversification of the investors investing in Luxembourg funds; from over 70 countries around the world.
The growth in AUM is, however, somewhat fragile if we look at recent market activities and volatility, but we are very optimistic for the future. We must not, though, rest on our laurels, and we need to make sure we continue to be strong in all ways, including having an efficient infrastructure, investor protection, an efficient tax regime, products that fit the needs of investors, etc.
Schintgen: UBS in Luxembourg operates as a UCITS and an AIFM management company, with a focus on UCITS as Luxembourg acts as the distribution hub for UBS funds. On the distribution side, we see a trend for clients to ask for more specific regional features in our funds.
The master-feeder is becoming much more popular, where distributors want to have their own UCITS feeder and distribute it within their clientele. We are seeing a quicker turnover of funds as clients change their investment style. And then there’s the challenge of technology; from regulations, changes in distribution and demand for a more risked-based approach to investment. Clients need information, they need reports; we have the information and we have to deliver.
What single regulation or proposal concerns you the most for your business in Luxembourg?
Voss: The Financial Transactions Tax (FTT). This would have a potential knockon effect on investors, and the viability of funds, because of the additional tax that would be due every single time a portfolio manager trades securities in a portfolio.
Schintgen: We fully support investor protection regulations, investors are at the heart of everything we do, but the FTT would be a really unnecessary and unavoidable financial burden on the investor without any added value to them.
Danloy: For depository banks, UCITS V is certainly an area, not of concern, but of attention because we’ve already seen AIFMD and the impact it had on the roles and responsibilities of depository banks.
Now we have UCITS V; there is that market entrants concept behind UCITS IV or V and then the depository liability, and also a supervision required by the depository on the asset management company. I would also add MiFID II, and its impact on the distribution industry as a whole; how are the relationships going to change between distributors and asset managers, and how will it impact our own role as transfer agents?
Griffin: The Regulatory agenda remains a busy one but MiFID II is probably the biggest one to get organised on a nearterm basis, there are many implications for national ‘RDR’ models, market transparency, data requirements and trading venues. A positive trend is that the Regulatory tone in Europe is moving away from crisis reaction to a more growth-orientated one such as in the Capital Markets Union.
Curwen: There is the issue of whether the regulations that came in as an immediate reaction to the banking crisis are really attuned to the asset management industry which usually becomes lumped in with banking? People are starting to look at what has been put in place.
What are the different industries; where are the gaps and where are the overlaps and what makes sense? That’s still going to take time to work through the system. However, as a service provider we almost always see opportunities to help our clients because of the requirements of these legislations.
Tell us about ALFI’s 2020 ambition
Voss: ALFI’s ambition is to enhance Luxembourg’s reputation as the international fund centre of reference, with UCITS remaining best in class, and also to prove that we serve best the interests of investors, and the economy. There’s a lot of focus on regulations, tax and transparency, and pressures on the cost of doing business.
We have to make sure we have the highest investor protection standards, and that we have the right resources to run what is a more complex industry, with more complex products, requiring more knowledge.
We are facilitating cross-border distribution of our funds, so we’ve been doing a lot of promotion, and consolidating our position as the partner of choice for the asset management industry, including the alternative asset management industry.
Another area of interest is the Capital Markets Union where Europe is looking to add alternative sources of funding beyond traditional banks, including investment funds, to fund projects in Europe.
These are areas where investors, including retail investors, can invest in, such as the European long-term investment fund, which will focus on infrastructure. ELTIFs will have to appoint an AIFMD-compliant alternative investment fund manager. So there are obvious product and managerrelated opportunities for Luxembourg.
How is ALFI involved in investor education?
Voss: I want to make sure we focus on the demographic challenges; our ageing populations, and the need for people to take more responsibility for their retirement. We haven’t had a big disaster in Europe yet, in terms of a state not being able to pay out pensions but, I think, given demographic changes that may come.
Financial and investor education is a vast topic, but necessary to ensure that individuals do understand the need to save and invest. We can and should all contribute; e.g. ALFI has a website on this called understandinginvesting.org.
Griffin: Unfortunately the next generation are unlikely to be able to rely on the government to provide for their futures. We have a role as an industry, as does government, in promoting better and sound financial education across Europe. For pension solutions one of the biggest growth areas in the US has been around target date funds, but in Europe we have seen nowhere near that kind of development yet although the needs are the same. Also Europe hasn’t yet achieved a crossborder pension vehicle for individuals.
What are the opportunities for Luxembourg outside Europe?
Voss: The rise of the middle class around the world is creating new opportunities; in China and the Far East, and in South America. Brazil is a particularly interesting opportunity with a population of over 200 million people; upwards of 50% are deemed to be middle class.
Brazil is reforming fund legislation and all types of investors, from retail to professional investors will, as from October 2015, be able to invest outside of Brazil via Brazilian feeder funds.
We expect Luxembourg UCITS will be a main investment of these new funds so we’re working closely with a sister association in Brazil to ensure the market understands UCITS and how they are managed and regulated in Luxembourg.
Danloy: In Asia, we are seeing a number of initiatives that impact the way Luxembourg funds are being distributed; for example, the ASEAN Collective Investment Scheme Passport, the Asia Region Fund Passport and the Hong Kong & China Mutual Recognition Initiatives.
Griffin: We as a firm are getting better with our product development capabilities on being coordinated on managing, developing and rolling out funds on global basis.
We can create a product in an Asian wrapper, in a US wrapper and then for international distribution in a Luxembourg wrapper and, basically, have a global product proposition; maybe it’s multiasset or income solutions, whatever, that you can market and distribute in many markets because the need is universal.
Schintgen: We should not forget that for the moment Europe is the largest economy, but China is expected to take up this role in the foreseeable future, and not to forget the growing importance of India. So the placing potential is definitely going to be in that part of the world. We must not lose the ability to provide them with fund-based products; not necessarily our products, but the products they need.
Will Luxembourg repeat the success of UCITS with alternative investment funds (AIF) and AIFMD?
Curwen: Current demand from alternative players seems to be for the UCITS product. It ticks the boxes; it’s an established product, there’s confidence in an established regulation, and there’s the distribution network that exists.
I do think UCITS V may start shifting the balance between UCITS and AIFMD again. When you’ve got the cost of the depository on both sides, is there an arbitrage between the two or not? And I do also question whether some of the strategies suit the UCITS wrapper.
Ultimately, the alternative world will start to get some more traction with AIFMD over the years, and I’m confident in Luxembourg’s position, with distribution being the ace in the pocket. Bar one or two names, all of the alternative service provider community is here, and even if they are not here physically, they have got conduits into Luxembourg. Of all the AIFMs approved by the regulators across Europe, Luxembourg has more than most domiciles.
Danloy: Absolutely, and it will also depend on how demand for alternative investment grows. With this low interest rate environment, the need to generate higher returns to fund future commitments and the lifting of investment restrictions, the proportion of funds in alternative investments could grow.
These clients have invested in Luxembourg funds so they know the Luxembourg environment; they know how Luxembourg is working.
Voss: Luxembourg has around half a trillion euro in assets under management in alternative investments.
AIFMD and UCITS are not exactly the same but there’s much in common, and we believe there is very good potential for an AIFMD brand, following on the UCITS brand. And, from a management and operational perspective, where individual management companies hold both UCITS and AIFM licenses, their processes can be as similar as possible, creating efficiencies.
What are the main developments in distribution, and how is your support evolving to meet the needs of asset managers?
Danloy: In addition to MiFID II there is more scrutiny from the regulators around AML KYC, for example - an area that significantly changes the way asset managers deal with distributors and underlying investors.
For the industry as a whole, data management is also very important. What can you do to leverage the data that you have, as an asset manager or as a transfer agent to support the business? For instance, what does the data say is happening in the marketplace, with existing and new products, so that as an asset manager I can redirect my sales efforts into certain types of products in certain regions of the world, through certain distribution channels? There are initiatives in the market by players, including RBC’s Fund Sales Intelligence, to help clients leverage that data.
Griffin: Good data completely underpins any digital strategy. We consume whatever data our engine or the transfer agent can give us. In terms of one of Luxembourg’s key strengths, distribution insight is in the DNA of this place; through-out the industry participants from the legal profession to the fund administrators and custodians, their export mindset and understanding is on how it works for investors in other countries.
Luxembourg is small, it’s non-threatening, it is neutral and stable providing investors with important security and comfort when buying a Luxembourg fund product.
Curwen: Luxembourg’s established UCITS community knows distribution and understands it. We can help clients understand how they can use the existing networks to access markets and investors. We can help them identify what they need, as well as the limitations of that network, including some of the quirks that they won’t always necessarily understand up front.
I have had this discussion a lot with clients when they say “we’re launching a UCITS because our investor wants it.”
They don’t necessarily understand everything they could actually do with that UCITS and how they could turn it into a strategic vehicle for their European distribution. That being said, Managers should assess the compatibility of their strategy with the rules of a UCITS fund.
Schintgen: Yes, the past shows that Luxembourg finds solutions for problems and whenever somebody wants something special, Luxembourg can produce it. Distribution is changing and we are going to see more platforms emerging and taking a bigger role than they had in the past with new regulations.
For instance, the emergence of master-feeder constructs, as distributors want to be nearer to their clients, offer new value generating services and generate new revenue streams. Regulations have reduced the capability or willingness of distributors to give advice to clients, and this will change distribution as well.
Voss: It also comes down to technology and the digitalisation of distribution. In the future, people will not walk down the street to see their banker to buy funds, and not just because the banker doesn’t have the incentive to offer the funds, or people don’t want to pay for advice.
The example I give all the time is my 15-year-old daughter with her iPhone. It’s certain she’ll be buying funds online, so we need to think about how we can support that. FinTech is one example.
Luxembourg prides itself on having nearly 150 FinTech firms here, and one of the challenges ALFI is working on bringing the financial industry and those companies together, for example at our recent Global Distribution conference and at forums and other platforms.
In terms of service provision, what are the pros and cons for asset managers of in-house versus outsourced back office and technology services?
Curwen: I’ve been on both sides of the table. I’ve been through the manager’s side of the crisis with revenues dropping and how do you control costs? And I’ve seen it from the other side as the service provider. Outsourcing to a service provider has significant advantages; you get access to scalability and technology.
More importantly, is it an asset manager’s job to be a technologist and understand technology and data management, or should they be able to rely on someone else? Obviously the right answer will be on a case-by-case basis. But I do think that there are areas where scale does help.
For example, we’ve seen a huge appetite around the regulatory reporting side, where our clients do not have to worry about how to build it themselves. We have a tried and tested solution that is one less headache for the managers.
And you do sometimes have an element of free consulting from service providers as well. So, for example, if this regulation is a little bit open to interpretation, what methodology do I use? Service providers can often tell you, “80% of our clients are answering it like this so if follow them you’re in the middle.”
Danloy: The role of asset management companies is to provide performance, and find the right distribution networks for their products. I don’t think their role is to invest in back office services when today there are many players in the marketplace, whether in Luxembourg or around the world, whose job is to provide those services.
I agree that scalability is very important in a business like fund administration, custodial activities or shareholder services. You need to have the scale to cope with the impact of all the different regulations at the same time, and then as we start to embrace new worlds, it will require a significant investment in the skills and technology required.
I also believe that in the longer-term the regulators are ultimately going to look for a split of responsibilities between the role of a management company and the role of a depository bank and administrator, with independence between the two. There might be exceptions to the rule today but where the functions are in the same group, it is becoming more difficult in my opinion.
Griffin: No matter what you do, even if you appoint somebody else, you remain completely accountable. So with the exception of the role of the custodian, the management company is accountable for anything that goes on. You have to make sure that you pick the right partner, in that regard, and they must view that service as something long term and they invest in it.
Around regulatory change, there’s rarely any real proprietary edge. You want someone to understand it; you want somebody to get it done and it needs to work. I don’t think there are any universal players anymore. The functions are handled by a large number of actors, and even if they are affiliates in the same group, they are substantially at arm’s length from the management company.
Having said that, I do think there are opportunities for further mutualisation of tasks in the industry thinking for example about the effort in all firms on areas such as AML KYC or distributor due diligence and oversight.
Schintgen: We have to ensure that we get the best service at the best price, in the best interest of our investors. You have to avoid conflict of interests. You have to show the independence and that’s what we are doing.
If an external supplier can give a better service at a better price and it is in the interest of the investors, yes, of course, you do consider it. But, obviously, big groups have the scalability, which makes it economically questionable, if outsourcing is the best thing to do.
On the mutualisation of specific services, we are all looking at costs, and I’m sure everyone would welcome providers who could come in and offer this kind of service. However, it has to have the highest standard, and it has to be a competitive offer, so not only one provider, but maybe competition between two or three offering the reliability and trust we need.
Danloy: This is what we are doing on behalf of our clients. So when we have 10 clients who distribute through the same distributor, we goand ask that distributor for the same information ten times. Is there a way to mutualise that information? Yes, and we’ve started to discuss that approach with our clients.