November 2009

LUXEMBOURG: Lux to flex its leadership muscles

Luxembourg must continue to change and adapt if it is to secure favoured brand status, especially in a world of commoditising funds, says Bob Kneip, of KNEIP
lux.jpgIn the last decade investment fund assets in Europe have doubled to €6.1 trillion and at the end of December 2008 represented half of the entire GDP of Europe. But the business environment in the EU has become unpredictably complex, with the global financial crisis severely impacting Europe’s fund industry, leaving the fate of domiciliation centres like Luxembourg firmly in their own hands.

The European investment industry is far from harmonised and is characterised by a patchwork approach to fund creation, distribution and processing at a national level, with purely national funds representing the majority of the assets in the industry.

This means there is little in the way of consistency with regard to pricing policies, valuation periods, rules for subscription and redemption, payment methods, and custodian support services.

This national fragmentation is reflected by a lack of common standards in terms of fund identifiers, fund providers and distributors. All of this has arguably contributed to the feeling across all investor segments that the products they bought prior to the financial crisis were not as transparent or safe as they had believed.

For fund managers, the disparities between distribution models at a national level and fund processing pose a variety of problems in terms of cross-border fund sales and administration, which make the concept of a pan-European fund value chain virtually nonexistent.

In response to the move towards open architecture in the European investment industry in the late 1990s, a number of ‘offshore’ fund distribution centres emerged including Dublin, Jersey, Guernsey and Luxembourg, to create an infrastructure for cross-border distribution. However, the fallout from the financial crisis and flight to safety among investors in all client segments has threatened the continued evolution of the open architecture model in Europe and accordingly the future of domiciliation centres such as Luxembourg.

The rise of Luxembourg
In the latter part of the 1990s, Luxembourg rose to its preeminent position in the investment management industry due to its physical location, multilingual credentials and strong history as founder and champion of the landmark global economic block, the European Union.

Luxembourg based funds – both Ucits and non Ucits – now account for 27% of the overall European fund market and are sold all over the world, particularly throughout the Asia-Pacific region which accounts for the majority of inflow with over 50% of net Ucits sales just last year. In addition, Luxembourg, along with Dublin, accounts for the majority of new fund flows in Europe.

Despite this, after a period of strong growth from 2003 to 2008, when Luxembourg-based funds passed through the €2 trillion mark in mid 2007, the domiciliation centre’s fortunes started to change.

Luxembourg must now utilise its wide-ranging fund management expertise, its well-established fund infrastructure and its favourable geographical location to lead the call for a truly single European funds market. This is particularly important if Europe wants to compete with the enormous US investment industry, overcome problems caused by the credit crunch and evolve along with the changing economic landscape.

Luxembourg was established with the guiding vision of becoming the centre of a truly pan-European funds industry. To date it has fought to fulfill that role, as the dominance of local fund distributors in individual European countries, the prominence of indigenous funds and a reticence among fund managers to relinquish control of the back office have impeded the development of a single European fund market. However, the financial crisis is sowing the seeds of change.

Towards a single European market
The current economic crisis has boosted the call for a single European investment industry, as funds have suffered from the deterioration of the global economy and the onset of fear has seen fund managers struggling to keep pace in hugely illiquid markets, with the flood of redemptions from investors seeking refuge from equity markets. Added to this, funds continue to suffer from competition from structured products and bank deposits, especially in countries where banks were the main distribution channels for savings products.

However, crises often provide windows of opportunity to mobilise and build competitive advantage. This crisis is no different – but the window of opportunity may be narrow.

The investment fund industry remains an essential part of Europe’s financial system and Luxembourg must continue to change and adapt if it is to secure favoured brand status, especially in a world of commoditising funds.

Luxembourg’s changing role
Despite the fallout from the financial crisis, Luxembourg remains the leader in the European fund industry, with assets under management exceeding €1.62 trillion as at May 2009. It is therefore important that it consolidates its preeminent position by leading the call for the creation of a single, highly efficient investment fund market in Europe.

In the current business environment, consultation is essential. Luxembourg has always held a privileged position in shaping and implementing the EU and the single market. It should harness this collective fund expertise and capability to drive through imaginative solutions which will lead the way towards a single European funds market. This will not only help the European investment industry emerge stronger from the crisis but will reinvigorate Luxembourg’s own role within the EU.

Luxembourg can also take a central role in reviewing the European value chain, with a focus on eliminating duplication and examining opportunities for cooperation and centralisation. The currently fragmented business processes require a serious degree of streamlining and the elimination of redundant processes. Economies of scale solutions to harmonise distribution and fund administration across Europe are long overdue.

Ultimately, Luxembourg is well placed to leverage its position by developing a winning formula in a fragmented European fund market. By motivating disparate and competing organisations to cooperate, consulting with them and creating a common understanding of the challenges and potential opportunities, Luxembourg could lead the way at the dawn of a new paradigm for the European fund industry.

• Bob Kneip is CEO of KNEIP, a Luxembourg-based service provider

©2009 Funds Europe

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