In a quarter of a century of funds servicing, Luxembourg has had its ups and downs, but mainly its ups. Our panel of veterans looks back on the country's rise as a fund domicile. Chaired by Nick Fitzpatrick.
Josee Lynda Denis, CEO, Standard Chartered Bank Luxembourg
Chris Edge, managing director, JP Morgan Bank Luxembourg
Pervaiz Panjwani, securities and funds services country head, Citi Luxembourg
Thomas Seale, CEO, European Fund Administration
Camille Thommes, director general Association of the Luxembourg Fund Industry
Denise Voss, conducting officer, Franklin Templeton, Luxembourg
Funds Europe: What have been high points and low points for Luxembourg as a fund centre over the past 25 years?
Camille Thommes, ALFI: The main high point was the development of Ucits as a global brand and the subsequent success of Luxembourg in establishing itself as a fund centre. The low point was the financial crisis in 2008 when we saw our assets substantially diminish largely due to negative market performance.
Josee Lynda Denis, Standard Chartered: The high point was the industry’s first decade. Luxembourg-domiciled funds’ asset servicing back offices, particularly custody, fund accounting and transfer agency, were coming to life. We learned as we went along with designing corresponding IT applications, transaction processing flows, investor services, reporting capabilities, and so on. Building the global cross-border fund services platform, this invisible giant that it has become today, as we did in those pioneering days, to me was one of the highest points.
A low point, of course, we could say was Madoff, but there were others that impacted the industry before then. For instance, the BCCI money laundering case that saw one of the first instances where this industry was potentially tainted. It was the first time, I believe, in the history of investment funds that the concept of layering across companies, using investment funds, came to fruition. That’s when we really started to create a robust regulatory and operational framework in terms of anti-money laundering rules and procedures specific to the fund industry.
Denise Voss, Franklin Templeton: What’s been most impressive is that the Luxembourg Ucits has become a global brand in its own right.
The low point – and it still persists – is that investment funds have become confused with investment bankers as the bad guys of the financial crisis. As such, funds have much work to do to regain the trust of investors.
Thomas Seale, EFA: After I became president of ALFI in 2003, I attended my first FEFSI [European Federation of Investment Funds and Companies] annual general meeting, representing Luxembourg. I realised that many of my colleagues held misperceptions that Luxembourg was a tax haven and had used this status to attract business. That was a low point for me personally and I realised how important it was to communicate.
The high point was the first ALFI road show in London in June of 2005. That was the first time ALFI had gone out and invited clients of fund centres to come and hear us. It was in a West End hotel and we didn’t think anyone would show – but 150 people came. We were delighted.
That high point showed me that we had tapped into something important.
Pervaiz Panjwani, Citi: One high point was when Luxembourg overtook France in 1999 by Ucits market share in Europe. It was a proud moment for Luxembourg and since then it has been a great success for us.
Another point was the 2007 Sif [Specialist Investment Fund] law that led to diversification into alternative investments and this is where I expect we will see a lot of growth come from. For the low point, I would agree that it is the financial crisis.
Chris Edge, JP Morgan: Every year brings a new high! The relentless pursuit of maintaining Luxembourg’s status as the pre-eminent cross-border domicile is a high in itself. This was manifested for me just last year in Asia when I was talking to Asian asset managers about the basics of Ucits. The response you typically get is, ‘Ah, Ucits, that’s a Luxembourg fund, right’. That’s when you realise just how strong a brand it’s become.
Another high point is to see how many pioneers of the Luxembourg industry are still around from the early days. It speaks volumes for the industry’s stability.
On the low side, it’s any scandal, whether it’s BCCI, Madoff or anything like that. There have been reassuringly few over the years. Also, any reference to Luxembourg being a tax haven or being secretive, and the recent comparisons to Cyprus, are new lows, but there was a rapid, professional and mature response from the location when the Cyprus comparison was made, which quickly made it tomorrow’s fish and chip wrapper.
Funds Europe: How do you expect Luxembourg’s postion as a domicile and its market share of the alternatives asset servicing business to evolve over the next decade?
Panjwani: It could be a great opportunity for Luxembourg but it depends on how the AIFMD [Alternative Investment Fund Managers Directive] regulation is implemented.
If the regulatory approach is not in line with that of the market and industry, it will be very difficult to see the alternative sector growing to expectations.
Luxembourg would want to double its current share of 4% in the alternative investment space and is a good challenge to have, given the regulatory environment.
Voss: It was the funds industry that requested the European Commission to make AIFMD look as much like Ucits as possible, which it now does. And so, given Luxembourg’s expertise in the Ucits field, the introduction of AIFMD should be positive for Luxembourg going forward. At Franklin Templeton our idea is to put Ucits and alternative funds under one management company and if this becomes an accepted approach in the industry, this will steer funds to Luxembourg. AIFMD is a great opportunity to organically grow the alternative business.
Edge: I’m bullish about the outcome. If you look at what this location has to offer – the competency of infrastructure in supporting complex funds, the experience of being a cross-border model, and a regulatory framework that is comforting to investors – it has all the ingredients you can want. If you were making a recipe for the perfect AIF [alternative investment fund] cake, it’s prewritten in what we have in this location.
The mandates we’re getting for alternative funds servicing are tremendous and way above expectations. We are having to run to keep up.
Denis: The fact that Standard Chartered Bank has chosen to set up a branch in Luxembourg, dedicated to providing a full Luxembourg Ucits suite of services, in the midst of a financial crisis, speaks for itself. The initial strategy for Luxembourg was about assisting our existing mandates, primarily in Asia, as they sought to develop a Luxembourg Ucits solution to support their global asset growth across Asia and Europe.
What has now also transpired, is demand from Asian asset managers that already have a Luxembourg Ucits and are looking at sophisticated Ucits as well as the alternative investments space.
Another scenario is European asset managers requiring our services to support them in their Ucits and alternatives distribution strategy in emerging markets in Asia and Africa.
I am optimistic that Luxembourg as a fund domicile and asset servicing centre, regardless of fund type, will continue to gain market share in many more countries and regions going forward.
Seale: Although there is reason to be confident about the future, I worry that regulation at the European level is just too heavy. But I think Luxembourg will find a way to cope with this.
If we look back at 2007 when we implemented the SIF law, what we wanted was something very simple that fell between an unregulated structure and the Ucits fund. The SIF was that. It was something that was relevant for alternative asset managers, private equity and real estate managers. These people are allergic to heaviness in cost and the SIF succeeded. Now it’s a case of rolling over all this with very heavy risk management. All these things, you can argue, are good and we will find a way to do alternatives well.
Thommes: We have the ambition to further develop the alternative sector into a second pillar of our industry, next to the Ucits industry, and a third pillar being responsible investing. We have 4% market share if we look at the global, worldwide picture. Roughly 10% of our assets are alternatives, including hedge funds, private equity and real estate.
We are already well positioned when it comes to real estate and private equity although, in the area of hedge funds, other jurisdictions are a little bit ahead of us. But we see positive trends.
As we travel the world it’s clear that those who are interested in raising money in Europe will not escape AIFMD and they are definitely looking for a jurisdiction that has the competence and the expertise to serve clients, especially when they would like to pursue an international strategy and sell their product cross-border.
Panjwani: I agree we have a better position. We’re seeing market trends like re-domiciliation from offshore locations into Luxembourg.
But could AIFMD lead to regionalisation? Could it lead to re-domiciliation outside of Europe? There is a threat that it could.
However, Luxembourg is well positioned to take advantage of the AIFMD opportunity.
Funds Europe: How important to Luxembourg is business from the fund industries of Asia and the emerging world? Are fund managers from emerging markets using Luxembourg’s service offering and why?
Denis: The Standard Chartered Luxembourg story was really driven by our existing Asian asset manager clients that came knocking on our door asking why we did not have a presence in Luxembourg. If we service them in Asia, Africa and/or the Middle East, why aren’t we supporting them here? There are now approximately 32 Asian asset managers that have Luxembourg Ucits, distributing these in Europe and the Asia Pacific region. Over the past 12 years or so, global asset servicers have set up servicing hubs in Asia on the back of global asset managers’ distribution strategies in Asia. The success stories go in both directions.
Seale: There has been a natural sequence of events that started when European and occidental asset managers wanted to sell investment management in Asia, and then phase two is Asian asset managers increasing their sophistication.
Now, phase three might be local vehicles, too.
There are opportunities in each phase, though the last phase is not really there yet.
Panjwani: About $1 trillion in Ucits funds comes from Asia, so this element of business is important and will remain important. Flows continue not just because of the history, but because of the way Luxembourg has evolved as a global centre that can service multiple pricing points with global operating models to service clients and create more business opportunities from Asia.
Voss: The global model and the ability to adapt to different ways of doing business around the world are obviously advantages for Luxembourg’s service providers, but expertise in more mundane areas, such as reporting and the production of Kiids [key investor information documents], has proven important, too.
The next phase will be about servicing funds domiciled in other countries and these funds will want to draw on Luxembourg’s ability and know-how for operational and distribution-related tasks.
Edge: We are not going to see many more Asian managers establishing products in Europe if they haven’t already done so. That’s peaked.
My hypothesis is two-fold. First, why wouldn’t they simply use a sub-advisory route into Europe if they wanted to get access here? Second, Asia is a large and diverse region with a lot of wealth being created. If I were an Asian fund manager I’d be looking more and more at domestic product and taking advantage of the emerging bilateral and trilateral distribution or mutual cooperation arrangements springing up all over the region. It’s probably where my investment money would go.
There’s probably another phase coming along now, too, with very early discussions around reciprocal registration of Ucits into Asia, and Asian products into Europe. That would be quite an interesting next phase, which I’d welcome.
I don’t see any reason it should not be done if the product is equivalent in every respect. It makes life easier. It does away with potential protectionism from both sides of the equation and allows products to compete on their own merits for the benefit of the investor.
Thommes: I’m not so sure the peak in Asian managers has been reached because I still continue to see, for example, Chinese asset managers who have platforms in Hong Kong still taking the Ucits route. It’s easier for them to sell their products in several Asian jurisdictions, at least for now.
The second thing is that some Asian managers also want to go further than just selling back into the Asian market or tapping the European market. They are also interested in South America, especially in Chilean and Peruvian institutional clients. They’re also interested in countries like Brazil and Mexico.
But I totally agree that one of the next phases of development is to look at mutual recognition. We have been welcomed in Asian markets so the point comes where Europe also has to open up. A first step in that respect has been achieved with the AIFMD.
Voss: We can look to the example of the US many years ago which, at the time, was not interested in discussing with the EU any form of mutual recognition for investment funds. Their market is restricted to the US market today so, in retrospect, this was a missed opportunity for the US mutual fund industry, especially now that most, if not all, US asset managers have already set up Ucits.
Funds Europe: To what extent is the mutual fund recognition, which is due to be implemented across China and Hong Kong, a challenge to Luxembourg as a fund domicile?
Thommes: It is definitely a topic that we monitor very closely and it is clear that Hong Kong has an ambition as a regional fund centre.
In my view, mutual recognition will develop in phases. I could imagine that, in the first phase, Hong Kong funds will be allowed to enter mainland China. But I’m also quite confident that other jurisdictions and products – those with a track record like Ucits – may also be allowed to access the Chinese market.
With the RQFII [Renminbi Qualified Foreign Institutional Investor], there was a requirement to put quotas into locally domiciled structures; but in the latest release, that requirement was lifted, meaning that you have now the flexibility to lodge it into a non-local fund vehicle
Edge: It’s going a bit too far to say mutual recognition is a challenge for Luxembourg as a fund domicile. We’re talking about competition to access a new market rather than any threat to existing asset flows.
We’ve got to put it in perspective, too. To start with, Hong Kong has got to move towards a corporate structure with a vehicle that is equivalent to a Sicav. At present, they only offer a trust structure, which is a big impediment.
We must also note this is not a passport arrangement. I don’t want to downplay it at all because it is quite a big strategic move in the region, but it’s a long way away from threatening existing asset flows. Even if it were, the ‘Asean’ region is becoming a very, very attractive part of Asia and if ever there was a threat to flows from Hong Kong because of this arrangement with China, there’s plenty of opportunity to redirect effort towards other parts of Asia that are growing just as fast.
Denis: We must also consider whether China and/or Hong Kong have the infrastructure to absorb transaction inflows. Would local fund providers come to those of us with established asset servicing hubs in the region? Will they build a local China/Hong Kong cross-border platform, or outsource to existing asset servicers?
During one of the first Luxembourg Ucits road shows in 2007, we [the Association of the Luxembourg Fund Industry and Luxembourg for Finance] met with the local finance regulators and asset management joint ventures in Shenzhen. From that first exploratory visit to the yearly Asia road shows since, no one has really approached the fund infrastructure component nor how they could absorb the administrative requirements of launching and maintaining an investment fund.
Voss: It’s true. Everyone talks about wanting to do it but I don’t think they realise what amount of time and energy it takes us all to do this.
Edge: There is a huge amount of activity behind the scenes. The former ambassador to China for Luxembourg is now head of Luxembourg for Finance and there’s a new China-Luxembourg Chamber of Commerce that has just been launched in Luxembourg. So there’s a lot of behind-the-scenes effort going on to maintain those contacts.
The Chinese have a lot of affection for Luxembourg as a gateway to Europe. What better place than somewhere with an established cross-border discipline and culture, and where you have easy access to decision makers, whether they’re government, regulators or the industry. You try doing that in France, Germany or the UK. You’d spend months establishing your footprint compared to the speed which may be possible in Luxembourg.
Voss: This is where small is beautiful because, clearly, they’re not worried about Luxembourg standing up against China in terms of size. But your point there about government, is pretty key.
The willingness of the Luxembourg government to be available when asset managers from China and around the world come to the country is important and is one of its key advantages.
Funds Europe: Is Luxembourg becoming too expensive and is this a threat to the continued success as a fund centre?
Seale: There is an issue of how to keep TERs [total expense ratios] down for investors, particularly as we have more and more regulatory pressure – but that’s not just a Luxembourg challenge. We’ve had some success at this through critical mass, through technology, through certain offshoring or outsourcing arrangements. We have a very efficient service-provider base and that gives real critical mass, enabling us to ensure that we deliver value against costs and keep TERs down as low as possible.
Edge: Luxembourg has always been relatively expensive compared with other parts of Europe, not necessarily to those in our close proximity but certainly to Ireland and, to a lesser extent, to the UK. It has not stopped Luxembourg from being successful over the last 25 years though. You have got to look at cost as one part of the equation, while quality, productivity, efficiency form another part, along with an intimate heritage in servicing the complexity of a cross-border model. Luxembourg does pretty well in that respect.
There is a very healthy competitive service provider arrangement here; if one of us is too expensive, we risk losing business. It’s quite simple.
Denis: Let’s not forget the oversight responsibilities that we have as a fund domicile. We do not only consider costs as a main driver for outsourcing, offshoring, near-shoring or whichever term used nowadays. There is a Luxembourg brand that has been built over 25 years and an expertise as we exported these quality servicing standards, efficiencies and corresponding oversight responsibilities, all home grown in Luxembourg.
Voss: Before Luxembourg proved its worth, it was seen as expensive compared with other places. But I don’t see that as an issue now given the arguments about quality and service.
Panjwani: Providers have had to adjust between cost and quality. It’s what we have been doing for years, and it will continue.
In my view, Luxembourg will continue to maintain a high quality of service with the robust oversight model and will avail opportunities to reduce costs by leveraging global models, global businesses, global franchises.
Luxembourg is expensive and so is the majority of Western Europe. But there are ways to work around this and that’s what we’ve been doing very well, as service providers, and we’ll continue to strike the right balance between quality, experience and cost.
Funds Europe: What must Luxembourg’s priorities be for the next few years – or 25 years – in order to maintain its status as the key cross-border fund servicing centre?
Thommes: We cannot rest on our laurels or be complacent and we will continue implementing the plan launched two years ago. We must consolidate and further expand our business in the Ucits space whilst at the same time develop the two other pillars: the alternative sector and responsible investing.
Edge: Continued focus on alternative funds, that’s a winning proposition for this location, without a doubt. Promoting Luxembourg as the domicile for management companies to become the ‘SuperManco’ location.
Fund complexes must also do something about their legacy structures and it’s that competency that we can develop in Luxembourg around helping fund managers with a legacy issue of bloated umbrella structures, too many domiciles, wrong product, wrong place, somehow restructuring them into a more efficient and productive structure.
Panjwani: The stability of the business environment that Luxembourg has created over the years is the key to future success. We should continue with that stability together with the promotion of Luxembourg’s relevance globally.
Voss: We need to continue to offer a best-in-class service at a reasonable price. But I also agree, we need to be proactive, and to continue making our road shows a priority.
Denis: To continue to work together as an industry towards common goals. We have built an optimum global cross-border operating platform over the past 25 years. We have a dedicated fund operations forum launched over 14 years ago. We’ve recently launched a corresponding Asia forum to support local requirements in that region. There is still so much commitment today around making sure the Luxembourg fund infrastructure is sound while being a globally recognised operating model. More than 20 companies now commit to this forum.
You’d think that after 14 years we would’ve become bored with the operational aspects of this industry. But there’s still that vivacity in that all members are keen to make sure that this industry continues to be recognised for its long-standing expertise and thought leadership in the global cross-border fund servicing space.
Seale: Pericles was a famous Greek general born in 495 BC who said that instead of trying to predict the future it is more important to be prepared when the future happens. That’s a good message for Luxembourg. We don’t know what’s going to happen in the future but the Luxembourg model is durable and solid. We need to keep this model and keep working together. That will give us confidence for the future.
©2013 funds europe