Asia is increasingly concerned about what the eurozone crisis means for Luxembourg's Ucits funds, which are distributed widely in the region. Our panel discusses this development and other themes affecting the fund and asset servicing industry. Chaired by Nick Fitzpatrick.
Sebastien Danloy, managing director (RBC Dexia Investor Services)
Chris Edge, managing director (JP Morgan Worldwide Securities Services)
Georg Lasch, head of client development (Luxembourg, BNP Paribas Securities Services)
Barry McGloin, sales manager (Caceis Investor Services)
Pervaiz Panjwani, head of securities and fund services (Luxembourg, Citi)
Olivier Renault, deputy CEO & country manager (Societe Generale Securities Services)
Funds Europe: What trends are emerging in fund re-domiciliation in light of regulatory impulses that are said to be driving this? Is Luxembourg managing to attract funds from competing domiciles? What are the specific drivers for this? And what fund structures are being sought?
Sebastien Danloy, RBC Dexia Investor Services: There is a difference between fund domiciliation and fund servicing and sometimes there is confusion between the two. Certain countries service many offshore products but do not have the products domiciled there – Ireland is a good example. It’s fair to say in Luxembourg there are many Luxembourg-domiciled products and fewer offshore products serviced here.
We carried out a survey with KPMG and found that due to the Aifm [Alternative Investment Fund Managers] directive, a lot of alternative investment funds domiciled in offshore, unregulated domiciles are either already re-domiciling or, more importantly, co-domiciling between offshore unregulated and offshore regulated centres, such as Luxembourg and Ireland.
Luxembourg and Ireland are well ahead of the competition. Between the two, I think there are arguments in favour of both, but most fund managers looking at co-domiciling or re-domiciling funds have not decided yet.
Of those that have re-domiciled, about two-thirds of them have chosen Luxembourg. I think that there are still a lot of opportunities for Luxembourg, and for other countries, resulting from fund mergers.
Chris Edge, JP Morgan Worldwide Securities Services: We can also look at this from a product perspective – that’s to say alternative funds and Ucits funds.
Until the Aifm directive is clear about its product-cost implications, I don’t think we will see a great wave of re-domiciliation of alternative funds. But we are seeing a lot of interest in establishing brand new products in Luxembourg.
In fact, the government, regulator or industry bodies could not do anything more to attract alternative funds here.
On the Ucits side, it’s a little different. The cost of regulatory change is beginning to manifest itself in the cost of Ucits funds. The transparency of the price investors pay for Ucits funds is becoming clearer and in a high-inflation environment producing good yields is becoming more challenging. This is putting pressure on promoters to drive scale efficiencies into their products and it is resulting in re-domiciliation where a promoter wants to consolidate funds.
Pervaiz Panjwani, Citi: A recent study revealed that 80% of institutional investors canvassed didn’t really care about whether the fund they invested in was domiciled onshore or offshore.
That the percentage was that high came as a bit of a surprise to me because I think all of us have had numerous discussions with asset management clients about re-domiciling to new jurisdictions, due mainly to increased regulation. Statistics show that market share for domiciles such as the Cayman Islands have pretty much stayed the same between 2008 and 2010.
On the Ucits and traditional fund side there is some re-domiciliation going on and it is certainly in favour of Luxembourg. What has played into Luxembourg’s hands is the stable and healthy financials of the Grand Duchy.
Today, this matters to asset managers; simply, it makes their sales process easier, even though there is no direct link between a sound investment funds business and a country’s credit rating. Nevertheless, retail investors do make that link sometimes.
Frankly, the Chilean issue [where Chilean pension funds were discouraged to invest in funds domiciled in countries below a certain credit rating] has, unfortunately, impacted on our competitors in Dublin and that’s why there are a couple of rather sizeable funds re-domiciling to Luxembourg.
Georg Lasch, BNP Paribas: Both Luxembourg and Dublin have taken steps to facilitate the re-domiciliation of funds – particularly alternative funds – because investors want their assets put into safekeeping in a well-regulated jurisdiction. They probably lean more towards Luxembourg because it is seen as being ‘best prepared’ for the arrival of the Aifm directive.
But the majority of re-domiciliation, I believe, is still to come pending the directive’s final approval. We do see some re-domiciliation already, but it’s a very small proportion of assets.
Within the alternative space, in terms of new products, fund promoters are looking much less towards offshore, unregulated jurisdictions as they know that the Aifm directive is coming. Perhaps it’s slightly different for US and Asian promoters, because they are very much more used to unregulated centres.
Within Ucits, we’ve seen a very strong trend towards aggregation, which has an element of re-domiciliation. Luxembourg is probably the best location to put funds into – that’s the consensus of the past and it’s continuing.
But there is one negative for Ucits: Asian fund promoters have stopped the trend seen through 2009, 2010 and the beginning of 2011 of re-domiciling products in Luxembourg for distribution into Asia. This is due to the debt crisis, which hit their confidence in the European market.
Barry McGloin, Caceis Investor Services: One of the definitive moments in Luxembourg was in July 2004 when you could actually list a hedge fund-like strategy on the Luxembourg Stock Exchange. That transition really opened up the landscape because historically Luxembourg had been the domicile for pan-European [retail] distribution, whereas Ireland had been institutionally client based. But Luxembourg then became quite attractive for a number of hedge fund managers who wanted to tap into our knowledge base about Luxembourg’s end investors.
I agree that asset managers may not be thinking much about re-domiciliation, but they will be concerned about where clients want to invest and we may find that some investors are restricted from investing in certain strategies and certain locations.
I believe Cayman will certainly prevail for non-taxable persons and US taxable persons. But the European regime under the Aifm directive will also put in a framework for other types, particularly EU investors. European institutional investors have had pressure over the last couple of years to ensure that they put their end-investors’ money into regulated vehicles. They’ve had to pull back their allocation in core hedge fund strategies and put it into hedge fund-like, or more lightly regulated vehicles. That sits nicely with Luxembourg.
Olivier Renault, Societe Generale Securities Services: Asset managers last year were focused on the technical issues of Ucits IV, such as the Kiid [Key Investor Information Document]. Plans this year focus on domiciliation, and fund managers will use the different tools of Ucits IV to do this.
There are some projects going on to create master funds in Luxembourg and feeder funds in target countries where they want to distribute.
Surprisingly, we also see some clients working on cross-border mergers despite our expectation that there would be a lot of tax issues about these.
We also see French asset managers making strategic moves to domicile or re-domicile their funds in Luxembourg. It seems they are starting to understand that Luxembourg could help them with distribution.
It’s too early to imagine what will happen with alternative funds. However, Luxembourg is used to managing complex funds and should benefit from the convergence between alternative, or non-regulated, funds and Ucits funds.
Danloy: Regarding the issue of master-feeders, we have a client with master-feeder structures across various European countries and we have at least five clients looking at setting them up. One of the challenges for Luxembourg is to see that the master funds for these new structures are domiciled here and not in other European countries.
Lasch: I expect that the trend for master-feeder funds will hasten over the next two to three years. People will reorganise and aggregate their assets through master-feeder structures.
Edge: I agree. It doesn’t help that not every country in Europe has finished transposing the Ucits IV directive, so that’s still an impediment to a pan-Europe master-feeder structure.
Funds Europe: Asia is important to the Luxembourg Ucits story. How is Asia’s perception of Europe changing due to the euro crisis?
Panjwani: The Ucits brand, in the eyes of our partners around the world, stood for simplicity and transparency, but in several cases we have noticed that some Asian regulators find it difficult to understand ‘sophisticated Ucits’ [a Ucits fund using more complex instruments and strategies] and that had some impact on the brand. It may have played into the hands of some of our competitors in that region who are speeding up the process of creating their own Asian Ucits brand.
However, I disagree that there are few Asian asset managers looking at establishing Ucits now. I think that trend is still going to continue, not just because they want to use the product to distribute into their region but, let’s remember, they still want to have a share of the European investment flow, too. Even though we’re in the middle of a crisis there are still a lot of interesting opportunities in Europe.
Lasch: Completely outside our direct control, the sovereign debt crisis has just created an image of higher risk within the European market. Asian investors have a trading culture and quite often a short-term horizon, so they will react extremely quickly to news. Asian investors were probably the first ones to ask questions – that’s the reason that they’ve probably postponed projects if not abandoned them.
Edge: We shouldn’t forget that something like 50% of the assets held in Ucits come from outside the EU and those investors are increasingly asking why they should pay the cost of regulation designed to protect the European investor. We are in danger of pushing those investors into the arms of those seeking to establish a regional product in Asia.
Danloy: Ultimately, I think we have demonstrated in Luxembourg over a very long period of time a very stable tax system and infrastructure around investment funds. Luxembourg still has a stable environment, it’s probably very different from the rest of Europe and is still offering the right conditions to set up and structure products.
Edge: But it may not be able to resist the pressure to adopt a financial transaction tax. That could be very dangerous in terms of pushing cost into products that an Asian investor is not prepared to pay.
Danlo y: At this point in time it’s more like one man against the rest of Europe over this issue, so I am not sure this is the direction Europe will take.
Panjwani: But I think we need to face the fact that we are impacted by the European financial crisis. I have personally joined a number of these financial industry workshops around the globe in the past few months and I have noticed that our pitch has changed. Whereas before we could just focus on marketing the Ucits brand, now we have to spend a lot of our time explaining the debt crises in Europe. Equally, we have to explain the sound financials of Luxembourg as a country to regain credibility before we can talk about Ucits. That wasn’t the case before.
Lasch: Saying that Luxembourg is a part of Europe used to be a positive factor. Today, that has turned into a slightly more negative spin. We should be explaining that although we are in Europe, the stability we have is a self-sustained stability in that it’s not dependent on Europe as such.
Renault: Clearly, we need to give more information about the eurozone, but I’m not sure that the brand name of Luxembourg has been hurt by the turmoil.
I think that, for example, as a French actor often we have to justify the whole situation in Europe and in France, but we never need to justify the brand name of Luxembourg.
End of part 1
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