Luxembourg offers plenty of opportunities for investment managers, but cross-border distribution is not without its complexities. Sascha Calisan, Head of Fund Distribution Support at Northern Trust, highlights the key themes and challenges.
Why is Luxembourg such an important fund centre?
36% of assets contained in UCITS funds are domiciled in Luxembourg1. That’s €3,473 billion in assets, making it the largest distribution centre outside of the US, and is mainly due to their expertise of launching a diverse range of international funds. Historically, it was dominated by European players, but is increasingly attracting international managers looking to launch into the European market.
What are some of the challenges of distributing into Europe?
There are three key challenges, in my opinion, starting with raising assets in an extremely competitive environment. There are more than 4,0002 managers offering over 3,2003 investment products in Europe, so managers need to stand out from the crowd. It is not enough to launch a product. You have to be able to sell it, and that means coming up with a strong distribution and sales strategy.
The second issue is cost. It is about understanding the true cost of cross-border distribution, and not just looking at annual regulatory fees. With a UCITS framework it is easy to assume that costs will remain consistent across Europe, but each individual market will have different legal, regulatory, and tax agent fees. The costs of marketing and building your brand will be significant as well.
The third challenge is around governance and oversight. There have been multiple regulatory developments in Europe, and in July the Central Bank of Ireland’s Fund Management Company Guidance (CP86) took effect, requiring managers to create governance frameworks that will impact distribution channels and manager responsibilities for oversight. Management companies need to do their due diligence on the entities they are working with.
So what should managers do?
Europe is a disparate market. Rather than registering in every jurisdiction and adopting a scattergun approach to target the most clients, it is sometimes worth adopting a more focused approach. Targeting markets and channels offering the most potential for your strategy can really help keep costs under control.
It is also important, from a cost perspective, to understand who your distributors are, and what value the platforms you onboard with provide. Getting the ‘plumbing’ right – registering your fund and getting on a platform – is really only the first step. Creating a dynamic sales plan, understanding cultural nuances and getting to grips with which distribution channels will really work for you, is the bigger challenge.
How do managers meet these challenges?
Understanding the complexities and working with partners who have local knowledge can really help. Northern Trust, for example, leverages our scale and expertise to provide Distribution Support services, helping clients with their sales and distribution goals. We have an Onboarding service, supporting clients entering new markets or needing to on-board with a fund platform efficiently. We are also planning to offer an Oversight component, to help clients oversee their distribution network in response to regulations like MiFID II and CP86.
Fund managers should work with partners who offer customised and focused support for their business and asset growth ambitions, but who also bring insight into managing costs and operations, and help with the regulatory burdens around distribution. For fund managers who get this right, there is everything to play for.
1 – Trends in the European Investment Industry in the First Quarter of 2018, www.efama.org
2 – EFAMA Asset Management Report, May 2017, www.efama.org
3 – EFAMA, ‘Quarterly Statistical Report’ Q1 2018, www.efama.org
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