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Supplements » Luxembourg Report 2021

Roundtable: Back in the office


Funds Europe – Has the full impact of Covid-19 on the funds industry begun to be truly realised?

Nicolas Mackel, Luxembourg for Finance – Beyond the operational aspects, the second question may also touch more on general economic perspectives. We can discuss at length what will happen economically, how the consequences and the scars of this crisis will impact the funds industry, but really the magnitude of it is really something that we can only speculate on.

I think currently we live in a world that is basically on life support, still benefiting from both the direct aid of different governments, the indirect aid of central banks, and hopefully by the summer or shortly thereafter the first payments will be made by the European Recovery Fund, which also should give our economies some boost. Hopefully, the light at the end of the tunnel is progress with vaccinations. Possibly, it is from the asset managers that we should get the most interesting insight, how they within their different houses see the perspectives of the impact of this crisis, whether in economic terms or in investment terms, playing out.

Forelli – Yes, we have focused so far on operational smoothness and solidity, but it is very important to remember that although Luxembourg sometimes tends to be seen as a compliance, risk management and oversight centre, in reality it’s an enormous centre of value-add in terms of investments.

There are currently around US$17 trillion (€14 trillion) of bonds yielding negative rates, therefore there is some concern that a degree of tapering of all this liquidity – which has helped rescue the situation from that famous weekend of March 16 – will start. Liquidity is what helped operations run smoothly and helped sustain markets last year, despite all the challenges in the real economy.

There may be good lights at the end of the tunnel with the vaccine rollout, but it is still uncharted seas for the economy and our role is to help our clients navigate this situation.

Kaveh – The market crash around Covid-19 was faster than those of 2011, 2008 and 2001. It was the quickest ever registered. It was the worst slowdown since the Great Depression and we were all affected at a personal level, making it very different to 2008 and 2011.

Yet fund performance was good towards the end of the year, in terms of returns and fund flows, albeit with big dispersions in asset class and between fund managers, some of whom had bad flows. But economically, there is a big question still to be answered. The global situation is not clear. My sister in Singapore lives in a country where you can today go into restaurants, a situation that is back to normal. In Asia you could observe a big economic rebound. But are we in Europe able to observe this? After experiencing something in 2020 that we all have never ever faced, I think 2021 is very difficult to model.

Noel – It is difficult to assess the long-term impact on the economy. Yet, at the same time, the low interest rate environment that we are seeing at the moment makes, in my view, investing into funds more appealing, especially for alternative investments which are less correlated to equity markets, and therefore I’d like to think that some of this may make the funds industry more appealing to investors. This is potentially something positive.

Something that is important from the asset servicing standpoint is the acceleration of digitisation that we have seen over the past year to optimise operational processes, manage data and strengthen resiliency. Many people would not have thought a year ago that it would be so efficient to work from home full-time, yet we can. We still have fund promoters able to reach an investor without travelling around the world. A new way of doing business has emerged drawing on digital communication channels. This is a positive development which will accelerate this year.

The last thing potentially in relation to some of the long-term impacts of Covid-19 is the ESG theme. As a community, as a whole we have all become more sensitive to ESG and it is likely in my view to be translating into more ESG investment. The view that good returns and positive impacts for sustainability are mutually exclusive has gone, in my view, and there is a clear indication that both go hand-in-hand.

Bechet – Policymakers have had a close look at some of the vehicles and there is a debate now on money market funds (MMFs), which is driven by negative interest rates. On the one hand, the industry has said that existing regulation works well, but policymakers perceive that central banks have salvaged funds through their support. Probably the reality is a bit inbetween, yet IOSCO [the International Organization of Securities Commissions] has already announced further work and recommendations on MMFs. This is something to watch.

A second element, and which was a response to the crisis in March, was the use of liquidity management tools – so swing pricing, gating and other techniques. There I think Luxembourg is extremely well positioned because there is a long track record of usage of these techniques. However, Esma [the European Securities and Markets Authority] has stepped in with an intention to harmonise rules across Europe. Again, this is something to watch for.

There is also a perception and probably some evidence that sustainable funds have been more resilient. Morningstar data at the end of 2020 showed a huge inflow into sustainable funds. The statistics are really quite compelling. This is now the highest ever amount of money in sustainable funds, some $1.6 trillion. These assets increased in the last quarter by 29% compared with the previous quarter, with 80% of this flow coming from Europe. This also suggests some confirmation of the validity of the European Commission’s Plan for Sustainable Growth and this all links to the Capital Markets Union Plan 2.0, where the Commission understands that in order to reboot the economy post-Covid, the capital markets and the funds sector will be really key. We might say that this is all good news for the industry.