Camille Thommes, director general of Luxembourg investment funds association Alfi, writes about the role of the funds industry in the wider economy and why financial education is crucial.
Investment funds are an indispensable component in the financing of the economy. Through funds, companies and projects receive financial resources that other sources in the financial industry often cannot provide with the same efficiency or at the right time.
Investment funds can mitigate crisis effects (think pandemic relief) by allowing asset managers to fully play out their interface role: they can help to channel investment flows from around the world into local projects and, at the same time, offer our citizens the opportunity to invest in other parts of the world.
In order to support non-bank corporate finance, at Alfi, we see an ever-growing importance in providing individuals with easy and practical investment solutions while unlocking untapped money to fuel crucial societal projects. It is in the very nature of an investment fund to enable small amounts to make a big impact, and as a result, retail investors play an important role in this context. We are convinced that long-term savings, and pension products in particular, will become more and more important in our industry. In the EU, the keywords here are PEPP and Eltif.
By strengthening Eltifs, or European Long-Term Investment Funds, the aim is to attract retail investors to invest in small and medium enterprises alongside institutional investors such as pension funds and insurers. As transparent, strictly regulated vehicles for alternative investments – such as in SMEs that need long-term capital, but also in infrastructure, for example – they could have the potential to become the recognised brand for illiquid investments that Ucits has long been for liquid investments.
The pan-European private pension product (PEPP) is designed to make the much-cited pensions gap, a serious issue and growing concern in many European countries, part of the solution, addressing worries about ageing societies and citizens’ financial wellbeing in later life. The importance of placing pension systems on different pillars has been explained many times, not least by our association. The three pillars of state, occupational and private pension provision quite literally ensure the stability of European economies. The PEPP is intended to further expand the third pillar, which will in turn result in more first-time individual investors. This can afford big opportunities, but good products will be required, coupled with attractive ways of accessing them, and the industry must work to enhance knowledge of financial products across age groups.
Besides financial education, another factor appears paramount in the context of today’s investors and their demands: we see that investment funds are increasingly used for their leverage that can be targeted at a purpose. Because investment managers must invest a fund’s assets in accordance with its defined investment strategy, investors can use their money to pursue their ideas and goals – not only those of a financial nature, but also idealistic ones. The huge choice in investment funds also extends to their policy and orientation. In addition to this element of transparency, the long-range perspective of a fund means that its shareholders can influence decisions in the financed companies and be instrumental in determining the direction of the supported project in the long run. The more robust the investors’ purpose and financial education, the better it is not only for them individually, but for the economy as a whole.
By making investing easier and more attractive for all, such as through safe, transparent products like the PEPP, our industry can enable more financially inclusive, resilient societies across Europe, greater prosperity in old age, and at the same time unlock capital for the shift towards sustainable and crisis-proof economies.
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