Digi Pulse Asia conference report 2022

Asian managers strengthen Luxembourg connection as they take on sustainability challenge

As signs emerge that the impact of the Covid-19 pandemic on the global economy and the financial services industry is easing, the focus is turning to evolving regulatory requirements and in particular sustainability rules, according to speakers at the ALFI Digi Pulse Asia events held in Hong Kong, Singapore and Tokyo from 25 to 27 January 2022.

While the European Union is taking the global lead on ESG assessment and disclosure, that also affects the many Asian asset managers with Luxembourg-domiciled funds, the online audiences heard. For instance, countries including China, Indonesia and Malaysia as well as financial institutions across the Association of South East Asian Nations are all engaged in drawing up taxonomies of sustainable activities.

Stéphane Karolczuk, a partner with Arendt & Medernach and co-chair of ALFI’s working group in the territory
Valerie Mantot-Groene, Apex Group regional managing director

The ALFI Digi Pulse events, focusing on Hong Kong, Singapore and Japan, brought together participants in Luxembourg and elsewhere in Europe with asset managers, service providers and other experts based in Asia. The session for Hong Kong was chaired by Stéphane Karolczuk, a partner with Arendt & Medernach and co-chair of ALFI’s working group in the territory; Apex Group regional managing director Valerie Mantot-Groene chaired the Singapore event and heads the working group there; while Andrew Gordon, managing director for Asia at RBC Investor and Treasury Services and also co-chair of ALFI’s Hong Kong group, chaired the Japan session. The Singapore and Hong Kong working groups welcome any interested participants.

Robust regulation

Nelson Chow, chairman of the Hong Kong Investment Funds Association

Luxembourg funds play a major role in Asian markets – they make up 75% of non-locally domiciled funds sold in Hong Kong, notes Nelson Chow, chairman of the Hong Kong Investment Funds Association, thanks to the Grand Duchy’s reputation for a robust regulatory framework and focus on investor protection. And he points out that new distribution opportunities are opening up such as the Wealth Management Connect scheme, which brings institutions together with millions of investors across the Greater Bay Area encompassing China’s Guangdong province, Hong Kong and Macau.

A key attraction for asset managers in Asia and elsewhere that are running or plan to establish funds in Luxembourg is the country’s regulatory framework – which demonstrated its value during the period of extreme financial stress at the onset of the Covid-19 pandemic.

Marco Zwick, Director of the Luxembourg Supervisory Authority, the CSSF

Marco Zwick, Director of the Luxembourg Supervisory Authority, the CSSF since 2018, says that while temporary difficulties experienced by some funds were speedily eased by existing liquidity management tools – an approach pioneered by Luxembourg, he points out – the crisis offered lessons not just about less liquid strategies but broader systemic risk issues.

As part of a wider initiative by the European Securities and Markets Authority, the CSSF has been conducting a survey of 26 managers in charge of more than 2,600 sub-funds looking at issues such as organisational requirements for asset valuation and managers’ processes and procedures as well the liquidity of assets.

Delegation model

Mr Zwick expressed satisfaction that the European Commission’s recent review of the Alternative Investment Fund Managers Directive has not resulted in disruption to the delegation model that enables portfolio management of Luxembourg-domiciled funds to be conducted by firms outside the EU, including groups based in Asia.

The review has highlighted areas of the AIFM that might be improved, says Mr Karolczuk, in terms of substance at ManCos. However, he notes that some of these changes – which will not take effect until 24 months after they are approved by the EU Council and European Parliament – mirror measures already in force in Luxembourg, including the CSSF’s 2018 Circular on the authorisation and organisation of investment fund managers, which sets out applicable substance requirements. Asset managers will also be required to explain and justify their motives for delegation of core functions.

Gast Juncker, a partner with Luxembourg law firm Elvinger Hoss Prussen

Gast Juncker, a partner with Luxembourg law firm Elvinger Hoss Prussen, notes that other regulatory changes in the EU or the Grand Duchy with an impact on the fund industry cover  areas including anti-money laundering controls, the eligibility of special purpose acquisition vehicles as eligible assets for UCITS, the CSSF’s announcement on virtual assets – AIFs may invest in them directly, but UCITS are restricted to securities of companies in the digital asset market – and new rules on pre-marketing under the Cross-Border Fund Distribution Directive.

Currently the CSSF is overseeing the adoption by asset managers with Luxembourg funds of new EU sustainability legislation, notably the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. “Some of the non-financial data on investee companies is not yet available,” he acknowledges, “but asset managers can already start working with what they have.” With the entry into force of detailed SFDR regulatory technical standards at the beginning of next year, Mr Zwick says, “it’s not just about regulation and a change in culture, in Europe but also internationally.”

Real-world impact

Guillaume Perrot, head of middle office at Hong Kong-based JK Capital Management

For Guillaume Perrot, head of middle office at Hong Kong-based JK Capital Management, sustainability entails “integration of environmental, social impact and governance considerations into the whole investment chain and quantifying those claims”. But he notes the significant change of managing funds in Europe that invest in countries where the embrace of ESG considerations is at a very different stage.

Kenneth Robertson, Robeco’s sustainable investment client portfolio manager

Robeco has a 45-strong sustainability team responsible for areas for research and active ownership that supports the firm’s investment teams, says sustainable investment client portfolio manager Kenneth Robertson. He says that, like other asset managers, the group is pivoting away from integration of sustainability into strategy toward assessment and measurement of the real-world impact of its investments.

Martin Mager, Linklaters’ partner

In less than a year, the classification of funds under articles 6, 8 and 9 of the SFDR have become labels, according to members of the Digi Pulse Asia panels – and this has prompted a switch by asset managers over the course of last year. Whereas there is evidence that initially firms were adopting a cautious approach and classifying funds under Article 6, without claiming sustainability characteristics, now Article 8 funds are regarded as a marketing necessity because of demand from investors, says Linklaters’ partner Martin Mager.

Karine Hirn, a partner at Stockholm’s East Capital

Article 8 funds have now become the standard and account for 80% of fund sales in Sweden, argues Karine Hirn, a partner at Stockholm’s East Capital. But Kazuko Funakoshi, a fund manager at Tokyo-based Asset Management One Alternative Investments, cautions that it will be more challenging for asset managers to meet the exacting requirements of the SFDR level 2 disclosures from next year to justify their Article 8 status. It is a “huge step from level 1,” agrees Robeco’s Robertson.

International reach

Michael Chow, managing director of Fullgoal Asset Management (HK)

Over the past two decades, Asian asset managers have increasingly identified Luxembourg as the ideal domicile for funds to be distributed not only in Europe but in other regions such as the Middle East and Latin America. “When we were expanding into the international market, establishing UCITS funds in Luxembourg was our first choice,” said Michael Chow, managing director of Fullgoal Asset Management (HK), part of a leading Chinese fund group. “It enabled us to take advantage of the local ecosystem to outsource functions such as the management company and transfer agent, and to reach investors worldwide.”

Starting in September 2016 with a first fund, a mid-cap growth strategy, and $10m in assets, Fullgoal now manages more than $600m in Luxembourg and has soft-closed the fund after enjoying growth of 111% in 2020; it is now planning to launch further sub-funds including a mid- to -large-cap equity fund.

Simon Shen, a fund manager with Hines Asia Property Partners

According to Simon Shen, a fund manager with Hines Asia Property Partners, the group established its first Luxembourg fund in 2001 and now has 25 investment vehicles with $6bn in assets, including managed accounts. “We established our first European funds in Luxembourg because it was clearly ahead of other jurisdictions in terms of taxation, regulation, law and infrastructure,” he said.

Third-party provider ecosystem

Initially Hines drew upon the breadth of third-party service providers, but over the years it has brought more functions in-house, such as establishing a licensed AIFM and performing other fund services, and now has more than 50 staff in the Grand Duchy. “I would recommend other new managers to draw on the expertise available in Luxembourg while they see how the business grows,” Mr Shen said.

Christopher Yik, EMEA head of product at Nikko Asset Management Europe, says the Japanese group first established Luxembourg funds in the mid-1990s because it wanted to set up UCITS as “the gold standard of regulated funds”. With the ability to passport funds across Europe and achieve distribution in Asia, he says asset managers can benefit from economies of scale rather than having to create multiple duplicate vehicles for different markets.

That said, Mr Yik notes that in Luxembourg Nikko has established both SICAVs, whose corporate structure is familiar to investors in many global markets, but also contractual FCP funds, which are favoured in countries such as Germany, France and Italy. A key advantage for the Grand Duchy, he says, is the attitude of the CSSF: “The regulator is very supportive and open to consultation – and at the cutting edge in spotting trends.”

With some pandemic restrictions still in place – particularly in China and Hong Kong – the asset management industry in Asia continues work around the constraints on face-to-face contact with clients and business partners. However, the longstanding close working ties with Luxembourg’s fund industry have been maintained and developed through online communication channels, and they are set to strengthen further in the future as the fund sector plays its part in addressing the global climate challenge.

Thank you to our sponsors