24 September 2021
Like the investment fund sector as a whole, ALFI has had to rethink how it operates over the past 18 months, according to chairwoman Corinne Lamesch. While the fund industry association’s Global Distribution Conference, organised in partnership with US counterpart Nicsa and the Hong Kong Investment Funds Association, took the form of a virtual event for the second consecutive year, Ms. Lamesch says she is “cautiously optimistic we will be able to see each other again soon in person”.
The conference attracted more than 800 registrants, indicating that like the industry itself, ALFI has successfully negotiated an environment complicated by health-related restrictions. In the past 12 months Luxembourg fund assets have grown by 20% to more than €5.5 trillion, a sizable share of a global investment market that has itself grown to $100 trillion.
The industry in Luxembourg is in the process of transforming itself in two significant ways:
First, it is embracing advances in information technology, from smartphone apps to artificial intelligence anticipating customer needs, that are already starting to bring substantial efficiency gains while easing and enhancing the investor experience.
Then, an even bigger shift is underway with the rise of sustainable investing, notably but not exclusively involving aligning investments with the Paris Agreement goal of keeping global warming below 2ºC. That goal is, in turn, adding to the volume of new regulations with which the industry must comply, starting this year with the Sustainable Finance Disclosure Regulation and the EU taxonomy for sustainable activities.
Sustainable finance may have developed further in Europe but it is gaining momentum as well in the United States, argues Howard Marks, co-founder of Oaktree Capital Management and a much-followed investment luminary. “No longer is the only responsibility of corporations to make money for shareholders,” he told conference delegates. “That’s what ESG is – more than just portfolio returns.”
Sustainable funds have more than doubled their share of total industry assets between 2018 and June this year, says Arnd Heßeler, head of the Luxembourg office of financial services specialist zeb consulting, also noting that annual growth in the grand duchy is running at 23% compared with 15% for the rest of Europe. Hortense Bioy, global head of sustainability research at Morningstar, says a switch is already evident to categorisation of funds under articles 8 (“light green”) and 9 (“dark green”) of the SFDR, and these categories could reach half of the total by or before mid-2022.
Communicating with customers on the sustainability of their investments will become even more important in the future – especially with those younger customers eager for ESG products. “Asset managers must respond to clients’ demands and use social media to engage with people who want to make their money do more,” says Campbell Fleming, chairman of impact investment fund platform The Big Exchange.
“ESG is now a hygiene factor,” he notes, but acknowledges there’s a long way to go: “More people in the UK own crypto-currencies than funds, let alone sustainable ones.” He is echoed by Chris Chancellor, senior director for global insights at Broadridge, who says: “ESG is lighting a fire under the demand for transparency.”
Carne chairman John Herlihy insists the industry must “get in the minds of customers or get left behind”.
With the fund industry facing new, technology-driven competitors for savings and investment, from eToro to Revolut, he says: “The future owners of European wealth are spending time on TikTok and Instagram. You have to be where the eyeballs are.”
However, conference participants are convinced Luxembourg will remain a focal point of the industry, thanks to its readiness to adapt to market changes and to embrace new technology such as blockchain.
Jack Wang, a fund manager at Japan’s Asset Management One Alternative Investments, says: “We chose Luxembourg as a domicile because we thought it would benefit investors. We liked the AIFMD governance requirements, the fact it offered access to the EU single market and the benefit of the country’s network of tax treaties. We are confident we made the right decision.”
So despite the turbulence of the past few years, Luxembourg’s fund industry remains buoyant and has retained its appeal to the world’s major players. Conference speakers praised the adoption of technology, the openness to sustainable finance and the certainty offered by the EU’s AIFMD directive as key reasons for establishing funds in the grand duchy.
However, industry members and regulators hope that the much-vaunted review of the AIFMD directive will result in largely technical adjustments, rather than the more far-reaching and intrusive changes to supervision of cross-border funds sought by some EU member states. Whatever the adjustments, Luxembourg with its 20% increase in AUM, is in a strong position for the year ahead.
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Make sure to have the next edition of the conference marked in your calendar. It will take place on 22 September 2022.
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