Roles and responsibilities

There are various key areas of responsibility within the investment management industry.

Distribution, sales and marketing

Investment funds are typically made available to investors through banks, independent financial advisors and life assurance companies. They can also be distributed directly by the fund management company. There are clear guidelines about how an investment fund can be marketed and all fund literature, before and after a sale, must comply with the regulations. Financial advisors are qualified to provide an investor with advice and recommendations on their specific needs and will offer their clients access to a wide range of investment funds. Banks and life companies may offer only funds managed by their own group, or may give their customers access to a wider choice of funds from different providers. A fund management company will only sell or redeem shares in its own funds.

Asset and risk management

Fund managers decide how to construct a portfolio of assets that will achieve the fund’s particular investment objective. The portfolio of underlying assets must adhere to the parameters outlined in the fund’s prospectus. The fund manager often uses the specialist expertise of analysts to identify investment opportunities and highlight new trends. Analysts and fund managers tend to focus their expertise and research on particular asset types, sectors or regions and therefore have a comprehensive knowledge of their specialist field.

The fund manager takes responsibility for the investment decisions. A risk management process must be employed that enables the UCITS fund to monitor and measure at any time the risk of its positions. In taking the investment decisions, the fund manager must ensure that the investment fund remains within its investment limits and does not exceed its risk boundaries, including any use of derivatives or borrowing; the decisions are reviewed by risk specialists. The fund manager’s decisions are implemented by dealers who execute the manager’s orders to buy or sell assets. Dealers work with a wide variety of asset types and always seek to buy or sell assets for the fund at the best possible prices.

Administration

Operations and administration staff are responsible for all the ‘back office’ processing that keeps the wheels of the investment fund industry turning. Their roles include fund performance measurement and dealing and settlement, as well as calculation of the Net Asset Value and administration of client accounts. UCITS funds also have an independent custodian bank whose responsibility is the safekeeping of the fund’s assets. The administrator has no responsibility for selecting or managing assets.

Oversight and regulation

The custodian bank is a service provider to the fund but also part of the framework of supervision and oversight. A further layer of protection comes from the investment fund’s annual audit, carried out by independent auditors who confirm that the accounts and results published in the annual financial statements give a true and fair view of the fund’s financial position.

Members of the fund industry, including not only the fund itself but the management company, administrator and custodian, are subject to supervision by the national financial regulator, in Luxembourg’s case the Financial Sector Supervisory Commission (CSSF). In certain cases the European Commission in Brussels can also step in to protect the interests of investors if the rules of the EU single market are being broken. For example, the Commission has taken legal action to prevent investors being forced to pay higher taxes on investments from other European countries.

Industry organisations

ALFI is Luxembourg’s fund industry organisation bringing together investment funds and the many different types of companies that are involved in managing funds in Luxembourg. Other countries have similar organisations, which may also belong to EFAMA, the European Fund and Asset Management Association, which represents the industry in dealings with the European Union and represents the industry on the global stage. There are also national and European associations of investors and shareholders that help support the rights and interests of investors.