Growth under pressure in a volatile environment

30 Jan 2019 | Press Releases  


ALFI presented the figures of 2018 as well as the opportunities and challenges for the asset management industry in 2019.

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ALFI continues to report high levels of assets under management (AuM), ending the year 2018 at €4,064.64 bn.

  • With €105 bn of net sales, Luxembourg managed to record 45% of all net sales in Europe – a strong testimony of investors’ continued trust in the Luxembourg domicile (data as of November 2018)
  • Luxembourg ETF units have increased by 30%, ETF AuM by 56%
  • While UCITS maintain their appeal as a core product for Luxembourg, alternative asset classes continue to experience robust growth:
    • 17% increase in AuM for private equity funds
    • loan funds have increased by nearly a quarter
    • Luxembourg remains the favoured location in Europe for multi-geographical and multi-sectoral regulated REIFs
  • Very strong rise in the number of RAIFs, with a total of 575 funds

Denise Voss, Chairman of ALFI, explains: “In 2018, the Luxembourg fund industry held a steady course, despite volatile markets. Luxembourg thereby remains the largest fund centre in Europe, the second-largest in the world and the leading centre for cross-border investment funds.  Whilst we expect volatility to continue given the geopolitical environment, and therefore growth to be under pressure, Luxembourg remains attractive as a domicile.”

She continues: “The RAIF has further boosted the appeal of Luxembourg as a domicile for alternative funds – 248 new RAIFs have been created over the year.”

ALFI sets out its priorities for 2019:

Regulatory developments

ALFI continues to actively engage with policymakers on key issues such as the ESA review and to provide solutions for asset managers in the context of Brexit.  In 2018, ALFI responded to 15 consultations and issued 15 publications, guidelines, white papers and studies – on topics as varied as EMIR, PRIIPs, GDPR, risk management, AML/CFT and tax – not only to explain the view of the industry but also to help its members with the implementation of legal, regulatory and operational requirements.

Denise Voss says: “Most firms have been preparing for Brexit and have put in place plans for each scenario, over the past months including a “no deal” exit. One thing to bear in mind is that, from the end of March, UK UCITS will qualify as AIFs in the case of a “no deal” scenario. This is an additional challenge for fund management companies with UK products.”

She continues: “The Luxembourg fund centre has a long-standing relationship with the UK, evidenced by the fact that over 18% of AuM in Luxembourg funds are managed by UK-based asset managers. UK fund initiators remain very active in Luxembourg, accounting for 41% of all new fund units created in 2018. Our efforts focus on how we can continue this constructive relationship even after Brexit.”

23 UK-based asset management firms have publicly announced that they will create or reinforce their presence in Luxembourg to “Brexit-proof” their business.

ALFI welcomes the press release issued by the national competent authority in Luxembourg (CSSF), in which it confirms that the required cooperation with the FCA as its UK counterpart shall be in place on 29 March 2019 in the event of a “no deal” Brexit. Delegation to UK delegates shall thus continue to be possible, on condition however that the UK delegates meet all applicable requirements.

While the EU Commission’s Proposal of September 2017 on the review of the European Supervisory Authorities (ESA) and the Brexit negotiations are in principle separate, the link between them is undeniable. 

Denise Voss states: “ALFI has never seen the benefits of these proposals for the end investor. We do not embrace direct supervision by ESMA, as we believe that close oversight of market participants and products by national competent authorities guarantees the best and most efficient level of investor and market protection. Furthermore, we are very concerned about the proposed review by ESMA of delegation arrangements and outsourcing to third countries. This would introduce an extra layer of regulation, additional costs, delays in time to market and uncertainty. Delegation has been a tried and tested practice in the fund industry for 30 years, and there is no evidence of a market failure resulting from delegation. The delegation model is a cornerstone of the global success of the European asset management industry and as such provides investors with access to expert asset management from around the globe.

“We haven’t stopped calling for a significant change in the EU Commission’s Proposal and have engaged intensively with important stakeholders in Europe and internationally to express our concerns about this proposal.”

Sustainable finance

ALFI has been an early mover in actively promoting responsible investing opportunities for asset managers. Convinced of the opportunities for and the key role of asset management in fostering sustainable finance, ALFI supports the EU Commission’s Action plan on Sustainable Finance and is closely monitoring the first concrete regulatory proposals.

Anouk Agnes, ALFI Deputy Director General, comments: “Speed is picking up in the area of sustainable finance, which is very positive as there is urgency to progress, notably on climate related matters. Work on regulation related to sustainable finance will be a top priority for ALFI in 2019, with a view of encouraging market growth while at the same time making sure the texts work in practice and that they do not become too prescriptive or stifle a very innovative market.”

Luxembourg is already the leading fund domicile for responsible investment funds in Europe[1], accounting for 31% of funds and 39% of total AuM in European responsible investment funds.

ALFI welcomes the EU Commission’s first legislative proposals published on 24 May 2018[2], as they tackle transparency and provide more clarity in the market. Information and trust are at the heart of the continuous development of the sustainable finance market, i.e. to fight misleading information (”green-washing”).

ALFI believes that sustainability factors should be taken into account in investment decisions when it is in the best interests of the client. In addition, applying sustainability risk to the investment process is an important risk management tool which helps to focus on investment performance over the long-term.

Finally, ALFI also cautions against restricting the sustainable finance investment universe available for EU asset managers and EU funds as a consequence of regulatory requirements, which would create an uneven playing field in comparison to non-EU managers and funds.

The pan-European personal pension product (PEPP)

ALFI sees the pan-European personal pension product (PEPP) it as an interesting opportunity for asset managers. European households must increasingly assume responsibility for their own financial well-being and long-term savings, including retirement. At the same time, if the European economy is to be strengthened, workers’ mobility must also increase. Fragmentation between national markets and limited portability of personal pension products however make this difficult as present.

Denise Voss comments: “The EU Commission’s plan to create a standardised PEPP comes at the right time. The PEPP will link the investment product to an individual rather than to an employment relationship and provides interesting opportunities not only for workers, but also for the asset management industry. Interestingly, funds themselves are eligible providers to structure pension funds under the PEPP, which is a tremendous opportunity for the asset management industry. We believe that Luxembourg, with its long-standing expertise in cross-border distribution of retail investment products, is an ideal hub for PEPP providers.”

International distribution

Camille Thommes, ALFI Director General, states: “One particular highlight in 2018 was ALFI’s 30th anniversary, as we celebrated the work we’ve done over those years to make Luxembourg the domicile of choice for cross-border investment funds. We continue to explore markets around the world and open new opportunities for funds. This year our roadshow plans include the US, Latin America and a number of South East Asian countries.”

Interest in UCITS continues to increase in markets around the world. Non-European markets account for 24% of UCITS assets[3] with Asia representing 13% of cross-border assets.

ALFI expects UCITS and AIFs to be key beneficiaries of the Capital Markets Union, which aims to increase investment and the choices available to retail and institutional investors in Europe and to migrate some of the vast pool of deposit savings into managed investments. Looking outside of Europe, the global footprint of UCITS will surely serve well in the coming decade as populations in many markets are encouraged by their governments to take on the mantle of pension provision.

“As in the past, ALFI will be at the forefront of all these opportunities to increase the global footprint of UCITS. Australian, Brazilian, Mexican and pension funds in other jurisdictions are showing interest and we will continue to visit them regularly to stay on top of regulatory and business developments.” says Camille Thommes.

Recently, in recognition of the long-standing cooperation between Luxembourg and Hong Kong, the Securities and Futures Commission (SFC) of Hong Kong and the Luxembourg CSSF have signed a MoU which provides a framework for the mutual recognition of eligible funds offered, marketed and distributed to the public in Hong Kong and to retail investors in Luxembourg. It serves as a facilitator for the approval and marketing of investment funds in both jurisdictions.

FinTech

Financial technology (FinTech) and technology in general have been an important focus for ALFI. The association’s Digital/FinTech Forum aims to raise awareness, identify the challenges and develop the opportunities inherent in new digital technologies for the fund industry. In 2018, this included aspects of digital distribution and “RegTech”. In the year to come, a new cybersecurity working group will develop best practices in this field, aiming at a joint industry understanding of what cybersecurity responsibilities business leaders have. Camille Thommes explains, “ALFI will also continue its regular interaction with FinTech players to monitor and develop RegTech and blockchain tools, which will reduce costs and increase efficiency in the industry, ultimately benefitting investors.”

[1] All figures from the ALFI KPMG Responsible Investing Fund Market survey, 2016

[2] In May 2018 the Commission presented a package of measures as a follow-up to its action plan on financing sustainable growth. The package includes three proposals aimed at:

- establishing a unified EU classification system of sustainable economic activities ('taxonomy');
- improving disclosure requirements on how institutional investors integrate environmental, social and governance (ESG) factors in their risk processes; and
- creating a new category of benchmarks which will help investors compare the carbon footprint of their investments.

https://ec.europa.eu/info/publications/180524-proposal-sustainable-finance_en

[3] From big bang to a galaxy of stars: an assessment of UCITS after 30 years of evolution, September 2018