Financial Services Ireland

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Investment Funds in Luxembourg

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EY Luxembourg recently published the 2018 edition of the Investment Funds Guide in Luxembourg – A technical guide. The guideline is intended to answer the numerous questions on fund origination and distribution of investment funds in Luxembourg. The 2018 edition has been updated to incorporate the latest laws and regulations.

In 2018 assets under management increased on average by 15%, cash flows rose by 5% and profits grew by 10%, while margins were largely maintained at close to 37%.

These positive trends were supported by:

  1. Strong underlying demand for investment products driven by an ageing demographic, the shifting for long term savings to individual and a growing middle class in emerging markets,
  2. Rising equity markets across the globe, coupled with a relatively benign interest rate environment. This resulted in very strong asset flows into the passive sector with continued greater focus and flows to alternatives.

Notwithstanding the many positive headlines on passive sector growth, active managers that have been able to demonstrate true alpha credentials have been able, and will continue, to attract assets.

However, the initial positive headlines mask some key fault lines that the industry is facing and will have to deal with over the coming years. Many of these have been on-going for a number of years and include:

  1. Implementing the ever-evolving regulatory agenda, made more complicated by a series of political uncertainties (including Brexit),
  2. An increasing cost base arising from implementing the regulatory agenda along with having to absorb certain costs that were previously charged to the investor,
  3. Downward pressure on overall fees – a contagion (or active alignment?) of passive sector pricing along with increased challenge from investors and regulators of the value for money proposition of the active sector,
  4. The investment cost of dealing with technology and digital innovation in all parts of the value chain coupled with the related competitive disruption challenges and the increasing investor demands for a digitalised service experience.

Alongside these challenges the phenomena of “winner takes all” is accelerating, with the top 10 global managers attracting over 80% of all flows: “biggest is seen as best” as size drives better operating margins and asset retention. In addition investors, both retail and institutional are increasingly focused on the non-financial returns of their investments with a growing demand for compliant solutions.

The likely outcome of all of this over the coming 3 years will be an assets under management growth rate of around 4 – 5% per annum with revenues remaining broadly flat and the gap between winners and losers getting wider.

So, the one and only remaining key question is: how to remain relevant and continue to grow in these changing times?

A twin track strategy of enhancing distribution and getting bigger is required, in order to make the most of the remaining good times whilst preparing for distribution and leaner times ahead.

Lisa Kealy

Financial Services Markets Leader
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