Luxembourg well and truly holds its own in the crowded EU marketplace. Compared to its heavyweight neighbours, such as Germany and France, the small nation (just 35 miles wide), is certainly mighty—especially when it comes to the physical presence of asset servicing providers, which grew significantly in 2017 alone. In a report released on by the Association of the Luxembourg Fund Industry (ALFI) on 1 February, assets under management grew 12 percent from the end of November last year, with an increase of €458 billion over the last 12 months. Since last January, ALFI reported that 73 percent of the growth in assets under management was from new money being invested into Luxembourg (predominantly UCITS) funds.
Like many smaller financially markets around the globe, Luxembourg has adapted by cornering the market in a niche area of financial services where it can compete on the global stage on its own terms.
Today, Luxembourg has found itself as the beneficiary of several opportunities, created from a combination of internal self-improvement and external geopolitical and economic developments, that may soon mean the country could be punching well above its weight.
In the past year, Luxembourg has welcomed many major firms, who wanted to set up a presence there, such as Northern Trust and Liberty Speciality Markets, which were just two entities to move partly away from the UK by into relocating their EU hubs to Luxembourg City.
As of November 2017, ALFI reported that Luxembourg held over 4,000 separate funds. So it’s no wonder then that Luxembourg is the second biggest investment funds market after the US, representing 9.3 percent of the investment funds market worldwide. More specifically, in the asset servicing sphere, the total automation rate of processed orders of cross-border funds received in Luxembourg and Ireland reached 86.6 percent in Q2 2017, according to a report by Swift and the European Fund and Asset Management Association (EFAMA).
David Suetens, country head of Luxembourg for State Street, states: “Luxembourg is different versus the local German or French fund market since it specialises in cross-border fund distribution. Funds domiciled in Luxembourg are registered for distribution in more than 70 countries.”
To add to this success, ALFI found that Luxembourg-domiciled funds held the record amount of €4 trillion assets under management as of September 2017. But what does the future hold, in terms of asset servicing? And can Luxembourg capitalise on displaced market participants that may be wooed away from London by Brexit?
The European Council received eight applications last year from cities vying to host the European Banking Authority (EBA) once the UK leaves the EU. Luxembourg, as well as Paris, Prague, Vienna and Warsaw, all lodged bids for the EBA ahead of the European Council’s deadline on 31 July 2017. And although Paris won, the fact Luxembourg was taken as a serious contender, speaks volumes.
Despite the stiff competition, through ambitious moves like this, Luxembourg has the chance to be the cement its status as the world’s gateway into Europe but it is competing with several other major markets for that honour, most notably Germany and Ireland, which withhold a massive physical asset servicing space of their own.
UCITS: king of the road
Luxembourg’s asset servicing hurdles revolve around the fact that its primary offering, UCITS funds, are fiercely controlled by stringent regulations that mean they are a consistently underrepresented market demographic, despite having some of the richest lending asset portfolios. EFAMA reported that by September 2017 Luxembourg attracted 36 percent of UCITS inflow in Europe versus 9 percent for France and 4 percent for Germany.
ALFI reported that at the end of September 2017, 4,110 investment funds were domiciled in Luxembourg, 1,880 of them were UCITS. By the end of Q2 2017, UCITS funds across Europe registered net inflows of €174 billion, according to EFAMA.
Luxembourg’s financial service teams don’t seem to fear the complications surrounding UCITS too much. As Don D’Eramo, managing director of securities finance at RBC Investor & Treasury Services, explains: “Within strict risk parameters, Luxembourg still utilises additional products to maximise returns to end investors.”
A strong engine: the centre of everything
In the first month of 2018, Apex Group acquired M.M.Warburg & Co’s asset management and servicing business in Luxembourg. At the end of 2017, BNP Paribas Asset Management completed a full end-to-end fund transaction test in using blockchain technology, developed by a three-way collaboration between Fundsquare, InTech and KPMG’s Luxembourg team.
While Intertrust, a Dutch fund manager, announced it has been approved to provide alternative investment fund management (AIFM) services from Luxembourg. Intertrust Luxembourg can offer a suite of integrated fund services covering AIFM, central administration and depository services.
Paul Lawrence, global head of fund services at Intertrust, says: “The AIFM Directive (AIFMD) prompted a transformational shift in the EU alternative funds landscape by introducing EU passporting, compulsory regulation and significant reporting requirements.”
In November, LendInvest Capital selected CoInvestor as the platform for UK advisors to invest in its £130 million Luxembourg-domiciled real estate opportunity fund.
CoInvestor’s online platform was setup to help streamline access for investors looking to participate in a diverse pool of real estate-backed loans, which have been underwritten by LendInvest. LendInvest’s fund was the first in Luxembourg to be available on CoInvestor.
In October 2017, HSBC Securities Services (HSS) was selected as a depositary and administrator by EFG Asset Management (EFGAM), overseeing its New Capital Fund Lux, adding to its presence on the ground for Luxembourg’s asset servicing landscape.
Commenting on HSBC’s selection, Claudio Camplani, director and chairman of EFGAM, says: “HSBC’s continued support will allow us to expand our business in Luxembourg whilst leveraging a consistent and effective operating model, ultimately allowing us to offer a greater quality of service to our clients.”
Earlier in 2017, Northern Trust also made headway in Luxembourg as it acquired the fund administration servicing units of UBS Asset Management in Luxembourg and Switzerland.
The deal, first announced in February, positioned the wealth management provider in to the top 10 asset servicing providers of Luxembourg.
Northern Trust has operated in Luxembourg for more than 10 years, being a stronghold for asset servicing since 2004. Northern Trust also appointed a new head of continental Europe, David Wicks, in 2017, in a move that it said would “further establish its commitment to the region”.
Nicolas Mackel, CEO of Luxembourg for Finance, mirrored in his confirmation of Wick’s appointment, the importance of Luxembourg as a European base for asset servicing.
He says: “We are delighted that Northern Trust, one of the world’s biggest financial services companies, has chosen Luxembourg as a base to expand within the European Union.”
“Its decision is further recognition of the cross-border expertise and crucial strategic position of Luxembourg for non-EU financial services companies.”
Deloitte also established a joint EMEA Financial Services Asset Servicing Centre of Excellence based in Luxembourg and Ireland.
Brexit: opportunity avenue?
The UK is expected to leave the EU in March 2019, notwithstanding, any transitional agreements by UK Prime Minister Theresa May and the EU. Until then, the rest of the world await the outcome of current negotiations.
At Sibos 2017, an audience poll predicted that Frankfurt could be set to displace London as a global financial centre after Brexit.
Over 45 percent of audience members said they think Frankfurt will be the next big financial centre. Could this possible shift to the German financial hub affect Luxembourg’s financial future?
During a Brexit panel at ISITC Europe, panellist Kay Swinburne, Member of the European Parliament for the UK’s Conservative Party and vice chair of the Economic and Monetary Affairs Committee, said, in the lead up to the UK leaving the EU, the other 26 Member States are “preempting their own [financial service] vulnerabilities in this midst of change”.
One of those 26 member states is Luxembourg. But, for the moment at least, Luxembourg seems untouched, still achieving asset growth.
As D’Eramo explains: “Traditional assets such as equities and government bonds are growing, [but also], the industry is showing greater demand to borrow exchange-traded funds, corporate bonds, and emerging market assets and Luxembourg beneficial owners bring a growing supply of such assets.”
ALFI has said that, based on their long-lasting experience in cross-border fund distribution, the many specialised service providers of the Luxembourg investment fund industry are serving an increasing number of investment funds domiciled outside Luxembourg.
It stated: “For several years now, Luxembourg’s financial centre is recognised and used as a center of excellence for fund administration and distribution by fund promoters from all around the world.”
“Given that the overall environment of historically low interest rates should continue to have a positive impact on stock exchanges and probably motivate investors to make use of private banking services in their quest for returns, we expect the assets under management and thus the assets under administration and custody to further grow.”
