Paperjam Plus Alfi 2019 by Maison Moderne

S E P T E M B E R / O C TO B E R 2019

ALFI

Luxembourg reaching for 5 trillion Corinne Lamesch chairperson, ALFI

“ Volatility is likely to continue so we have to look for new opportunities” 14

“ Continuing a success story made in Luxembourg” Pierre Gramegna minister of Finance

“ Sustainable investing, a journey rather than a destination” Sachin Vankalas general manager, LuxFLAG

In which fund should you invest in 2020? 66

Naturally different.

PHOTO / TOUR RADAR AÉROPORT LUXEMBOURG © LUCAS ROTH - KÖLN / PAUL BRETZ ARCHITECTES SARL

Focused on your business opportunities in an evolving legal landscape.

30 Offices

2 792 Lawyers linklaters.lu

ÉDITO

SOMMAIRE

Bien plus qu’un vœu pieux

Luxembourg reaching for 5 trillion

e temps des tergiversations et des messages creux est révolu. La soif des investisseurs de projets chargés de sens pèse de tout son poids sur le secteur financier, et celui des fonds n’échappe pas à ces revendications. Ni aux questions qui y sont directement liées : où va mon argent, comment faire pour qu’il serve à assurer la transition énergétique, à lutter contre le réchauffement climatique, et assurer l’avenir des générations futures ? Le rendement financier n’est plus le seul vecteur qui motive l’investisseur. Le dire est une chose ; le répéter à longueur de conférences sur la finance durable en est une autre, et le mettre réellement en pratique, un chemin encore bien plus long. Actuellement, l’Union européenne abat un important travail pour codifier concrètement ce qui est et n’est pas un investissement durable. C’est la fameuse « taxonomie » qui devrait sortir de terre dans les prochains mois et effacer le flou qui enrobe le concept. Des experts luxembourgeois ont contribué à sa confection. La preuve d’une certaine expérience en la matière. Mais aujourd’hui, comme elle l’a fait il y a 30 ans avec les UCITS, la Place grand-ducale doit se placer résolument à la pointe de ce nouveau chantier. Faire de Luxembourg une Place réellement engagée dans la finance durable est tout simplement devenu un gage d’avenir. 

PHOTO Maison Moderne (archives)

Paperjam

Stewart Aldcroft, Citi Markets & Securities Services

François-Kim Hugé and David Berners, Deloitte Luxembourg

David Suetens, State Street Luxembourg

Investment

xxxx xxxx x xx Steve Bernat, xxxxxx ONE Group Solutions 14-26 Beythan, Hermann Linklaters LLP Luxembourg

Xxxx xxxxx Patricia Kaveh, xxxxxxx Banque de Luxembourg 34

Olivier Carré, PwC Luxembourg

Mathieu Maurier, Societe Generale Securities Services Luxembourg

24 Gilles Dusemon, Arendt

Xxxxx xxxxx Sachin Vankalas, xxxxxxxx LuxFLAG

48 Steve Waygood, Aviva Investors

50 Natalie Westerbarkey, Fidelity International

Noel Fessey, European Fund Administration

Claus Mansfeldt and Rajaa MekouarSchneider, LPEA

Jim Fitzpatrick, NICSA

Sven Muehlenbrock, KPMG Luxembourg

Michael Gloor, Lufthansa Group

Arjan Ruijs, Actiam

Ken Yap, Cerulli Associates

Jérémie Schaeffer and Olivier de La Guéronnière, Atoz Tax Advisers

Nasir Zubairi, LHoFT

32 Paperjam Entreprise

Maison Moderne ™ www.maisonmoderne.com, Téléphone (+352) 20 70 70, E-mail publishing@maisonmoderne.com, Courrier BP 728, L-2017 Luxembourg, Bureaux 10, rue des Gaulois, Luxembourg-Bonnevoie, fondateur Mike Koedinger, ceo Richard Karacian, directeur administratif et financier Etienne Velasti, RÉDACTION Téléphone (+352) 20 70 70-100, Fax (+352) 29 66 19, E-mail press@paperjam.lu, Courrier BP 728, L-2017 Luxembourg, directeur de la publication Richard Karacian, directeur éditorial Matthieu Croissandeau (M. C.), rédacteur en chef Thierry Raizer (T. R.), secrétaire de rédaction Jennifer Coghé (J. C.), free-lances Stephan Evan (S. E.), Sébastien Lambotte (S. B.), Jeanne Renauld (J. R.), photographes Anthony Dehez, Nader Ghavami, Jan Hanrion, Patricia Pitsch, Antoine Setter, correction Lisa Cacciatore, Sarah Lambolez, Manon Méral, Elena Sebastiani, AGENCE GRAPHIQUE directeur de l’agence Mathieu Mathelin , directeur de la création Jeremy Leslie, head of production Stéphanie Poras-Schwickerath, head of art direction Vinzenz Hölzl, graphisme / layout Maison Moderne, directeur artistique José Carsí , head of production assistants Stéphane Cognioul, Myriam Morbé, mise en page Sascha Timplan (coordination), RÉGIE PUBLICITAIRE Téléphone (+352) 20 70 70-300, Fax (+352) 26 29 66 20, E-mail regie@maisonmoderne.com , Courrier BP 728, L-2017 Luxembourg , directeur associé Francis Gasparotto, chargés de clientèle seniors Marilyn Baratto, Laurent Goffin

32 Vrignon, Fabien Keytrade Luxembourg

Peter Kraus, Aperture Investors

Pierre Gramegna, ministry of Finance

La conversation continue en ligne :

our contributors

Jean-Michel Lalieu journaliste, Paperjam

@paperJam_lu

Corinne Lamesch sets her priorities as ALFI’s new chairperson

Robert White, EY Luxembourg

54 Ed Winters, Allen & Overy LLP

58 Marco Zwick, CSSF

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September/October 2019 —ALFI—

—3

SUR LE RADAR

LUXEMBOURG’S SUPERSTARS NET ASSETS UNDER MANAGEMENT IN LUXEMBOURG FUNDS

LUXEMBOURG’S FUND ACTORS RANKING 1

1 2 3

Net Asset US$ bn

5,000

5 4,000

910.9 666.8 339.8 298.7 250.7 1. State Street / 2. J.P. Morgan Bank / 3. BNY Mellon / 4. BNP Paribas / 5. BBH

926.4 876.5 369.9 354.1 322.9

nov dec jan–19 feb mar apr

0 jul–18 aug sep oct

14,911

4,350.4 4,404.9

Custodians

4,282.5 4,272.4 4,279.8 4,207.3

Administrator

4,199.7 4,262.7

Net asset US$ bn+D (in billions of euros)

Number of fund units

4,192.3 4,064.6

INVESTMENT CLASS DISTRIBUTION (APRIL 2019)

1. State Street / 2. J.P. Morgan Bank / 3. BBH / 4. BNP Paribas / 5. BNY Mellon SOURCES CSSF/ALFI

Promoters

Fixed income 3,138 Equity 4,056

Lux ManCo AIFM (UCITS only)

Balanced 3,971 Money market & cash 240 Funds of funds 2,149

PE/Venture capital 647 Other 386

Net assets

Net asset US$ bn

Real estate 324

317.0 201.0 173.2 164.1

317.6 196.5 184.6 164.9 1. J.P. Morgan / 2. DWS International / 3. Amundi / 4. BlackRock Financial Mgt.

4,404,936

Auditors

1. J.P. Morgan AM (Europe) / 2. DWS International / 3. Amundi Luxembourg / 4. BlackRock

36.2 %

Legal advisors

1 2 Fixed income 1,278,555

1 3

No. funds

Equity 1,337,126 Balanced 951,291 Money market & cash 336,796 Funds of funds 251,213 Real estate 78,086 PE/Venture capital 97,882 Other 73,987

6,384 3,076 2,520 2,394 1. PricewaterhouseCoopers / 2. KPMG / 3. Deloitte / 4. EY

SOURCES CSSF/ALFI

4—

4,285 3,511

— ALFI— September/October 2019

858

604

1. Arendt & Medernach / 2. Elvinger Hoss Prussen / 3. Linklaters / 4. Allen & Overy

SOURCE Monterey Insight

$ LUXEMBOURG MARKET SHARE IN EUROPEAN FUND

$ NUMBER OF FUNDS DOMICILED IN LUXEMBOURG

3,871

SOURCES CSSF/ALFI

Asset Management Wealth Management Asset Services

Geneva Lausanne Zurich Basel Luxembourg London Amsterdam Brussels Paris Stuttgart Frankfurt Munich Madrid Barcelona Turin Milan Verona Rome Tel Aviv Dubai Nassau Montreal Hong Kong Singapore Taipei Osaka Tokyo assetservices.pictet

EN BREF

Les fonds durables labellisés de LuxFLAG

2159,4 M€

2018,6 M€

1771,8 M€

1734,3 M€

1368,0 M€

982,7 M€

1. BNP Paribas Aqua Type : Environnement Domiciliation : France

2. Nordea 1 SICAV – Emerging Stars Equity Fund Type : ESG Domiciliation : Luxembourg 3. Tikehau Taux Variables Type : ESG Domiciliation : Luxembourg

7. The European Fund for Southeast Europe Type : Microfinance Domiciliation : Luxembourg 8.DPAM L Bonds EUR Quality Sustainable Type ESG Domiciliation : Luxembourg

892,4

9. Parvest Global Environment Type : Environnement Domiciliation : Luxembourg

M€

884,2 M€

10. FDC SICAV Actions Monde – Actif 3 Type : ESG Domiciliation : Luxembourg

s’élève à 19,4 % entre 2015 et aujourd’hui. Cette baisse globale rend la position des sociétés de gestion inconfortable. Concurrencées par les acteurs pratiquant une gestion passive, dans un environnement de taux bas, elles sont contraintes de proposer des tarifs toujours plus compétitifs pour obtenir de nouveaux mandats. Or, ce jeu de la concurrence met considérablement leurs revenus sous pression… C’est l’ironie de la situation. Pourtant, selon le cabinet, la tendance britannique n’est pas prête de s’inverser.

Président LPEA, Luxembourg Private Equity and Venture Capital Association

5. Parvest Aqua Type : Environnement 1. Domiciliation : Luxembourg

6. DPAM L Bonds Emerging Markets Sustainable Type : ESG Domiciliation : Luxembourg

Entre juillet 2018 et juillet 2019, les frais de gestion des fonds domiciliés au Luxembourg, en Irlande et au Royaume-Uni auraient connu une baisse moyenne de 9 %. C’est ce que révèle la dernière étude du cabinet Fitz Partners. Cette baisse s’établirait même à 13 % sur les deux dernières années. Ces frais servent à rémunérer les sociétés de gestion pour leur conseil en allocation d’actifs et en sélection de valeurs. Ils varient selon la classe d’actifs gérés et la taille du mandat qui leur est confié. Si l’on considère les frais de gestion « bruts », qui incluent les frais de distribution, la baisse

3 QUESTIONS À CLAUS MANSFELDT

4. NN (L) Global Sustainable Equity Type : ESG Domiciliation : Luxembourg

922,8 M€

Étude Des frais de gestion toujours plus bas

Pouvez-vous nous rappeler la raison d’être de la LPEA ? D’abord, il s’agit de renforcer le rôle du Grand-Duché en tant que « hub » international pour les investisseurs en private equity / venture capital. Ensuite, nous voulons être une plate-forme d’information, d’échange d’idées et de partage des bonnes pratiques pour l’ensemble de ces acteurs, tout en veillant à défendre leurs intérêts. Quels seront les grands enjeux de votre présidence ? On assiste à un mouvement global de démocratisation du private equity à travers le monde. Un des enjeux est de mieux faire connaître notre industrie à un public plus large.

Des actions doivent pouvoir être menées auprès des banques privées, très présentes au Luxembourg, qui s’intéressent de plus en plus à ces classes d’actifs. Quel est le potentiel de progression du private equity ? Selon un rapport de J. P. Morgan de 2018, la performance du private equity reste globalement supérieure à celle des actions, et ce sur le long terme (de 2 à 7 % par an). Dans un scénario de taux bas, avec des marchés très volatils, les investisseurs sont obligés d’aller chercher du rendement dans de nouvelles classes d’actifs. Le private equity apporte une réponse

« On assiste à un mouvement de démocratisation du private equity » à leurs besoins, pour peu qu’ils acceptent un horizon d’investissement plus long. Il est essentiel, du côté des gestionnaires de fonds en private equity, de veiller à créer de la valeur sainement et durablement alors que l’industrie est de plus en plus concurrentielle… D’après Preqin, entre autres sources officielles, on s’attend à une croissance de 50 % du volume d’actifs sous gestion dans les cinq ans. Il devrait passer de 3,000 milliards a 4,900 milliards de dollars entre 2018 et 2023.

SOURCE LuxFLAG

Les brèves du secteur  Le nouveau comité exécutif de l’ALFI est composé de Corinne Lamesch (présidente), Michael Ferguson et Maria Löwenbrück (vice-présidents), Patrick Stampfli (trésorier) et Camille Thommes (directeur général).  Le fonds Phoenix Luxembourg Fund enregistré à Senningerberg, a investi, fin août, 800.000 euros dans un cheval, un des fils du super-champion Galileo, considéré comme un des meilleurs étalons au monde.  Le rappeur américain Snoop Dogg a décidé de prendre part au Global Ventures Summit, qui se tiendra les 20 et 21 novembre à Belval. Son fonds, Casa Verde, investit dans des start-up dans le domaine de l’industrie du cannabis. Il aurait levé 45 millions de dollars.  Les sociétés financières britanniques qui souhaitaient profiter d’une période transitoire en cas de Brexit sans accord avaient jusqu’au 15 septembre pour introduire une demande auprès de la CSSF. En cas de no deal, les entreprises britanniques seront considérées comme des entités tierces et ne bénéficieront plus des avantages réservés aux détenteurs du passeport européen. 6—

— ALFI— September/October 2019

TEXTES Sébastien Lambotte, PHOTO Nader Ghavami

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8—

— Novembre 2018

SÉCURITÉ À LA POINTE

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Scott Garlick, Business Development manager, Victor Buck Services

BRAND VOICE

2015 Création de Docunify IP Company

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Docunify remporte le Prix de l’innovation de la FEDIL, dans la catégorie « start-up »

2019 Acquisition de Docunify par Victor Buck Services

Marc Lefebvre Founding Partner, Docunify IP Company

Pour Docunify, quelles sont les nouvelles perspectives offertes par cette acquisition ? Marc Lefebvre Avec près de 20 ans d’existence et une croissance continue, Victor Buck Services est reconnu au Luxembourg et à travers le monde, notamment grâce à sa filiale à Singapour et ses prestataires internationaux. De plus, son expertise certifiée en sécurité de l’information (PSF, PSDC-DC, ISO27001) rassure nos clients et leur permet de bénéficier de garanties supplémentaires. Ce rachat ouvre donc la voie à une expansion et une évolution rapide de la solution, notamment à travers le développement de nouvelles fonctionnalités.

PHOTO Maison Moderne (Jan Hanrion)

2018

utres me d’a de m o c Faites e gran nify. rises d cu entrep utilisez Do et ce e n r e u c g li enver z une e s s. is in Chois à vos beso e é t adap om

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Septembre / Octobre 2019 —

nify.c

—9

LE JOUR OÙ...

quand Le Luxembourg transposa la directive OPCVM

n mars 1988, la transposition en droit national de la directive européenne E relative aux organismes de placement col-

lectif en valeurs mobilières (OPCVM) constituait un enjeu-clé pour le Luxembourg. À l’époque, j’étais Premier ministre et ministre des Finances. Le pays s’inscrivait dans une démarche de diversification économique à la suite de la crise sidérurgique qui se faisait ressentir depuis quelques années. Le Luxembourg, grâce à la loi holding de 1929, servait déjà de base pour de nombreuses structures d’investissement. La place financière, depuis quelques années, gagnait en substance. Avec cette directive, adoptée en 1985, la Communauté économique européenne avait la volonté de créer un cadre unique régulant les organismes de placement à une échelle paneuropéenne. De cette manière, elle entendait créer le marché européen des capitaux, invitant alors ses États membres à transposer la directive dans leur droit national avant la fin de l’année 1989. Pour le Luxembourg, cette perspective constituait une belle opportunité. Pour en profiter, l’un des défis a notamment été de prendre Londres de vitesse. Notre ambition était d’être les premiers à transposer cette directive, notamment pour garder sur notre territoire les structures d’investissement déjà présentes. Nous avons donc travaillé

10 —

— ALFI— September/October 2019

’arrache-pied, avec une grande solidarité d entre les membres du gouvernement, les différentes forces politiques en présence s’unissant autour d’un objectif commun. Et bien sûr aussi en bonne coopération avec les acteurs privés de la place financière. Un projet de loi a été établi début mars 1988 et transmis à la Chambre de commerce ainsi qu’au Conseil d’État. Après avoir très rapidement reçu un avis positif des différentes structures consultées, le projet était soumis aux députés, qui l’adoptaient dès la fin du mois de mars, à l’unanimité. Même les élus les plus à gauche ont soutenu la vision proposée. Tout le monde était conscient de l’importance de ce texte. Nous étions le premier pays de la Communauté européenne à transposer la directive en droit national. Non seulement le Luxembourg est parvenu à préserver l’attrait de sa place financière pour les structures d’investissement, mais l’industrie des fonds s’est développée de manière prodigieuse, au-delà de toutes les attentes, pour devenir le deuxième domicile de fonds le plus important au monde, derrière les États-Unis. La transposition de cette directive démontre, en outre, combien un petit pays comme le nôtre doit être innovant. Ce que j’ai appris, au fil de ma carrière en tant que responsable politique, est que nous ne pouvons pas nous contenter de suivre nos voisins

dans nos démarches. Là où il y a des opportunités à saisir, il faut pouvoir être les premiers. C’est d’ailleurs à cette même époque que nous avons pris d’autres initiatives, comme le lancement du premier satellite Astra, au service du développement du secteur audiovisuel. Dans une même logique, dès 1979, Luxembourg a investi dans le développement de l’activité de réassurance. En 1985, nous avons créé le pavillon maritime luxembourgeois. La transformation de l’économie luxembourgeoise implique des efforts, mais aussi des prises de risques. L’histoire, finalement, nous a souvent donné raison. Et beaucoup des personnes qui nous ont critiqués, à l’époque, sont revenues sur leurs propos pour nous féliciter. » 

éfis était « L’un des d Londres de prendre . » de vitesse

PHOTO Nader Ghavami, ILLUSTRATION Jan Hanrion

Mars 1988, les députés adoptent à l’unanimité le projet de loi transposant en droit national la directive européenne relative aux OPCVM. Jacques Santer, Premier ministre de l’époque, se souvient de ce choix historique pour le succès de l’industrie des fonds luxembourgeois.

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PHOTO 11_ (Prénom Nom) Maison Moderne

David Wicks Head of Continental Europe and Chief Executive Officer of Northern Trust’s EU bank

Steve David Chief Operating Officer of Northern Trust’s EU bank in Luxembourg and Country Head of Luxembourg Global Fund Services

12 —

—ALFI— September/October 2019

BRAND VOICE

15 years in Luxembourg some key moments ANNIVERSARY

Built on trust In 15 years since expanding into the Luxembourg market, Northern Trust has become a top 10 fund administrator in the Grand Duchy1, the company’s new European banking base. Northern Trust’s David Wicks and Steve David reflect on the 15-year anniversary milestone in Luxembourg as they look to future prospects. SPONSORED CONTENT BY NORTHERN TRUST

in 2004 as part of a client-led initiative, which led to the establishment of Europe’s first taxtransparent pooling investment vehicle. We have expanded to around 350 employees supporting approximately 600 funds and providing

“We have built our reputation from listening to our clients’ needs.” Steve David

a full range of asset servicing solutions2. Our 2017 acquisition of UBS Asset Management’s fund administration business in Luxembourg and Switzerland has given us additional presence and scale. You relocated your EU bank from London to Luxembourg in March 2019. What led you to select Luxembourg? David Wicks: Luxembourg was chosen as the new

headquarters for our EU bank, because it is a natural hub for our expanding business in continental Europe. The re-domiciliation

The Luxembourg office opens with four employees

2005 The office launches Europe’s first fully tax-transparent cross-border pooling vehicle for a multinational in the form of a Luxembourg-domiciled Fonds Commun de Placement (FCP)

2010

enables us to continue to “passport” products and services within the EU, regardless of the ongoing Brexit discussions – and helps to ensure we continue to be well placed to support our clients’ requirements.

Assets under administration increased by 460% from 2005 to 20102

What other factors played a role in the location selection? S.D.: Luxembourg is a gateway for cross-border

Acquisition of UBS Asset Management’s fund administration business in Luxembourg and Switzerland

distribution to more than 70 countries with over EUR4.4 trillion of assets under management, making it the largest fund domicile outside of the U.S.3. It has long-standing experience and a strong reputation in the financial sector, backed by a solid legal framework and stable political and social environment. What do you regard as the key opportunities and challenges for Luxembourg over the next 15 years? D.W.: Emerging technology will likely have

a significant impact on the asset servicing industry. The challenge and opportunity for Luxembourg is to keep at the forefront of these fintech trends to become an early adopter. With its pragmatic approach to regulation and the collaborative spirit of its financial industry stakeholders, Luxembourg is well placed to succeed.

2017 2018 Northern Trust named as a top 10 fund administrator by assets under administration1

2019 The re-domiciliation of Northern Trust’s EU bank from the UK to Luxembourg completes (1 March, 2019). Northern Trust has approximately 350 employees2 (30 June, 2019)

About Northern Trust: Northern Trust was founded in Chicago in 1889, counting approximately 20,0002 employees across its worldwide locations

What attributes will help drive Northern Trust’s success over the next 15 years? S.D.: From the outset, we have built our reputation

from listening to our clients’ needs and providing solutions for them. Today and in the future, we remain highly focused on helping our clients access opportunities through our regional expertise, substantial local team and global outlook. 

: n, visit rmatio om o f in t.c ore ntrus For m r ther

PHOTO Northern Trust

How have the operations of Northern Trust changed since branching out to Luxembourg 15 years ago? Steve David: We opened our Luxembourg office

2004

.no www

1. Monterey Insight Luxembourg Fund Report 2018 edition - 2. Northern Trust, as at 30 June, 2019 unless specified - 3. The Association of Luxembourg Fund Industry, June 2019.

September /October 2019 —ALFI—

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Corinne Lamesch believes that sustainable finance, alternative investments and pensions are areas where the Luxembourg fund industry can make a positive difference.

14 —

—ALFI— September/October 2019

INTERVIEW

PHOTOS Anthony Dehez

“Volatility is likely to continue so we have to look for new opportunities” On the 19th of June this year, Corinne Lamesch was appointed ALFI’s new chairperson, succeeding Denise Voss. Also country head Luxembourg and head of legal Europe at Fidelity International, here she reviews ALFI’s hot topics and perspectives for Paperjam. September/October 2019 —ALFI—

— 15

INTERVIEW FINDING SOLUTIONS WITH FUNDS

Can investment funds help to solve climate change and diffuse the pensions time bomb? EU policymakers believe they can. This is the backdrop to Corinne Lamesch being appointed chairperson of the Association of the Luxembourg Fund Industry (ALFI). Investment funds put savings to work, channeling money into private and public sector investment projects that create jobs, wealth, new products and new services. However, these days, clients, politicians and voters want more. Environmental, social and governance (ESG) criteria need to be taken more into account, concerns about retirement need addressing, and more investment is needed for start-ups and infrastructure. Hence after her appointment, Ms Lamesch identified three immediate priorities: facilitating sustainable finance, embracing the opportunities of the EU’s pan-European personal pension product (PEPP), and deepening Luxembourg’s expertise in alternative funds.

European Commission recently published a draft classification system (known as a “taxonomy”) for environmentally-sustainable economic activities. They screened activities across a range of sectors, from energy to transport, to agriculture, to real estate, and more, identifying low-carbon practices and also “transition activities” that seek to limit greenhouse gas production. Reports have also been issued on a green bond standard, and climate and ESG benchmarks. These reports are now being studied and debated by the finance industry and political decision makers, with a conclusion and legislation hoped for by the end of the year.

are on course to be created in late 2021 or early 2022.

WHY EDUCATION IS NEEDED

Regardless of this innovation, investment funds will remain the bedrock of many pension schemes, and ALFI has long been aware of the need to work to educate the public about the potential benefits. They point to just 8% of wealth in the EU being invested in mutual funds, compared to 23% in the USA. Around a third of Europeans keep their savings in bank accounts, despite negative real interest rates. Not only does this mean these people are missing out on more healthy investment returns, but entrepreneurs are deprived of POTENTIAL NEW NICHE vital start-up and growth capital. “Many EuroMs Lamesch is keen for ALFI to contribute to peans have a way to go before they understand the work of developing and promoting this that they should provide for their own financoncept, but she knows this isn’t a straight- cial future,” said Ms Lamesch. forward task. “We have a lot of work to do This education is also needed domestically. to help explain the challenges and promote As well as increasing understanding about transparency. Without widely accepted defi- Luxembourg’s creaky public pension system, nitions, there is the risk of appearing to supWHAT IS ETHICAL FINANCE? port greenwashing,” she added. Who could be against “ethical” finance? The Success in this area could cultivate a lucraglobal fund industry has been advocating tive niche for Luxembourg, as well as resultthis concept for decades, to attract investing in environmental benefits. The country ment to sustainable projects and as a way to is well known in the global fund industry for boost the sector’s image. Yet it remains fiend- its expertise in decoding and implementing ishly difficult to define. What does it mean in EU regulations. practice to seek to minimise harm and maximise positive outcomes for the environment, THE PENSIONS IMPERATIVE society and for governance? For example, Too few people have sufficient retirement some see nuclear power as the most viable savings. In Europe, if current trends continue, way to reverse the growth of greenhouse gas for every retired person in 2060, there will production. Others see this technology as a only be two people of working age, compared greater environmental risk. What about an to four today. Inevitably, public sector penoil company which has invested heavily in sion funds will become stretched, yet the EU sustainable energy research? calculates that only a quarter of Europeans Numerous public and private initiatives between 25 and 59 years of age have addihave sought to provide clarity to investors tional private cover. BIO EXPRESS and their advisors. Luxembourg’s industry- The pan-European personal pension prodled labelling agency LuxFLAG is an example. uct (PEPP) is the latest attempt at a solution Corinne Lamesch became While this organisation makes a valuable by EU policy makers. The PEPP will enaALFI chairperson on 19th June. contribution, its relatively strict criteria ble investment products to be linked to an She is also country head mean fewer than 100 funds qualify for its individual rather than to an employer, thus Luxembourg and head of legal ESG labels. adding flexibility as workers move between Europe at Fidelity International, countries and different firms. Also, funds will and has been with the firm NEW ESG BREAKTHROUGH ATTEMPT be eligible to structure pension funds under since 2008. A lawyer by If the goal is to provide incentives to asset the new rules. profession, she was admitted managers to tend towards more sustainable “We are very happy with the initiative, with to the Luxembourg Bar (1999investment, a strict approach risks falling Luxembourg well positioned to become a hub 2008) and to the New York short of potential. If the proposals are too for PEPP providers given our cross-border disBar (since 1998). She worked strict, they may be ignored or might become tribution expertise,” said Ms Lamesch. Howpreviously for the law firms outdated. If they are too flexible, they could ever, few analysts expect a rapid expansion, Clifford Chance and Allen & become somewhat meaningless and open to not least because questions over taxation Overy. She has more than criticism. Yet if they are too complex, they remain unclear. “We are well positioned to 20 years’ experience in the risk adding to confusion rather than offering help, but it could take time, just as it did with Luxembourg fund industry, a potential solution. UCITS,” Ms Lamesch noted. The relevant EU including participation in ALFI The EU is currently seeking a breakthrough regulation was officially passed on 25th July, technical committees and by developing a common language to enable but further clarifying acts are required before working groups. greater understanding of this concept. The this can come fully into force. The first PEPPs 16 —

—ALFI— September/October 2019

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INTERVIEW ALFI needs to spread the message of what the fund industry brings to the country (including tax revenue and employment opportunities), as well as the wider benefits. “We are the leading fund centre in Europe, but when I talk to people outside of our industry, too often they don’t understand our role,” she said. Generally there’s hazy understanding, mixed with the negative connotations of the financial crisis. The CSSF is working on a national investor education strategy and ALFI will be helping.

ALTERNATIVE SOURCES OF FUNDING

Her third early priority is working to further growth in the alternative fund sector. The private equity funds, real estate funds and debt funds sectors have performed well, but this remains a relatively young industry in Luxembourg, and growth needs to be cemented. Unlike UCITS, where the cross- border model is pre-eminent, still much alternatives business is organised within member states. Greater efficiency and effectiveness in Luxembourg would help turn this around. Keeping in touch with European decision makers is another key role. With a new European Commission and a new European Parliament, there is work to do to restate ALFI’s point of view. That said, no major changes of strategy are expected at the EU level, and there is satisfaction that Commission president Ursula von der Leyen has highlighted sustainable finance as a priority. Often most significant are the on-going contacts with middle ranking officials responsible for the technical implementation of regulations. Along with the Luxembourg Bankers Association, ALFI has an office in Brussels, employing two people, working with regulators and European trade associations.

STEADY CHANGE PLEASE

ALFI hopes that when reviewing regulations, policy makers will take a gradual approach. Reviews of AIFMD, PRIIPs, MiFID, UCITS and more are on the agenda, and Ms Lamesch thinks it would be “good news” if there was a move away from big rewrites of the rules. “There is a need to pause and look at what alterations can be made to make things more efficient,” she said. “We should not lose sight of the fact that regulations have been introduced to benefit investors and boost efficiency, so changes should be mindful of this,” she added. A symptom of the regulatory load is the length of time the CSSF can take to process requests, with delays of several months for routine procedures common. However, Ms Lamesch sees the regulator’s willingness to make improvements, not least with substantial hiring and efforts to streamline process. In particular, she pointed to an increase 18 —

—ALFI— September/October 2019

“We should not lose sight of the fact that regulations have been introduced to benefit investors and boost efficiency, so changes should be mindful of this.”

in the use of guidance notes and templates to make it easier to complete forms. “We are keenly awaiting the e-desk portal which will allow e-filing that will streamline procedures,” she added. She also welcomed plans to gather statistics for the first time on how long certain processes take, with the hope this will highlight bottlenecks.

BRACED FOR BREXIT

It is in the regulatory field that losing the UK as a member of the EU is feared as a major potential long term downside of Brexit for Luxembourg and the cross-border fund industry as a whole. The creation of a pan-European industry was largely on the initiative of the UK government, so their removal from decision making bodies may have an impact. The UK’s voice has been muted since the referendum in June 2016, but so far there does not appear to have been a decisive shift in policy outlook at EU level. “We will continue to seek out allies with the same interests as ours, it’s up to us to work harder to make the case and make our voice heard,” said Ms Lamesch. Otherwise, she believes industry is as well prepared as possible for the potential of a chaotic no-deal exit. Indeed, preparatory domestic Brexit laws have allowed for a unilateral one-year transition regime to be granted to UK firms in the case of no-deal. Firms had to register with the regulator before 15th September this year. Most firms appear to have made adequate preparations, but some may have slipped through the net. These questions are significant, as just under one-fifth of total assets in Luxembourg are in structures launched by UK-based fund managers.

“The level of understanding in these countries among professionals and policy makers is quite high, but still we find they want to dig deeper into the details,” Ms Lamesch noted. There is increasing willingness of these countries to allow institutions and high net worth individuals to invest abroad. Mexico is a recent example. Tweaks to regulations and new uses of existing products continually need to be explained. Despite being the second female chair of ALFI, and this in succession, Ms Lamesch is aware that the fund business is a largely male-dominated area. “We need to attract all the talent we can, and having women in leadership positions encourages others to consider this industry for their career,” she noted. “Diversity helps generate the innovation we need to grow and develop.”

PLANNING FOR UNCERTAINTY

All of these factors and more will be taken into consideration as the association refreshes its regular five-year ambition plan. The 20202025 document will have to deal with a world of an uncertain macro-economic outlook, the continued pressure on fees and margins, the need to digitalise to cut costs and boost services, the need to reach out to new clients, the challenge of potential disruptors, and more. Ms Lamesch takes the helm at a time when recent growth has been steady rather than spectacular. Since the double-digit year-onyear increases seen in 2017, net assets in Luxembourg domiciled funds have risen from €4.21 trillion in January 2018 to €4.32 trillion in May 2019. A steady performance compared with the average growth in excess of 10% per annum over the last five years, when assets grew from €2.8 trillion in mid 2014. She is GLOBALISATION AND DIVERSITY aware that: “Volatility is likely to continue so An on-going role for the association is to we have to look for new opportunities, with cement Luxembourg’s reputation globally, sustainable finance, alternative investments with there still being considerable room and pensions being areas where we can make for development in Latin America and Asia. a positive difference.”  S. E.

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CONTRIBUTIONS

Why is China’s asset management industry so appealing? By any stretch of the imagination, the opportunities in China’s asset management industry are outstanding. But for many foreign (i.e., non-Chinese) fund management companies (FMC), both getting to understand them and then realising them can be a significant challenge.

he scale of the market can be quite dauntT ing for anyone not familiar with it. While the regulated funds part of the market is clos-

ing in on assets under management (AUM) of US$2 trillion, the unregulated sector, which includes private funds, hedge and alternatives funds, wealth management products (issued by banks as alternatives to deposits) and other similarly managed collective investment funds assets, is conservatively estimated to exceed US$10 trillion, and growing faster than the regulated area. In addition, sovereign wealth funds and pension funds also exceed US$4 trillion in AUM. A key objective of the regulators, the China Securities Regulatory Commission (CSRC), has been to convert a significant portion of the unregulated market to become regulated within five years. By any measure, this represents a lot of money, much of it needing professional management. China’s fund management industry is growing faster than any other, worldwide, and will exceed the scale of the UK within five years based on present estimates.

OPEN THE MARKET TO MORE FOREIGN FIRMS TO BE ACCELERATED

In 2019, announcements by the top government officials have made clear that long-standing plans to open the market to more foreign firms are to be accelerated, with 100% foreign-owned FMC allowed from 2020. Today, there are many wholly foreign-owned enterprises (WFOE) operating in the fund management space, and many of these are expected to transition to full FMC in the next three years. In the regulated funds (retail) area, there are just under 100 approved FMC, less than half of which are set up as joint ventures (JV) between foreign and local partners. Many of

20 —

—ALFI— September/October 2019

business. This is a well-established rule that previously had only been applicable to Chinese firms, but extending it to foreign firms will allow a great deal more flexibility as to how they may operate. It is essential, however, that the two firms operated totally independently of each other. For example, the foreign FMC may wish to own 100% of a Chinese FMC and hold a minority stake in a fund distribution business (mutual funds are still mainly distributed by the major banks, and a few other wealth and financial services firms). Or they may retain their minority in an existing JV FMC and create another new one where they own 100%. There can be a number of other permutations of this too. roft rt Aldc nd Stewa sian fu A r, o is adv dustry senior in t n e ets em manag iti Mark ctor, C es ing dire ic g a rv n e a m rities S ited & Secu rust Lim n, Citit a m ir a ch

the foreign partners are seeking to buy out their local partner. They can own 51% from 2019, but this can rise to 100% in 2020. But some of the locals are not willing s ellers, which can lead to more difficult negotiations. There are some foreign owners that are also not willing to sell, as they are making very substantial profits from their minority-owned JV.

THE “ONE + ONE RULE”

This has led to another market opening change, which is that foreign firms may now also operate under the “one + one rule”, whereby they can own one FMC 100% and hold a minority (i.e., 49% or less) of another

BRAND AWARENESS, A MAJOR CHALLENGE

A major challenge for foreign firms entering the market will be brand awareness. The big global brand names in fund management have been unknown in China, so a variety of strategies will be required, potentially including poster and advertising campaigns, social media and other areas of sponsorship. China presents many opportunities for all those willing to take on the challenge, but it will be important to stay patient and allow them to evolve, as whilst we can be sure change will happen, the timeframe will be of China’s choosing. And depends on how much it perceives a need to mobilise foreign participation to increase competition, which will drive up standards. The recent announcements have indicated a need on China’s part, to accelerate the influx of foreign players in both the asset management and securities markets, thus leading to many opportunities for those willing to take part. 

CONTRIBUTIONS

The call for NextGen solution providers The Luxembourg fund industry has experienced a phenomenal growth phase. According to ALFI, net assets under management in Luxembourg investment funds recently exceeded 4.4 trillion euros. They are expected to cross the 5 trillion euro mark well before 2025, making Luxembourg the largest investment fund centre in Europe.

uxembourg is reaping the benefits of being L a first mover following the European Union’s adoption of the original UCITS regulation in 1985 and has successfully attracted international fund managers wishing to leverage the opportunities of cross-border distribution in Europe and beyond. The recent success of LP structures and RAIFs shows that the Grand Duchy is not resting on its laurels, but remains a vibrant and innovative financial centre. The effects of Brexit only accelerated this growth trend, with 66 companies having announced their relocation to Luxembourg as of August 2019, the highest number for any European country, according to KPMG. Further asset growth will be driven by demographic trends and the rising demands of the

t Steve Berna rtner, pa ng di un Fo Solutions ONE Group

retirement market. This is truly a golden era for Luxembourg.

EVOLUTION AHEAD

However, this growth presents significant challenges for the industry. First and foremost, how do we, as service providers to the industry, accommodate and sustain the creation of value and quality for our clients as the asset management industry undergoes seismic transformations? Luxembourg faces a scarcity of talent in key areas, such as compliance and risk management. At the same time, the complexity of fund products is increasing (especially in the alternative space). Needless to say, the rise in regulation of our industry in response to the financial crisis of 2008 and the increasing intricacy of the regulatory environment is not only here to stay, but will increase the demands on all protagonists in the value chain for years to come. Finally, the technological landscape is developing in ever-faster cycles. These factors will demand evolution, adaptation and new solutions of the Luxembourg fund industry.

NEW SOLUTIONS

Luxembourg has taken many of the right steps to embrace these challenges: it remains an attractive place to work for a global talent pool, and the University of Luxembourg, with its international and interdisciplinary curriculum, contributes to a multilingual, professional workforce. However, this is only the starting point. In order for Luxembourg to avoid becoming a victim of its own success yet harness the opportunities presented by continuous industry growth, new solutions enabling us to use resources in a scalable, sustainable and efficient manner must be cultivated. This calls for NextGen solution providers for the fund industry employing smart technology—

“ In this golden era, new and bold firms that adapt to the evolution of the fund industry with innovative solutions will prosper.” with tailor-made, technology-based oversight and control applications: management companies built on automated governance solutions that provide full transparency and control to the client; compliance tool kits that automate mundane and repetitive compliance tasks allowing compliance officers to focus on highrisk areas; and corporate solutions utilising the latest technology to cover all aspects of fund governance and board oversight. NextGen solution providers will be our industry’s custodians ensuring that asset managers adhere to applicable rules and regulations, client mandates, and best industry practices. But we must consider the same question the Romans did: “Quis custodiet ipsos custodes?”– who will guard the guards? Technology-based governance tools will play a key role in this effort, whereby specialist solution providers can become a focused extension of the operations of established industry players relieving them of some of their resource challenges. In this golden era for Luxembourg, new and bold firms that adapt to the evolution of the fund industry with innovative solutions will prosper.  September /October 2019 —ALFI—

— 21

CONTRIBUTIONS

Challenges ahead for asset managers from interest rate benchmark reform The widespread manipulation of interest rate benchmarks by banks whose rate submissions helped to determine benchmark families such as Libor and Euribor has presented a challenge to the EU authorities.

eythan Hermann B stment ve in r ne part rs LLP te la nk funds, Li g Luxembour

enchmarks such as Libor – London InterB bank Offered Rate – underpin a vast range of financial contracts and transactions worldwide,

from derivatives and bonds to credit cards and property loans. Libor-based contracts have a gross notional value of $240 trillion. Changes to financial markets have also eroded the credibility of traditional benchmarks. As the role of non-bank institutions in managing liquidity has increased, interbank borrowing, on which most established benchmarks are supposed to be based, has plummeted.

RELIABLE AND ROBUST BENCHMARKS

Regulators worldwide are urging financial institutions to adopt alternatives based on 22 —

— ALFI— September/October 2019

actual transactions. From end-2021, the UK’s Financial Services Authority will no longer require banks to make submissions for the calculation of Libor rates, which could result in an end to their publication. The 2016 EU Benchmarks Regulation states that benchmarks must be reliable and robust, and underpinned by observable transactions in an active market determined by competitive supply and demand forces – which the euro-denominated benchmarks Eonia and Euribor no longer meet in their existing form. A private-sector working group convened by the EU authorities and Belgium’s Financial Services and Markets Authority, as lead supervisor of Eonia and Euribor, has selected Ester – Euro Short-Term Rate – as the benchmark risk-free rate. The ECB will publish €STR for the first time on October 2, 2019. The European Money Markets Institute (EMMI) has led efforts to convert Euribor into a compliant benchmark with a hybrid methodology using actual transactions where possible, but other market prices if necessary. The Belgian regulator has now authorised EMMI as administrator of the revised Euribor, certifying it as compliant and eligible for use by EU-supervised entities after the Benchmarks Regulation’s transition period. Eonia is not dead yet, either; EMMI intends to apply to the FSMA for authorisation of Eonia in September. However, the jury is still out as to whether market participants will embrace the reformed Euribor and Eonia in the long term.

and Euribor as benchmarks by two years to January 1, 2022. The impending shift poses a significant challenge to the asset management community, which the Benchmark Regulation will require “to produce and maintain robust written plans setting out the actions they would take in the event that a benchmark materially changes or ceases to be provided”. For new and existing contracts between a fund and a counterparty that reference a benchmark, asset managers must assess whether the benchmark in question will cease to exist and if so, when.

WHAT ABOUT THE EXISTING CONTRACTS?

Existing contracts may have to be amended, since fallback provisions were generally not required under EU law until recently and anyway typically address only temporary unavailability of benchmarks, rather than their termination. New contracts will have to include permanent cessation triggers and benchmark replacement language. Managers must also assess whether assets in which the fund invests have exposure to a benchmark that may disappear or be replaced. This could create legal uncertainty that needs to be reflected in risk management, and also affects the liquidity of the asset. In addition, prospectuses and private placement memorandums will need to contain appropriate risk warnings. Asset managers must also consider that in economic terms, the new benchmarks will not be equivalent to their predecessors. A NEW DEADLINE TO 2022 While the Commission has given an addiIn this situation, the European Commission tional breathing space to make the necessary has decided the original 2020 deadline set changes, with many aspects of the changeover by the Benchmark Directive is no longer fea- still to be finalised, the industry has plenty of sible, and pushed back the end-date for Eonia work ahead. 

Notre approche a résisté à l’épreuve du temps.

Capital Group ﬁgure parmi les plus anciennes sociétés de gestion au monde, et The Capital SystemSM est le pilier central de notre processus d’investissement depuis 1958. Nos portefeuilles allient les styles d’investissement de chaque gérant, ce qui assure une diversiﬁcation naturelle du risque, tout en laissant à ces derniers la liberté d’exploiter leurs idées porteuses des plus fortes convictions. Une approche de recherche fondamentale possède à notre avis un atout déterminant, celui de générer des résultats supérieurs pour nos investisseurs, le tout avec une volatilité réduite. Pour en savoir plus, consultez capitalgroup.com/europe

Les performances passées ne préjugent pas des résultats futurs. La valeur des placements et le revenu qu’ils génèrent peuvent fluctuer à la hausse comme à la baisse et vous pourriez perdre une partie ou la totalité de votre placement initial. DOCUMENT RÉSERVÉ AUX PROFESSIONNELS DE L’INVESTISSEMENT Le présent document publié par Capital International Management Company Sàrl (« CIMC »), 37A avenue J.F. Kennedy, L-1855 Luxembourg, est fourni à titre d’information uniquement. CIMC est régie par la Commission de Surveillance du Secteur Financier (la « CSSF ») et est filiale de Capital Group Companies, Inc. (Capital Group). La société Capital Group s’efforce d’obtenir des informations de sources réputées fiables. La société Capital Group s’efforce d’obtenir des informations de sources tierces qu’elle croit fiables, toutefois, elle ne peut certifier ni garantir leur exactitude, leur fiabilité ou encore leur caractère exhaustif. Le présent document n’a pas vocation à être complet ni à fournir un conseil d’investissement, fiscal ou autre. © 2019 Capital Group. Tous droits reserves.

CONTRIBUTIONS

CSSF Circular 18/698, The new benchmark for Distribution oversight and AML controls In August 2018, the CSSF published Circular CSSF 18/698. The new Circular, referred to as the “Governance” or “Substance” Circular, sets the tone for the governance standards to be complied with by Luxembourg-based investment fund managers (IFM) and their delegates, as far as delegated duties are concerned.

ules for delegation and oversight of particuR lar importance are the rules on delegation and oversight of delegates.

AML/TF SCENARIOS Scenario 1

Scenario 2

Direct relationship with marketing intermediaries and/or direct investors Registrar agent

Characteristics

Scenario 3

Direct relationship with marketing intermediaries and/or direct investors Delegated registrar agent

No direct relationship with marketing intermediaries and/or direct investors Delegated registrar agent

Scenario 4 No complementary function of marketing of UCIs or registrar agent function

Annual inventory of direct intermediaries AML/KYC & distribution procedure Initial due diligence Periodic due diligence Ongoing reporting Delegation control Contract with registrar agent

DECISION TREE: DISTRIBUTION VS INTERMEDIARY Does the delegate perform marketing or promotion services?

YES Does the delegate receive or transmit sub/red orders?

YES Does the delegate perform other distribution tasks?

WHAT DOES THIS MEAN FOR FUND DISTRIBUTION?

YES

NO N/A

Business introducer

Intermediary

Distributor

Intermediary

Distributor contract

DDQ AML DDQ distribution tasks Contract type

24 —

Customer due diligence (KYC information sharing) Business introducer contract

—ALFI— September/October 2019

The main changes are the following: Re-statement of the “three levels” of delegation oversight, i.e. (1) initial due diligence, (2) periodic due diligence (risk-based) and (3) ongoing oversight (i.e. KPIs and quality meetings); Broadening of scope of delegation oversight, i.e. not only the core functions (portfolio management, risk management and, for UCITS, distribution) as defined by the UCITS and AIFMD Laws are subject to delegation oversight, but also other delegated tasks such as IT, compliance, internal audit, finance, valuation and risk support are subject to at least the initial and periodic due diligence controls. Ongoing monitoring is not required from a regulatory perspective and can be organised on an as-needed basis; Inclusion of AML requirements, i.e. in Chapter 5.4, the CSSF has defined distinct scenarios implying AML-related controls for IFMs (cf. AML/TF Governance and AML/TF scenarios); Finally, more specific guidance as to the oversight of distribution networks and intermediaries in investment fund share transactions.

Distribution is subject to oversight and control requirements, both from the perspective of AML as well as for the purposes of broader distribution controls. The CSSF guidance introduces the concept of “intermediary”, as a counterpart (private or corporate) to the IFM (or its transfer agent) for the subscription/redemption of fund shares.

AML/TF GOVERNANCE

Application

Each IFM (incl. branches) registered in an EU member state or third country

Regulatory framework

AML/CTF law

CSSF 12-02

CSSF circulars

Law of 27/10/2010

FAvTF publications

“ AML/CTF compliance officer at management level” Located in Luxembourg

At least once a year, preparation of a summary report on AML/CTF activities for top management Report to be sent to the CSSF five months after the IFM’s FYE

“ Reporting manager” Located in Luxembourg

Monitoring compliance with professional obligations

Staff requirement & duties

! Scenarios

The CSSF has defined four scenarios differentiating the obligations applicable to an IFM Scenarios defined based on the relationship between the IFM and its marketing intermediaries

For direct intermediaries not subject to any other duties imposed by contract or subscription agreement (e.g. execution platforms or collecting agents), only the AML framework applies and provides written requirements to ensure that AML-specific duties are performed by the intermediary in accordance with Luxembourg standards. For distribution agents to which specific distribution-related duties have been delegated by contractual agreement, the product-related controls apply in addition to the AML-specific ones. As such, direct intermediaries can be subject to: (1) AML-specific due diligence and oversight; (2) or due diligence pertaining to the delegated distribution tasks/duties (e.g. quality of shareholders, complaints, minimum subscription amounts, distribution countries); (3) or BOTH, if the direct intermediary is a delegated distribution agent via a distribution agreement. The mapping of all distribution parties (introducers, intermediaries and distribution agents) is a key task of any IFM in order to align its distribution oversight framework (cf. Decision tree: distributor vs intermediary). All indirect intermediaries or distribution agents are subject to a “mutatis mutandis” principle, i.e. the distribution oversight does not require a full look-through on all sub- delegated distribution agents, as long as the IFM has obtained comfort with regard to the first level (i.e. direct distribution intermediary) by obtaining the sub-delegates delegation and due diligence procedures (existence and efficiency) on its sub-delegates. However, this main principle again changes if the first level (i.e. direct distribution

intermediary) is considered high-risk from an AML perspective. In such case, an enhanced AML due diligence process applies, which triggers a look-through on UBOs and sub-delegates/clients. Consequently, the distribution network management is to be enhanced in light of the new CSSF guidance in order to comply with AML requirements (i.e. AML written agreement and, in case of high risk, enhanced due diligence) as well as in terms of broader distribution control requirements (i.e. distribution agreement for MiFID target market information, quality of investors, prospectus rules and selection of sub-delegates) (cf. New distribution oversight requirements). 

Multiple scenarios can be applicable for one IFM

NEW DISTRIBUTION OVERSIGHT REQUIREMENTS

Distribution procedure Implementation of 2010 and 2013 requirements on initial due diligence and ongoing monitoring

Due diligence and ongoing monitoring Due diligence performed on the basis of the 4 AML scenarios include MiFID II requirements (target market, inducements) Ongoing monitoring distribution incidents distribution countries MiFID II requirements complaints subscriptions and redemptions

CSSF reporting Annual inventory of direct distribution intermediaries (five months after end of FY)

Olivier Carré Financial service s market leader, PwC Luxe mbourg

September/October 2019 —ALFI—

— 25

CONTRIBUTIONS

The further efficiency of cross-border marketing of AIFs and important consequences After a year of negotiations and lobbying efforts, a directive and a regulation with regard to cross-border distribution of collective investment funds have been adopted and are effective since 1st August 2019.

ith this focus on cross-border distribuW tion of collective investment funds (in particular amending the AIFMD directive

distributor), such third party will either have to qualify as an investment firm, as a credit institution, as a UCITS management company, as another authorised AIFM or as a tied agent. Absent a harmonised approach at this point in time, this change could have a significant impact on the placement and marketing activities in general. The new directive further states that the new rules on pre-marketing should not disadvantage an EU AIFM vis-à-vis a non-EU AIFM. It now remains to be seen how member states will construe this formal recommendation. This means that third-country managers (potentially soon UK-based managers) could soon again face some renewed uncertainty as a result of the further harmonisation at EU level.

publish any such costs and charges and ESMA will keep monitoring.

and the EuVECA and EuSEF regulations), ESMA CENTRAL DATABASE ON CROSS-BORDER the European legal and regulatory frameMARKETING AND DENOTIFICATIONS work applying to AIFs is being shaped further. As of 2 February 2022, ESMA will maintain a Both the directive and the regulation publicly available database for cross-border are providing for an entry into force by marketing of AIFs that will indicate all AIFs 2 August 2021. While this may be quite some that are marketed in another member state, time out, the industry should start focusing their AIFM, EuSEF or EuVECA manager and on the new rules as soon as possible. a list of member states where they are marAIFMs should in particular be prompted keted. This means that the target markets of individual managers can be publicly known. to review their marketing and distribution set-up in the not too distant future since this is where the new rules will impact most and CONCLUSION rapidly. With the current and ongoing uncerThe implementation of these new requirements tainty around Brexit and its impact on pan-Euneeds to be carefully monitored. While the ropean distribution of investment funds at intent was to facilitate cross-border marketing, large, cross-border funds distribution and DENOTIFICATION OF MARKETING ACTIVITIES managers need to be mindful that this alleged marketing should be the most important topics The new directive clarifies the process for facilitation comes with additional strings and for the months to come. Main changes. denotification of the formal marketing activ- formalities attached. These additional formality into a specific country. The final text limits ities will put additional documentary obligaHARMONISATION OF PRE-MARKETING CONCEPT the repurchase offer to open-ended funds. tions on managers, which should factor in these A harmonised pre-marketing definition has new obligations as early as possible.  been introduced for the entire EU. Hence COMMON PRINCIPLES REGARDING FEES AIFMs will be able to test each market for AND CHARGES investor appetite. This is a major improvement Marketing across the EU comes at a certain to the current non-harmonised environment cost which today varies on a member state by where pre-marketing was even prohibited in member state basis (some emon Gilles Dus certain countries (e.g., France, Italy or Spain). member states chargrmation, ner Fund fo rt pa The new rules require that any pre-marketing nothing). Also, the Arendt ing activity be disclosed via an informal let- EuVECA and EuSEF reguter to the home state regulator of the relevant lations provide that no fees AIFM with an obligation on that regulator to may be levied in relation to the cross-border inform the pre-marketing host state regulator. distribution of such funds. The new regulation now provides that where fees and charges are TIGHTENING OF PRE-MARKETING AND MARKETING to be levied by national competent authoriACTIVITIES, AND THIRD-COUNTRY APPROACH ties, these charges and fees need to be consistIf the duly authorised AIFM is to retain the ser- ent with the cost of the overall performance vices of a third party to engage into pre-mar- of the functions by the competent authority. keting on its behalf (i.e., a placement agent or Competent authorities will have to clearly 26 —

—ALFI— September/October 2019

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CONTRIBUTIONS

Post-crisis fund regulation pushes data to centre-stage A decade after the financial crisis of 2008-09, the fund industry, along with the rest of the financial services sector, is adapting to the new regulatory landscape that has evolved in response to the lessons learnt from the turbulence that rocked countries and economies around the world a decade ago.

ey Noel Fess CEO, Fund European ion Administrat

hile the investment management and W fund sectors played only a peripheral role in the unfolding of the crisis, they

duction of the PRIIPs requirement represents a fresh demand on the industry to collate, compile and publish information in the format required by EU and national legislation. The substantial increase in these new requirements reflects an important lesson of the crisis – that the financial meltdown was exacerbated by inadequate awareness and understanding of the often complex nature of financial products and strategies, not only on the part of retail customers, but in some cases members of the financial services industry. Remedying that information shortfall is now the direct responsibility of the investment management industry, but it is one they struggle to meet without assistance from service providers whose duties already require access to a vast range of data generated by the sector on a daily basis. Complying with the new rules requires the tracking of information throughout the investment value chain, including on the decision-making process, individual securities, pricing, costs, the fund product itself and the investors. This involves the difficult task of extracting and collating data from a range of often unconnected and sometimes incompatible IT systems. It has also helped to spur the emergence of providers whose business is connecting parts of the value chain, at a cost that has become an extra burden for an already stretched asset management industry.

have found themselves subject to new rules, especially regarding transparency toward regulators and clients, designed to improve understanding of the sector’s impact on the overall financial system and to address information imbalances between providers and their customers. Meanwhile, global initiatives and European legislation aimed at curbing financial crime, especially money laundering and the financing of terrorism, are also leading to new requirements on fund managers, along with other financial institutions. They are now responsible for monitoring and where necessary reporting the origin and destination of funds passing through the financial system, including stricter new rules on the disclosure of ultimate beneficial ownership of assets. THE COST FACTOR The cost issue is critical for the sector, whose THE IMPORTANCE OF INFORMATION revenues were severely impacted by the effects Although UCITS funds are already required of the crisis on asset prices and investment to provide a key investor information docu- demand, even though these have subsequently ment to potential investors, the future intro- recovered. At the same time, companies have 28 —

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been obliged to make substantial investments in IT systems and human resources in order to meet the heightened regulatory requirements. The sharply increased penalties for breaches and lapses worldwide mean this is not an aspect they can ignore.

PREPARING FOR THE NEXT WAVE

A few years ago, fund providers used to console themselves that the wave of new regulation developed in response to the crisis would soon be complete, and that the pace of rule-making would slacken. Today, this seems less likely as rule-makers in the EU and beyond focus on areas that are taking on a higher profile, such as protection of personal data.

“Complying with the new rules requires the tracking of information throughout the investment value chain.” The importance of the role of fund service providers in gathering and assembling the data required for regulatory compliance and customer transparency is poised to grow further in the future, beyond the upcoming impact of measures such as PRIIPs. But the message for fund firms is clear: they cannot afford to take their eye off the ball. 

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CONTRIBUTIONS

Advancing diversity in the North American fund industry As asset management professionals looking to best support the distribution of our products and services, we have to understand who our clients are and ask ourselves if the industry’s workforce is reflective of the society we serve.

his question has begun to take a solid footT hold in the minds of senior executives searching for ways to drive innovation and

how business leaders can own the diversity issue, in conjunction with HR, and embed inclusion into the day-to-day fabric of how they run their businesses. spark creative client solutions. Another challenge facing the asset manIn late 2018, NICSA launched the Diversity Project North America, an initiative aimed agement industry is the historical brand repat tackling the issue from a top-down and utation of a community largely run by white strategic business perspective. The program males. The reality is that, while we certainly spans across companies with the mission of have our work cut out for us on the D&I front, accelerating a more inclusive culture within the industry offers an incredibly diverse set of the global asset management industry. NICSA opportunities for people of all backgrounds aims to accomplish this goal through collab- regardless of gender, race, orientation, or orative leadership among senior business educational background; and whether their leaders who control headcount and budgets interests lie in portfolio management, sales and that have the power to solicit and effect & distribution, technology, operations, risk change within their organisations. To date, management, data science, artificial intelthe Diversity Project North America has ligence, etc. As an industry, we have the onboarded over 30 firms (with more on the opportunity to engage more robustly with way) that demonstrate a keen interest in those entering the workforce to highlight the moving the needle in a positive direction on opportunity set that this industry provides. this critically important issue. Diversity of ideas and approaches makes REAPING THE REWARDS for higher-performing organisations and pro- In building the business case for diversity, one motes long-term business sustainability. Our can look to a couple of corner-stone ideals: message to all asset management industry participants is that, if you have not already done so, it is time to move into execution mode. NICSA’s Diversity Project is hoping to help firms do this by engaging high-level executives in order to provide our members with concrete, actionable best practices at both the firm and industry levels.

CHALLENGES AHEAD

One significant challenge to success is that too many executives and business leaders across the industry see diversity and inclusion as an initiative executed by the human resources side of their organisations. Much of the Diversity Project North America’s efforts are aimed at setting an example for 30 —

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(1) the development of an operating model that is conducive to idea sharing; and (2) the optimisation of an organisation’s ability to harness creativity. The effectiveness of that operating model design – as it relates to collaboration – can be greatly impacted by the diversity of the workforce. For this reason,

“The industry offers an incredibly diverse set of opportunities for people of all backgrounds.” D&I should be at the top of asset managers’ minds as they face a fiercely competitive environment that rewards innovation with asset growth and brand loyalty.

LOOKING AHEAD

Distribution executives worldwide have been acutely focused on addressing key trends and challenges resulting from evolving business environments that include issues such as intermediary partnerships, fee compression, shelf space, tech-inspired client services, product structure, and data analytics, to name a few. NICSA is focused on serving members across all facets of the industry to advance the exchange of information on these key themes. As investors’ needs evolve, so does our association. That is why we will continue to deepen our voice in the growing D&I conversak ic tr Jim Fitzpa d an tion. Join us at #DiversityProjectt en id es pr NorthAmerica.  CEO, NICSA

CONTRIBUTIONS

How NDC is helping deliver superlative air travel experiences to today’s digital-first customers Digitisation has transformed the world and the integration of digital technologies into traditional enterprise’s processes and has triggered a large-scale metamorphosis within the global business ecosystem.

were created in the era before the mass adoption of the Internet, and are therefore unable to keep up with the demands of today’s dynamic, agile, and digitally driven travel landscape. Such a major gap has a significant impact on third-party airline booking partners, such as travel agencies. They can’t offer any product differentiation to their end customers and, as a result, miss out on the lucrative, high-value business opportunity that bundling of ancillary services such as pre- assigned seats, baggage fees, and boarding privileges enable. More importantly, they loor Michael G merely end up becoming a point of transctor sales re di or ni se g action for the customer, instead of being ur xembo France, Lu s, nd rla he an essential part of their end-to-end travel et N and the Group experience. Lufthansa It is this particular need gap that the International Air Transport Association (IATA) one are the days when customers had sought to plug with the launch of its New Disto call up multiple travel agents to find tribution Capability (NDC), which marks a a reasonable quote. The rise of online travel move towards modernising the distribution booking and the subsequent integration of of airline products through third-party chanonline processes into offline operations have nels. NDC’s XML-based APIs allow for deeper helped players in the travel industry signifi- and more dynamic integrations between an cantly streamline how their end users search, airline’s complete catalogue of offerings and discover, and book their itineraries. the database available to its partner agents.

CHANGING PURCHASE HABITS

Purchase decisions made by today’s digital-first consumers are no longer solely dependent on the need but are also deeply influenced by factors such as aspiration, convenience, and novelty. They also want their consumer experiences to reflect that proposition. Millennial consumers demand immersion and, above all, personalisation across all touchpoints whenever they interact with a brand, service, or product. At its core, this is a design challenge. Most major distribution systems currently in use

if emerging growth opportunities are to be effectively tapped into. With the unique benefits that it enables, NDC is rapidly moving beyond a luxury to become a necessity for travel agents. Those ready and embracing this new future will be the ones to prevail. The Lufthansa Group airlines are at the forefront of driving this change together with their value chain partners. Our goal is to enable retailing in the airline industry together with our partners for our customers. To achieve this, we follow three core principles: Customer centricity: The future of the travel market requires customer-centred retailing. We aspire to provide access to additional services, fares and flexibility. The customer is at the centre stage, and jointly we strive to upgrade his experience. Value-based partnerships: Discovering opportunities through business model innovation: one size does not fit all. Placement and reach of NDC offers create value and are key elements to upgrade our business partnerships. Industry leadership: Efficient processes, enthusiastic people, digital expertise, and smart offers define our path to NDC. Committed to shaping the IATA standard of THE LUFTHANSA GROUP TRANSFORMATION NDC, Lufthansa Group airlines are the Modernisation is the need of the hour, espevanguard of innovation and take responcially in high-potential sectors such as travel, sibility in the leaderboard. 

“With the unique benefits that it enables, NDC is rapidly moving beyond a luxury to become a necessity for travel agents.” September/October 2019 —ALFI—

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CONTRIBUTIONS

Continuing a success story made in Luxembourg The Luxembourg fund industry is a success story like no other. With nearly €4,500 billion in assets under management, Luxembourg is today the leading investment fund centre in Europe and the second in the world.

attractiveness of Luxembourg’s fund centre. More than half of the 60 firms relocating activities or strengthening existing operations in Luxembourg as a result of Brexit are from the asset management industry. Irrespective of Brexit, the further completion and development of the EU single market in financial services should be a priority. na eg m Thanks to UCITS, Europe has provided ra G Pierre Finance an important blueprint for global cross- minister of border fund distribution. Recent regulatory projects like the Pan-European Personal Pension Product (PEPP) and the Capital Markets Union will provide new opportunities for the asset management industry by further breaking down cross-border barriers, while offering more choice to savers and investors. t holds a 60% market share of cross-border The industry is also witnessing a generafund distribution worldwide and asset man- tional shift, with tech-savvy Millennials who agers from 67 countries rely on Luxembourg want more say in how and where their money funds to reach global investors. 98 of the top is invested. Artificial intelligence and auto100 asset managers in Europe are based in mation, the rise of digital assets, and the Luxembourg. These figures speak for them- tokenisation of the economy are game changselves and convincingly illustrate what has ers. These innovations have the capacity to been achieved over the last 30 years. Provid- fundamentally transform the asset manageing the necessary toolbox and right expertise ment industry’s current value chains, includto set up, manage and distribute funds across ing of course fund distribution. It is therefore multiple markets and serving investors across a government priority to provide the right the globe, Luxembourg plays a central role environment allowing the fund industry to in the value chain of the global fund industry. adapt and ideally stay ahead of the curve. The LHoFT, launched as a public-private A CHALLENGED SECTOR partnership less than two years ago, has The sector has witnessed several major trans- become a key pillar in the development of formations in the past and is facing a number Luxembourg’s FinTech ecosystem and imporof challenges in the current environment. One tantly in bringing together the financial indusongoing source of uncertainty that has kept try and tech innovators, notably in the field of the asset management industry busy these RegTech and FundTech, to help drive innovapast few years has been Brexit. Luxembourg tion in the asset management industry. did not wish for Brexit and regrets seeing The adoption of legislation to specifically the UK leave the European Union. However, allow the use of blockchain or distributed ledBrexit has also been a “real live test” of the ger technology in the transfer and distribution

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of securities is another example of the government’s commitment to encourage innovation in the financial industry and the fund industry more specifically. The new law will provide additional clarity and legal certainty allowing the industry to develop future solutions. This was a first step, and the government is committed to go further. The most pressing global challenge, however, is undoubtedly climate change. Already home to the largest share of Europe’s responsible investment funds and the world’s leading listing centre for green bonds, Luxembourg is not only uniquely positioned to help drive the global fight against climate change, but also to become a leader and first mover in developing new sustainable fund products based on a Europe-wide taxonomy of environmentally sustainable activities. The government is here not only building on the solid foundations that have been laid over the past years: be it the climate finance platform with the EIB, the Climate Finance Accelerator, dedicated fund labels or the launch of the Luxembourg Green Exchange, the first platform of its kind in the world. The government has proactively engaged and strategically collaborated with the United Nations Environment Programme to design a Luxembourg Sustainable Finance Roadmap laying out a vision and key recommendations on how to consolidate Luxembourg as a centre for sustainable finance. The next step will be the launch of a national Sustainable Finance Initiative to develop and implement a national sustainable finance strategy. The challenges are manifold, but I am confident that by building on the strong dialogue and cooperation between the government and the fund centre community, Luxembourg will be able to continue this unique success story. 

CONTRIBUTIONS

How cutting costs and increasing margins will result in smarter product distribution More than 130,000 funds are currently being distributed worldwide. Who believes that consumers actually need that many funds? Is each one truly unique? Do the funds really create that much value for asset managers?

reating and marketing these products C comes at a significant cost. Besides managing the complex reporting and transparency

nal shift to differently-minded millennial inves- that successful firms invest significantly more tors will further exacerbate these pressures. into distribution-related technology. The positive impact of such strategies includes higher HOW CAN ASSET MANAGEMENT client tenure, and reduced distribution and FIRMS REMEDIATE THIS? operating costs through leaner product ranges. The first step to reducing costs is rationaliIn a “distribution 2.0” model, client intellising the existing product range and reviewing gence and product development pipelines are the marketing plan. Funds or share classes actively managed to meet asset revenue goals. are often registered for sale in markets with The efforts to achieve such objectives include little local interest. Registering all funds the analysis of external market data (e.g., fund and all share classes in every jurisdiction sales per market and channel) or an advanced is still a frequent practice in the industry. integration of CRM systems across distribuThe second step is a better distribution strategy. tion locations and product ranges to produce Too much effort is spent in the actual manage- insightful distribution analytics. Strong data ment of funds, while too little effort is given to management capabilities are the basis of both. the actual identification of the product to be However, only a few asset management firms launched and the region in which such pro- do so today. ducts are in demand. The main reason for this A fundamental re-connect of the historically is the lack of sufficient knowledge about the disintermediated asset management industry end customer and the intermediation of the with its end consumers is urgently needed to fund distribution model. continue to grow AuM against competitor proInvestments in distribution technology ducts such as ETFs, but also to comply with and intelligence will be a cornerstone of any upcoming regulatory constraints (e.g., the such new product strategy. Research shows target market oversight obligation). 

requirements, strict regulatory and compliance rules need to be followed in order to avoid the risk of significant fines. We believe there is a huge cost-saving potential for asset managers by distributing in a smarter way the right product for the right investors and market. Most of the agendas of asset management conferences are stuffed with alpha chasing, active versus passive funds, blockchain, new regulations, or ESG/SRI considerations. Actual product needs and investor intelligence only take up a minor space on the agenda of these firms, with products being launched based on too thin, anecdotal rather than factual, evidence. The question is: what product is in demand, in which market, and why? At a more advanced stage, this means understanding the client’s behaviour in order to design the range of products that investors are looking for, as opposed to isolated product management. However, a great product range is not enough, as knowledge about local distribution practices is equally fundamental to a successful product launch (e.g., channel intelligence). Deloitte’s Casey Quirk study shows that buyers score service quality erners David B r, 14 percent lower than asset managers directo mbourg e x u L do themselves. This correlates to a draDeloitte matic 44 percent drop of revenues per sales FTE between 2012 and 2017 and the rise of low-cost alternatives (e.g., ETFs) offering lower prices. Only 17 percent of asset managers successfully enhanced distribution data to turn it into meaningful insight or impactful marketing output. Distribution into emerging markets with different distribution patterns and a generatio-

im Hugé, François-K partner, xembourg Deloitte Lu

September/October 2019 —ALFI—

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CONTRIBUTIONS

ESG impact on the investment fund industry and distribution: a new paradigm? For a long time, SRI and ESG investments have been seen by the industry at best as a niche and thematic investment, and at worst as a “fad” that will not last.

not just about green bonds, microfinance and climate transition solutions but also requires engagement by voting and creating a dialogue with the company in which the industry is investing.

AN IMPORTANT EFFECT ON DISTRIBUTION

This ESG impact is not limited to investments: it also has an important effect on distribution. Whereas, initially, ESG was driven by institutional investors’ demands, it is now clearly taking root in the wholesale and retail segment, a trend which is being accelerated by the regulations. The ESMA project on integrating sustainability risks and factors in Patricia Kav MiFID II, with the final report eh head of dist ribution, published recently, is a good Banque de Luxembour g illustration. The end recomInvestments mendations to a client must reflect both financial objeche performance of SRI investments has tives and ESG preferences. The same goes regularly been called into question – as for insurance intermediaries and insurance if it was not possible to generate alpha if you undertakings distributing insurance-based are looking for “virtuous behaviour” in the investment products; they will be required investment field – and fortified by some phil- to include ESG investment objectives in the osophical debates in the background about suitability assessment. liberalism and the purpose of capitalism. This has direct and multiple consequences Now, the very rapid growth of “main- for investment managers: stream” ESG investments is a fact and is underpinned by a key question from the European regulators: how to achieve sustainable and inclusive growth? This structural trend is forcing the asset management industry to act quickly and adapt its way of investing. The challenges of integrating ESG into investment funds have led to important organisational changes that impact people, tools, data and processes – at a huge cost, of course. However, there is now also a demand for cultural change in terms of the asset management company’s social responsibility. Impact investment is

The importance of defining the underlying principles as the advisers integrate ESG in their investment advice. The capacity to deliver transparency, accurate reporting and documentation on ESG – in itself also clearly related to the data to which the investment firms have access. And finally, the question of the fund “label”. On this last subject, the existence of different local ESG labels, such as the implementation of the Belgian sustainability label this year, is also a challenge for an industry that has taken the cross-border route with products registered in several countries. How can local demand be reconciled with a more European approach to ESG? For the asset management industry, the integration of ESG criteria in investments is not a project, but the beginning of a “journey”. Significant challenges both on the investment and distribution side and on the organisational implications should not be underestimated. On the other hand, this journey could also be seen as an important growth driver for the industry and a source of dynamism in terms of new solutions offered to different types of investors, as well as an opportunity for innovation through new tools and products. 

“Impact investment is not just about green bonds, microfinance and climate transition solutions but also requires engagement by voting and creating a dialogue with the company in which the industry is investing.”

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CONTRIBUTIONS

How new strategies will prime asset managers for success After over 20 years in asset management, it is clear to me that our industry stands at a crossroads. In my view, the proliferation of fixed fees in active management, which reward managers regardless of whether or not they perform, has led to a misalignment of manager and client incentives.

anagers have been incentivised to raise M assets, not to perform, and because of this, trust has eroded as clients have grown

This is true even in firms with performance fees – traditionally many hedge funds have charged “performance” fees on any returns weary of paying for over-diversified portfo- above zero, effectively charging clients for lios that simply do not deliver. So how does exposure to beta. This is great for asset manaan industry steeped in legacy and tradition gers, but not for clients. And I believe it has a course-correct before it is too late? By imple- perverse effect on managers by encouraging menting innovative new strategies that realign them to grow assets rather than to control manager and client incentives. capacity, which in turn makes it more difficult for them to perform. It should be no THE QUESTION OF FEES AND PORTFOLIO surprise that investors are tired of paying MANAGER COMPENSATION fees regardless of whether or not their active The first major issue in active management managers beat their benchmarks. is fees. Not the level of fees, on which most The second major issue is an extension of the industry discussions have recently focused, first – portfolio manager compensation. Fixed but rather the structure of fees. Most firms fees create relatively stable revenue streams, charge fixed fees as a percent of assets, mea- which in turn have created relatively stable ning that managers receive the same fee compensation for managers. But active managwhether or not they beat their benchmarks. ers should be compensated based on the results they produce – not the assets they manage. Taken together, these issues illuminate a clear path forward. Active strategies should charge base fees competitive with those of comparable passive ETFs, and as performance is generated in excess of benchmarks, only then should performance fees be levied. Clients shouldn’t have to Peter Kraus pay more than the price of passive unless chairman they actually get more, and this type of and CEO, s or structure will help asset management st ve Aperture In firms find and retain portfolio managers who can create – and are rewarded for – outperformance. Next, we must change the way clients interact with portfolio managers. Traditionally, retail investors have had almost zero exposure to portfolio managers, and funds have been sold by salespeople through intermediaries. And in the institutional space, investors battle for portfolio managers’ time when what they’re actually paying for is returns.

“Technology can enable clients to better understand their managers, while simultaneously giving managers back valuable time and resources they can spend investing. It’s a win-win.” A revolution in fund marketing and sales is needed. New digital and social strategies can expose managers directly – and personally – to thousands of existing and potential investors without them ever having to leave the office. Managers engage in analysis, education and risk management with their teams every day – we simply need to offer clients a better window into that world. Even in the institutional space where face-to-face meetings with portfolio managers will always be a necessity, there are incredible efficiencies to be had by modernising our sales and diligence processes. Technology can enable clients to better understand their managers, while simultaneously giving managers back valuable time and resources they can spend investing. It’s a win-win. Change is not easy, and it will take time. But it is necessary if we are to survive the changes that are already upon us.  September/October 2019 —ALFI—

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CONTRIBUTIONS

Leveraging technology to deliver efficiencies in funds Market conditions have been challenging for active asset managers. According to recent research, fewer than one quarter of all actively managed equity funds outperformed their benchmarks in 2018, a fall from 53 percent in 2017 1.

while outsourcing provides intrinsic value for managers, firms need to exercise caution when deciding on what processes to externalise. For example, a manager may obtain a number of strategic efficiencies through outsourcing, but he might like to retain control of (a) particular operational process(es) in-house. Maurier adds approaches to outsourcing will vary across managers, depending on their strategies, geographical locations or growth stories, principally whether businesses have expanded organically or through acquisitions.

tions for DLT has declined, Maurier says the technology could solve a number of inefficiencies facing the funds and post-trade industries. It should be borne in mind that many questions remain open, particularly on regulation, interface between securities and cash, guarantees provided to investors that will enable them to have confidence in new digital processes. Maurier adds Societe Generale is a pioneer in the development of tokenised securities through Societe Generale FORGE, one of the group’s internal start-ups, and its role in Societe Generale issuance of the first covered INNOVATION AT SERVICE PROVIDERS bond as a security token on a public blockSimultaneously, providers are attempting to chain last April. Societe Generale and Societe distinguish their service offerings through Generale FORGE recently issued EUR100 milaurier Mathieu M innovation. Maurier says it could prove chal- lion of covered bonds in token form via the ad, country he curilenging to uproot a legacy system and replace Ethereum blockchain, generating extensive Se e al er Societe Gen urg it with an altogether new piece of technology efficiencies in the process 2. es Luxembo ic rv Se s tie infrastructure. Providers could focus on how new technologies can interoperate with leg- A MODEL INNOVATION APPROACH ome investors have taken note of the dis- acy systems. Hidden and unnecessary operational costs are appointing returns, shifting part of their More providers are leveraging APIs to pervasive throughout the asset management assets out of actively traded funds into passive unlock siloed data held across their entire industry, but service providers are working products such as ETFs, many of which charge organisations, and consolidating all of the hard to deliver dynamic solutions. Maurier fairly nominal fees. information into a single framework, giving concluded with the idea that innovation is For Mathieu Maurier, Societe Generale them a holistic view of their internal oper- not about replacing everything. It can also Securities Services (SGSS) country head in ations and those of their clients. Such data be subtle, just upgrading legacy platforms Luxembourg, while the industry is undoubt- could be used by investment firms to better to reach the right combination of new and edly going through a tough cycle, technolog- predict their cash flow forecasts or collateral old technologies, to reach the goal: deliver ical innovation would play an invaluable role requirements, facilitating improvements in value to clients.  in supporting active management. how they manage their cash and collateral holdings. This will ultimately generate savBEGINNING WITH THE BASICS: OUTSOURCING ings for asset managers, potentially offsetThrough outsourcing middle and back office ting return slippage elsewhere. activities to external vendors, asset manag1. FT Adviser (February 4, 2019): active managers struggle ers can transition away from their own pro- NEW TECHNOLOGIES to beat benchmarks. prietary legacy systems, allowing them to The integration of distributed ledger techociete Generale (April 23, 2019): Societe Generale accumulate the benefits of automation and nology (DLT) into the funds’ ecosystem is one 2. Sissued the first covered bond as a security token on scalability. However, Maurier accepts that such example. While the number of applica- a public blockchain.

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CONTRIBUTIONS

The convergence between public and private markets: an opportunity for Luxembourg Private equity funds have faced similar challenges to those of traditional asset classes, as regulatory pressures have increased since the financial crisis of 2008.

o counter the cost and administrative T burden caused by this, the industry has had to be even more innovative and forced

public markets as they drop their private partnership statuses for public corporate shareholding structures (like EQT’s anticipated to focus more on efficiencies and value cre- IPO later this month) and invest increasingly ation than ever before. The public markets in listed companies, whilst, conversely, some savings industry has also been very innovative fund managers have been moving into the in terms of creating cost competitive access private equity space (e.g., BlackRock, with products, such as ETFs. Access, especially for its recent launch of the long-term private retail, however remains difficult in private capital, a long-term capital investment fund). Luxembourg, as a major hub for European markets and is a key challenge, as well as an opportunity, for the private markets players and global asset managers, is well positioned going forward. to lead the way on many levels, particularly now regarding notably distribution-related issues, cross-border and across investor categories. For private equity specifically, the looming – hard – Brexit has brought renewed focus on the Grand Duchy while the EU- centric and onshore nature of our ecosystem

“Brexit has brought renewed focus on the Grand Duchy while the EU-centric and onshore nature of our ecosystem encourages private equity firms already present to boost their local operations.”

Irrespectively, the advent of technology tools to streamline the value chain of private equity has been an integral part of the success that marked the industry, as AuM and dry powder continue to be on the rise on the back of sustained relatively high returns. At the same time, the largest private equity firms blur the frontiers between private and

encourages private equity firms already present to boost their local operations. This means it is more crucial than ever that the entire Luxembourg ecosystem follows suit and delivers sustainable solutions to the industry. Put all together, these trends call for increased cooperation between the public and the private asset management industries to come up with common best practices when it comes to tackling fundraising, compliance/ KYC and distribution issues. From ESG standards via gender equality to passporting, joining efforts to foster our positions can only create positive impact and enhance performance. The ALFI conference series are a great platform to debate these topics in a pragmatic yet conceptually innovating fashion, hence the LPEA’s full support of them. 

Claus Man sfeldt chairman, LP EA

ider ouar-Schne Rajaa Mek mbourg xe Lu – EA CEO, LP e ty & Ventur Private Equi n tio ia oc Capital Ass

September/October 2019 —ALFI—

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CONTRIBUTIONS

how artificial intelligence will change the asset management industry Recent, significant advances in technology are disrupting current business models and creating new opportunities in the asset management industry. Some fear the new technologies, some hype them – but there is not necessarily reason for either reaction.

ut simply, these technologies can be useful P and powerful for any person, business, or society if they are used properly and responsi-

bly, or indeed disastrous if they are not. They may involve simple robots for robotic process automation (RPA), or more advanced algorithms for machine intelligence (generally called artificial intelligence or AI) 1, which can be used in machine learning (ML) 2 and its subsets like deep learning, reinforcement learning, or Bayesian and artificial neural networks. The related use cases in the asset management (AM) industry for these technologies are many: using RPA in various AM processes; applying ML algorithms to early signal identification in social media (for predicting price movements, for example); option trading; identifying macroeconomic trends; liquidity management; churn analysis; intelligent document analysis and comparisons; suspicious

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transaction monitoring; and others. These applications are exciting, but the challenge is unlocking their value with the result not only of surviving – but thriving. Like others in the financial services sector, asset managers need to create value and secure long-term success. This means increasing revenues, decreasing costs, and thus increasing profit margins in the ever changing digitally driven business environment. How? Generally, the answer involves a (customer-centric) business strategy that properly embeds a digital strategy.

INTEGRATING A DIGITAL STRATEGY INTO A BUSINESS STRATEGY

CTOs to the management executive committee and seeking new board members who bring interdisciplinary expertise in operations and technology. Furthermore, creating new digital and data roles at the senior management level and investing in talent development to more effectively leverage digital capabilities will become key organisational tasks. With the right team, a digital strategy responding to the business’s goals can be made – though indeed the strategies can differ widely between, for example, an asset manager focusing on cost differentiation versus one prioritising product and service quality. Finally, the integrated strategy should guide the primary focus: asset growth, operating efficiency, or profitability.

The best practice seems to be to place operations and technology capabilities at the heart THE DIGITAL BUSINESS MODEL of a strategic differentiation. This may mean How can a business model be reshaped to in practice, for example, appointing COOs/ become digital? First, bring the business

“The changes run deeper than it may seem. It is not a simple question of replacing humans with computers, nor will the new controls resemble the old ones.” operations and technology function closer together, essentially gluing them together, to eliminate traditional and artificial boundaries. Obstacles here may crop up on the people or internal governance side. Next, define and articulate joint strategic and project plans, which means combining budgets, sponsors, and teams for new initiatives such as RPA or AI applications (like natural language processing) to automate compliance tasks and governance issues (generating statements, reviewing of fund prospectuses, etc.). Finally, keep a clear focus on the client journey and how digitalisation can enhance it based on the business strategy. Successfully implementing a digital strategy often requires a two-pronged approach: thinking big and starting small. On the small side, asset managers must have a clear and short-term focus on cost reduction through technology. They might tackle legacy issues by streamlining their current architecture, reduce redundancies in and inconsistencies between applications, and retire systems

that are outdated or require heavy investments. In terms of thinking big, asset managers must simultaneously consider and invest in next-generation technology (e.g., private clouds or data lakes), capabilities (e.g., hiring new technology profiles), and operating models (e.g., agile applications, new control framework – see below).

And another question to be answered: who is or will be accountable for the results of the algorithm? Ultimately, trust in new technologies is gained only if thoughtful processes, governance, and controls are implemented right from the beginning. On this, inspiration comes from other industries. Aviation, for example, is tightly governed by regulations and each MANAGEMENT CONTROL FOR A DIGITAL airline has developed internal best practices, BUSINESS MODEL which generates trust. New technologies are In discussions about digitalisation, it is often understood and proven to improve quality, forgotten that changes in the business model efficiency and safety – this is what the asset require changes in the management control management industry must aim to emulate. framework – the framework that facilitates In conclusion, disruptive new technologies the execution of the strategy according to the create new opportunities, but require a digibusiness model. Aligning the business model tal strategy to be integrated into the business to the business objectives is often the respon- model. Establishing a proper management sibility of the management. Having a control control framework is pivotal, as is involving framework that is ineffective is, especially everyone concerned by the changes right for asset managers, simply not an option: from the start – by doing so, the new techgetting the new technologies wrong means nologies can be successfully implemented more than financial loss, but ethical, repu- and immediately accepted as a valuable aid tational and brand damage, too. to business and individual alike.  Furthermore, the changes run deeper than it may seem. It is not a simple question of replacing humans with computers, nor will the new controls resemble the old ones 3.For example, if an error hides within an algorithm (or the data feeding or training the ck ro b n le ueh Sven M f o d algorithm), it can influence the integrity a he partner, se, u o th and fairness of the decision made by the h Lig ourg Luxemb machine. This could include adversarial KPMG data or data masking as ground truth. Of course, the business leaders are on the hook for preserving the reputation of the firm, even if AI models increasingly make decisions that are not understood or in line with corporate policies and values, guidelines, regula- 1. See the CSSF’s white paper Artificial Intelligence: opportunities, risks and recommendations for the financial sector (December tions, laws, or the public’s expectations. This 2018) for an introductory overview of artificial intelligence in the is when trust weakens or actually evaporates. financial sector. A new piece of technology, particularly if it relies on algorithms, should meet minimum 2. Machine learning is regarded as a subset of artificial intelligence and refers to algorithm and statistical methods that computer requirements such as: systems use to perform a specific task effectively. They rely on patterns and inference instead of explicit instructions. It is also Quality: are its inputs and development often referred to as “statistical learning” to emphasise the process of high quality? relevance of statistics. Resilience: is its long-term operation optimised for change, risk, and uncertainty? 3. See KPMG’s publication Controlling AI: The imperative for transparency and explainability (June 2019) and the CSSF’s white paper Integrity: is its use considered acceptable? Artificial Intelligence: opportunities, risks and recommendations for the financial sector (December 2018). Effectiveness: does it perform as intended? September/October 2019 —ALFI—

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CONTRIBUTIONS

EU taxonomy: vice or virtue? The EU taxonomy helps financial market participants, asset owners and investment advisors to integrate ESG considerations into their internal processes and inform their clients accordingly.

o know whether a company is EU taxonT omy-eligible, investors have to ascertain that the economic activity:

contributes substantially to at least one of the European environmental objectives; does no significant harm to any of the other objectives; complies with minimum social safeguards; and complies with the technical screening criteria. The “do no significant harm” (DNSH) principle is an important addition to the taxonomy. Minimum requirements and performance standards will be formulated to avoid that progress against one objective is made at the expense of others.

HOW WILL THE EU TAXONOMY HELP?

Actiam sees the taxonomy as a major positive step towards realising a sustainable future as it provides clarity. It enables new entrants to know whether their investments are indeed sustainable, enables data providers to align their data systems to the technical screening criteria and enables companies to disclose the information required. It also broadens the sustainable investments scope. Many investors currently focus on climate and on reducing the carbon intensity of their portfolios. Notwithstanding the importance of the transition towards a low-carbon economy, the other European environmental objectives, such as those on biodiversity, water, circularity and waste prevention, are equally important for solving the challenges society currently faces. The new taxonomy pushes the bottom of the sustainable investment market upwards. However, does it also create new incentives for those already operating sustainably to do even better? The taxonomy would help the market for sustainable investments more if 40 —

—ALFI— September/October 2019

Does the taxonomy sufficiently underscore that investing in sustainable companies not only contributes to a sustainable society, but is necessary for investors to maintain revenues in the long term? Climate change, Arjan Ru ijs water scarcity, pollution, declining senior resp onsible biodiversity, as well as social unrest investmen t officer, as a result of breaches of human or Actiam labour rights pose actual, existential risks. These are not only societal risks, but also in the medium to long term to businesses, and therefore to investors. Actiam’s sustainability policy measures whether companies have sufficient adaptive capacity to tackle the risks the sustainability transitions bring about. It follows the taxonomy by measuring the impact of comit would better distinguish between different panies’ behaviour to sustainability, but also shades of green. During the negotiations that goes one step further. Companies are cateled to the regulation, the plan to also define gorized as sustainable only if they have the “non-sustainable” investments (naming and adaptive capacity to adopt the innovations shaming) was not adopted. So the taxonomy needed, for example, for a transition to a allows for calculating the percentage of a com- low-carbon society. pany’s revenues that is taxonomy-eligible. Yet, It would help the market if the taxonomy it does not correct this for the possible negative would also adopt a more forward-looking impacts of the company’s other activities on argumentation and consider as well the matethe EU environmental objectives. The DNSH riality of making these transitions.  principle only applies on the level of an activity and not on the level of a company. Not all funds adopt this principle for other objectives. Some impact strategies focus on a limited number of SDGs or on the magnitude of “green revenues”, not considering possible trade-offs or negative green revenues by other activities of the same company. The taxonomy would help investors if it would focus DNSH on the level of a company instead of an economic activity. The key question is whether investors will indeed place sustainability at the heart of their financial decision-making process.

“Actiam sees the taxonomy as a major positive step towards realising a sustainable future as it provides clarity.”

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CONTRIBUTIONS

Fintech: overview, threats and opportunities A lot has been said over the past few years about fintech, blockchain and crypto-assets, and about the consequences of these technological disruptions on the financial sector and on fund distribution.

here do we stand today, what is LuxW embourg’s position in this landscape, and what threats and opportunities should be anticipated?

A BIT OF HISTORY

10 years ago, Satoshi Nakamoto issued a white paper explaining the functioning of a new type of asset: the bitcoin. The underlying technology, the blockchain, still went relatively unknown until 2016 when major companies realised the disruptive potential of the technology and invested massively into it. Accordingly, initial coin offerings (ICOs) were practically non-existent until 2017, when figures skyrocketed: from 50 ICOs in 2016 worth USD100 million, a total amount of USD3 billion was raised in 2017 as part of 200 ICOs. 2018 followed the same pattern, with a year-on-year increase of 238% of the number of ICOs and 130% of the USD amounts invested. This sudden worldwide interest for blockchain and tokens created turmoil at the level of national regulators and international institutions. This resulted in the issuance of many warnings by central banks, the European Banking Authority, the European Securities and Markets Authority, as well as many of the world’s national regulators. Some regulators even resolved to reject some ICOs: for instance, the new Cyber Unit 42 —

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of the American Securities and Exchange Commission resolved to file charges against PlexCorps and its founder Dominic Lacroix, as part of the company’s ICO.

LUXEMBOURG’S POSITION

The Luxembourg regulatory authority, the CSSF, issued two warnings on 14 March 2018, reminding investors that tokens are not currencies, are not regulated and do not benefit from any guarantee regarding their value, hence a very high investment risk. However, the CSSF recommended, in a business-friendly and constructive approach, that any person willing to exercise a business related to tokenisation should submit their project to the CSSF who could then determine any applicable regulation. This openness of the regulator, together with other major initiatives such as the setup of the Luxembourg House of Finance and Technology (Lhoft) and a strong will from the government, helped achieve significant milestones: The government inserted a new article in the Luxembourg Law of 1 August 2001 concerning the circulation of securities, in order to consecrate the principle of technological neutrality by expressly allowing the registration and holding of securities by way of “secure electronic registration devices, including distributed electronic registers or databases”; Tokeny assisted in the first-ever token fund-

raising representing a fraction of the rights of a luxury real estate asset located in Belval; evidencing how blockchain makes it possible to split the ownership of an illiquid asset, render it accessible to smaller investors and liquid due to the greater ease of disposing of a token; Bitstamp and bitFlyer, which allow consumers to buy and sell currency tokens, based in Luxembourg and have been authorised by the CSSF as an electronic payment institution; The new European super calculator, EuroHPC, will be set up in Luxembourg; The label “FutureHub” was created in order to recognise schools that invest in new technology training; LuxTrust is being used at European level, either by other European cities, or by the European Parliament itself which used it to electronically sign a legislative act on 25 October 2017; The CSSF further announced that it is developing artificial intelligence tools in order to improve the supervision of the fund industry.

OPPORTUNITIES FOR THE FINANCIAL SECTOR

As the second largest fund centre, with EUR 4.065 billion in assets at the end of 2018, Luxembourg’s financial centre would strongly benefit from the various applications of fintech.

Nasir Zubairi, CEO of the Lhoft, also mentioned that due to the nature of Luxembourg’s activities and the ever-increasing European regulatory burden, regtech (fintechs specialised in regulatory aspects) “makes sense” to decrease back-office work and costs. In addition, customers are asking for more direct-to-consumer distribution, and as a consequence are increasingly sensitive to transparency, costs, user experience and the ability to connect and manage their assets anytime, anywhere, on any device. Investment in fintech and blockchain tackles the above challenges: Fast sharing of secure and verified data between the various actors (funds, investors, regulatory authorities); Easier transferability and traceability of assets through the use of asset tokens; Theoretically inviolable register, enabling strong ownership evidence; Digital signatures and cryptography strongly and quickly increase security of transactions, while immediately identifying suspicious operations. Expected consequences are reaching faster and secure payments, ownership transfers and record-keeping, strongly decreasing costs and back-office burden, and increasing transparency with respect to the involved actors, their role and costs. The rise of smart contracts, which automatically execute their terms and conditions, would also allow for reduced time, costs and discussions over the implementation of an agreement: for example, by automatically enforcing

Olivier de La Guéronni

ère director, corporate implementatio n, Atoz Tax Advisers

“defaulting investor” provisions if an investor doesn’t settle his commitment on time. These new available technological solutions and the possibility to automate traditional checks (compliance with AML regulation, eligibility checks for restricted investments, roles of the transfer agents, paying agents and custodians) means that disintermediation is to be expected in the fund distribution environment.

WHAT ARE THE RISKS?

As with any new technology, benefits are only realised if some risks are taken. Regulatory risks: There are challenges regarding the legal classification of a token: is it a payment token, a utility token or an asset token? Do rules applicable to traditional securities and public issuance apply to tokens and ICOs? Many national regulators have resolved to apply the same laws to tokens as to traditional securities. The CSSF stated that due to the dematerialised and cross-border characteristics of token transactions, a national regulation would have only little effect: a European or international regulation would be welcome. Many warnings have also been issued with respect to money laundering and the financing of terrorism (it is estimated that half of bitcoins are used for illegal activities).

Data on a blockchain is encrypted with a public and a private key; the latter being kept by the user itself outside of the blockchain. If the private key is lost, stolen or hacked, any information or token secured by a private key will become definitively inaccessible or irrecoverable. In one dramatic example, the founder of QuadrigaCX, a Canadian online crypto- exchange platform, was the only person holding the private keys of his clients. Due to his unexpected death, none of the company’s 115,000 clients will ever be able to access their EUR126 million of investments. Companies favour private blockchains for their internal use. However, this means that the blockchain contains fewer nodes. If hackers manage to control 51% of the nodes, then they can take control of the blockchain and validate transactions. This happened in January 2019 on the platform Ethereum Classic, generating a theft of EUR1 million. The advent of quantum computing and its increased calculation capabilities generates an even higher risk of hacking.

External competition: Luxembourg is not the only country competing in this new field: England’s Financial Conduct Authority has accredited Prime Factor Capital, a crypto asset management firm, as a full-scope alternative investment fund manager. Technical risks: Any information on a blockChina has made research in artificial intelchain is theoretically unfalsifiable, but this ligence one of its main centres of focus, and also means that the initial registration needs the long-serving head of the technical division to be correct: any mistake made during the of the French external intelligence agency, first registration cannot be corrected. Bernard Barbier, warned that Europe is shifting from a dependence on the US to a dependence on China. Inaction: The biggest risk, however, is the risk of not acting. Today, no significant impact has been made, but major disruption is at the doorstep: digital giants are slowly entering Jérémie S chaeffer banking activities, and the World partner, Economic Forum has determined head of co rporate Implementa that blockchain solutions will tion, Atoz Tax Ad represent USD12 billion in 2022. visers Some former market titans such as Kodak or Blackberry are perfect examples of leading companies who did not adapt fast enough to changing technologies. To take Nasir Zubairi’s view, Luxembourg’s financial sector actors are only very slowly implementing fintech, but tomorrow’s competitors may come from all corners of the world and disrupt Luxembourg’s fund distribution market. Change is here and change will not go away. All professionals of the financial sector need to quickly adapt, or remain passive observers as current or future competitors seize their market share. September/October 2019 —ALFI—

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CONTRIBUTIONS

Emerging technology: what does the future look like? At some point, the technology that we take for granted today will be subject to the same questions: is it a fad? Will it become essential? Or will it disappear in a few years’ time?

mazon could not be the world’s bigA gest retail platform, if the world’s biggest stores had been convinced consumers would move to online platforms. Apple’s place in the mobile phone market could not have been carved out if handset manufacturers had recognised how ubiquitous touchscreens would become. But those industries’ biggest names did not use their advantages of scale and brand to cement themselves as the go-to providers of new services and products that people wanted. This reticence is understandable. Not all new technology turns out to be as successful as the Internet or the touchscreen, as anyone with a long-unused collection of mini discs will know. Financial services firms have been exploring various “emerging technologies” for years now, but have not yet taken significant steps towards embedding these technologies into their business. For example, we have yet to see much use of distributed ledger technology to make secure data simultaneously available to multiple accessors, in combinations or formats relevant to them. The same can be said for applications of artificial.

This 167% increase suggests respondents’ exploration of the importance of emerging technologies has begun to bear fruit, justifying investment into them as a driver for growth. When asked where they saw applications for these technologies, the responses covered a wide range of functions: investment strategy; distribution; and internal operations. However, the difficulty and cost of marrying new tech to legacy systems was often an impediment to this approach, creating reluctance among senior management to make the necessary commitments.

WORKING WITH FINTECHS

Another interesting theme that emerged from the research was the types of organisations respondents had entered into partnerships with in order to explore these new technologies. Established technology tens David Sue providers were common, as ad, country he g were FinTech startups and other Luxembour et re St e at St research focused organisations. For instance, State Street in Luxembourg is one of the founding members of the Luxembourg House of Financial This could divide the industry into compaTechnology (LHoFT) which was established nies that provide technology services, along in 2017. This partnership is an extension of with their traditional business lines, and peers A STRATEGIC BUT COSTFUL HELP in-house research capabilities that help State who focus on their core investment business. There is precedent for this type of split in State Street’s new research among asset Street bring together FinTech startups with fund distribution. Some asset managers have managers and asset owners, New Routes to its in-house industry knowledge. Growth, gives an interesting insight into what The goal of the collaboration is the proac- platforms that host third-party funds alongconclusions have been drawn so far. Between tive development of services and to respond side their own, offering administration services 2017 and 2018, the proportion of executives to increasingly complex and personalised through “wrappers” like pensions or ISAs. surveyed who consider emerging technology business demands in the industry. State Street The market for these emerging technologies (cloud computing, distributed ledger, arti- works closely with FinTechs to understand is still nascent and, as such, it is still difficult to ficial intelligence and robotic process auto- how these technologies can be applied within predict how the landscape for the provision of services associated with them will develop. mation) to be a significant factor in helping financial services. Core financial services firms, such However, the growth of investment in them as their organisations achieve their strategic goals rose from 18% to 48% (from the least as banks and investment organisations, solutions means that these developments are were also popular choices for partnerships. likely to be significant.  significant factor to the most). 44 —

—ALFI— September/October 2019

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CONTRIBUTIONS

Sustainable investing, a journey rather than a destination Sustainable investments have grown by 34 percent to $30.7 trillion since 2016, mainly contributed by institutional clients (pension funds), retail investors and growing public and political concern about climate change.

egulatory and policy developments, such R as the EU action plan on financing sustainable growth and following the three legisla-

This is different from ESG, which focuses on integrating Environmental, Social and Governance factors into the investment process in order to make informed decisions. “ESG investing” is therefore investing in companies with good ESG practises. Impact investing focuses on a company’s activity or services whereas ESG focuses more on how a company operates. The strategic importance of ESG issues may vary by company and sector. For example, a company involved in mining may have a higher likelihood to be exposed to ESG issues than a company in the service industry. In the past, a glossy Corporate Social Responsibility (CSR) with exaggerated claims and amplified pictures on “how good we are” was consid-

tive proposals, have significantly contributed to raising awareness about this topic. Europe firmly remains in the lead for sustainable investments with about $14 trillion devoted to these strategies, up 11 percent from 2016, according to the Global Sustainable Investment Alliance, which aggregates data from regional sustainable investment associations/ forums around the world. Sustainable investing, which was broadly understood as “avoiding/eliminating exposures to companies or sectors that pose certain risks or violate the investor’s values” only two decades ago, has evolved over time into a sophisticated investment phenomenon which “systematically considers Environmental, Social and alas Governance (ESG) factors in Sachin Vank er, ag an m l genera portfolio selection and manFinance xembourg Lu agement” in order to advance ency Labelling Ag on certain desired ESG out(LuxFLAG) comes and financial returns. Most investors still have difficulties in differentiating between so-called “impact investing” and ESG-related issues. In many cases, these two terms are misplaced.

WHAT IS “IMPACT INVESTING”?

There are various definitions of impact investing – most of the time understood as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. These investments could be typically made in any of the 17 sustainable development goals (water, food security, health and well-being, education, financial inclusion, future mobility, circular economy, energy transition, and impact enablers). 46 —

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ered a job done. However, the increasing investor scrutiny on ESG issues has pushed companies to a higher level of corporate transparency. Over a short period, more than 50% of global companies are reporting on their sustainability, including their performance related to ESG factors. As a result of this, there has been a wide consensus on poor ESG practises or ignoring ESG issues that pose legal and reputational risks, which can consequently damage the company’s ability to attract more investments. ESG-related data are improving, but still remain inconsistent. Some subcomponents of ESG ratings are more useful than others depending on the company’s activity and sector, e.g. while evaluating a financial services firm, the ESG subcomponent on customer data protection would matter more than their natural resource use policy. Therefore, aggregating those subcomponents into a simple headline score may be misleading. Numerous ESG data vendors have established benchmarks and tools on ESG risk and performance, which are well accepted by the investors in public markets. Though sufficient data are made available for listed companies, it also adds complexity as the data vendors use different methodologies, e.g. in the midst of a big scandal a German car manufacturer was rated “positive” by one ESG data vendor, but “negative” by another. In private markets, however, ESG disclosure remains limited. Does ESG pose a threat of significantly limiting investment universe for conscious investors? For the time being, it does to a certain extent, but this is only a matter of time. Today, if one is a reasonable size asset manager or investor, one can simply not afford to be ignorant of ESG. The same will apply to companies as well. 

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CONTRIBUTIONS

Responsible & profitable 20 years ago, more and more ethical and ESG (Environmental, Social and Governance) funds were being created. Nonetheless, although professionals invested a lot to distribute those funds to retail customers, they were not a huge success.

or about two years now, there has been F a real shift in people’s mindset mainly on three different issues: ESG funds are outperforming, the offer is booming and our personal responsibility with regard to tomorrow’s challenges is increasing. Global warming, Earth Overshoot Day coming earlier every year, and ESG funds are showing huge potential in terms of tackling these and other challenges such as population growth, an aging population and the new way of consuming. ESG funds are outperforming:

Historically, distributors stammered in the face of a customer asking: does it really perform? Now, after years and years of good results and performance, ESG funds are outperforming others. The result: in 2018, $11.6 trillion were invested by funds in ESG criteria, 40% more than two years before.

We became responsible:

In recent years, we have seen a “Green Wave” all over the world and the last European election results were an indication of the huge increase in interest for our environment. Consumers, investors, governments… everybody rails against non-sustainable sectors. Polluting companies, those that use child labour are almost blacklisted, and everybody is trying to act by reducing consumption in order to improve air quality, fairness, justice and fiscal equity.

HUGE POTENTIAL

The forecasts are good when you look at the potential for ESG funds, and this is where YOU, the investor, will find the performers of tomorrow. Environmentally speaking, the issue of global warming has reached a consensus. “Save the planet” is trendy and investors

48 —

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like it! There are plenty of issues which have to be tackled. Decrease pollution:

Water: limit its pollution by using fewer pollutant products. Invest in technologically advanced companies to replace plastics. Air: improve air quality. Invest in cleantech funds which help to decrease gas emissions by developing green energy production. Energy production: how to decrease this pollution while the global population continues to increase remains a non Fabien Vrig big challenge worldwide. There CEO, are two ways of thinking. First, Keytrade Luxembourg Malthusianism, infinite growth in a finite world, is impossible so we need to reduce population growth. Secondly, the belief in the possibility for You can invest in so many sectors humanity to be self-sufficient by increas- to follow this trend: ing its productivity or finding new ways Invest in geographical areas: where the to use resources (for example, the hydropopulations are growing, mainly in Africa; gen car). invest in specific sectors (raw materials, Invest in global environment funds which food). focus on the environment, sustainable nat- Aging population: in 1960, the median age ural resources or the companies that are in the world was 23 years old. Today, it is engaged in this area. 31, and in 2050, it will be 36. Invest in the To produce less and use resources more health sector, of course, mainly in Europe efficiently: Jeremy Rifkin, in his book The and North America where the percentage Zero Marginal Cost Society, suggests that of seniors is the highest. Invest in luxury people no longer want to buy something travel, the older you are, the less you want that they could use without owning it. This to camp! Cruises and luxury hotel chains prediction has been steadily becoming a are a good sector too. The wellness sector reality in recent years and the trend is also has a bright future. clearly rising: invest in sharing platforms In conclusion, I would say, let’s embrace the (cars, real estate, goods in general). “Save the planet” wave. Be altruistic by helping Less transportation and local consumption: to improve the Earth’s future and selfish by invest in local companies or global compa- investing in this area which is already shownies with a focus on this topic. ing huge potential. Let’s make true this motto Population increase: in 1960, we were 3 bil- of the free marketer Bernard Mandeville: lion on earth, today we are 7.7 billion; and in “Private vices, public virtues” by investing in 2050, we are expected to be 10 billion. sustainability and green funds. 

KEEP CALM AND

GO TO THE NEW

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CONTRIBUTIONS

Why responsible investing is about more than just divestment Economist Albert Hirschman once argued that people have two different ways of responding to disappointment. They will either stay put and complain or they will vote with their feet. Hirschman called these two responses “voice” and “exit”.

n unhappy customer may choose to A complain and exchange their goods for a refund, while another may simply never

return. This same dilemma also applies to ethically-minded investors. Divesting from companies that break ethical rules is often the most convenient option for investors and can sometimes even bring about a quick reputational boost. However, once investors sell out they can no longer apply the required pressure to company boards to drive change. Instead, they could be replaced by less conscientious shareholders who are more than happy to look the other way. And as Hirschman observed, while exiting may be more convenient and conscious soothing, it tends to entrench the status quo. So how can investors engage with companies to improve their practices?

USING ENGAGEMENT AS A FORCE FOR CHANGE

Engagement may sound like the latest industry buzzword, but its origins add more depth to the story. It can be traced back to the roots of consumer law, which positioned shareholders as the primary regulators of corporate behaviour. Modern investors should approach their responsibilities in the same spirit. Investors have a moral duty to act when and where they have the power to enforce generally accepted standards. This can often mean staying put to engage and establish a dialogue and exerting pressure where necessary. In turn, this can help to protect longterm shareholder value. While divestment is the simpler solution in many cases, the real question investors need to be asking is what is more likely to bring about long-term change?

HOW INVESTORS CAN DRIVE CHANGE

Equity investors have a wide variety of tools 50 —

—ALFI— September/October 2019

at their disposal. They have the power to fire a company’s leadership at AGMs and can use this power to vote against strategies they disagree with. Investors can also vote against auditors if they are concerned the company’s reports and accounts are not being properly scrutinised or do not truthfully represent the financial and reputational risk it faces. Importantly shareholders can work together to bolster their influence. This type of collaborative engagement is particularly important when it comes to addressing the behaviour of powerful fossil fuel companies that might be used to resisting pressure from environmental campaigns. One way institutions can ensure managers are taking responsibility for driving change is

to build engagement plans into yearly objectives. This helps set the scene for potential sanctions should the engagement plan fail to deliver. It is also important to note and recognise the limits of what engagement can truly achieve in the face of specific market failures. This could include the inability to correctly price the impact of climate change or the depletion of natural resources such as iron ore or fresh water. This is primarily the responsibility of governments; however, the investment industry also has a role to play through engagement and market reform efforts.

WHAT INVESTORS SHOULD DO IF THEY FAIL TO SEE CHANGE

Despite the impact engagement can have, not every investor will have the influence to make a company change its behaviours, and sometimes firms will refuse to improve their business practices no matter how strongly investors protest. There is no denying that sometimes engagement can fail and there will come a time when the best option for an investor is to walk away. Investors must set goals and timeframes to measure the effectiveness of their engagement. If those goals cannot be met despite persistence and a concerted effort, then it may be time for investors to use the exit – if the mandate agreed with the client provides for such an approach. Investors should be bold enough to use their voices to bring about positive change. Through engaging in dialogue and bringing ESG to the forefront of corporate discussion, investors can help to accelerate meaningful action. 

Steve W chief re aygood s investm ponsible ent offi ce Aviva Investo r, rs

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CONTRIBUTIONS

MiFID II – with or without you: client preferences already drive sustainable investing Sustainable investing has become the new norm for the asset management industry. The integration of ESG/sustainability factors by asset managers is already a reality and mainly a response to client demand in Europe and increasingly so in Asia.

sset managers operating in Europe now A view the integration of ESG criteria into their investment process increasingly as a nat-

ural element of their stewardship responsibilities: they score investee companies against E-S-and-G criteria based on company reports, external data providers and after assessment, internal investment professionals arrive at a rating. It is now common practice that institutional investor clients select asset managers not only based on performance, but also on ESG- related capabilities; for retail investor c lients, asset managers – including Fidelity – are launching new sustainable funds to meet growing client demand. Consequently, asset managers are already looking to identify clients’ ESG preferences through the distribution and investment process. Active asset managers even go beyond: through the engagement with investee companies, they aim to have an impact on how well companies apply ESG criteria in their respective industry sectors, so to reduce investment risks and enhance returns. As such, managers perform their stewardship duties by representing the interests of asset owners and transform client sustainability preferences into the business behaviour of companies.

is a key prerequisite so that clients are able to express their preferences. They can only make informed decisions based on their level of ESG knowledge to exercise choices. The public sector at EU and member state level plays a significant role through enhancing financial literacy of young people by providing independent and holistic information to citizens. Retail clients may then have greater incentives to start saving early for their retirement if their assets are invested into sustainable financial products. It is therefore helpful that not only AIFMD and UCITS, but also the IORP (2nd pillar occupational pensions) and the PEPP (3 rd pillar personal retirement savings) require the assessment of clients’ sustainability preferences.

EU ECO-LABELS, AN IMPORTANT TOO

The development of EU eco-labels for financial products will be an important tool for asset owners to express their sustainability preferences and helpful for asset managers in the distribution process. Labels should be easily recognisable for consumers. Therefore, the development of a label that indicates the sustainability of an investment fund on a spectrum, range or a ranking system is preferable. Similar to the energy label utilised in the property sector, which consumers find easy to understand. Investor clients could then MIFID II’S CRUCIAL ROLE MiFID II will play a crucial role nevertheless, choose the level of sustainability or impact although clients are driving sustainable their investment fund should have on a range investing already: enshrining common sus- of 1 to 5 or 7, or a spectrum from red-ambertainable finance distribution principles into green like in the real estate sector. A major law has multiple benefits. Firstly, it may lead advantage of designing the eco-label this to greater standardisation related to client way is that clients can truly drive the developpreferences (demand side) and hence support ment: it also allows asset managers investing the mainstreaming of the integration process in all assets and through active engagement by asset managers (supply side). Secondly, to improve the ESG performance of compait may promote investor education, which nies and the fund. As a result, it would have a 52 —

—ALFI— September/October 2019

arkey Westerb Natalie policy, lic b u EU p al head of ti a tern on Fidelity In

positive impact on sustainability, aiming also at reducing investment risks and enhancing financial performance.

THE NEED TO ACT JOINTLY

MiFID II, however, will not be enough. The EU can only reach its climate and sustainability targets if the global community acts jointly. The EU efforts to coordinate a global approach are essential. Also, IOSCO – through its Sustainable Finance Network – and other global initiatives can play a key role in this process through the creation of a level playing field for asset managers and the development of internationally consistent standards with regards to sustainable finance policies. With or without MiFID II – the fact that asset owners, both retail and institutional clients, are already demanding sustainable finance investment products is a positive development; and with MiFID II a common approach to identify client preferences will be made easier for distributors. 

TUE

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CONTRIBUTIONS

The evolution of pan-European open-end real estate funds 2018 proved to be a record year in terms of capital raising for non-listed real estate vehicles. This result follows a trend of steady increases in capital raising for the industry since 2012.

he increase in popularity of open-end T funds from an investor’s perspective has been driven by challenges encountered in

is undoubtedly a very important matter, few managers have cited this as a key consideration of existing and target investors they deal with. Fund investment strategy is, unsurprissome more established fixed income asset classes. Investors have been forced to seek ingly, key. As challenges in capital deployment other sources of stable income to satisfy their increase due to increased property market, needs and, inevitably, real estate has step- activity managers will come under pressure ped up as a prime candidate. Producing solid, to demonstrate their ability to find alternative recurring income returns, inflation protection investment targets whilst not falling into the trap of strategic drift. and diversification.

A RANGE OF EXCITING NEW PRODUCTS

This evolution has seen an expansion of the types of managers promoting such products. Whilst open-end funds were once predominantly the remit of traditional investment managers, we now see a range of exciting new products coming to market promoted by new entrants to this field, including established PERE houses and leading property developers, many of whom are putting a fresh spin on this product format. Equally, as the attractiveness of open-end real estate continues and new entrants enter this space, there is an increased diversity of the nature of assets being acquired and managed by these products. Pre-crisis, the majority of open-end funds held portfolios comprised largely office buildings. This is no longer the case as we see these funds expanding into various forms of retail, logistics and residential. Indeed, many new offerings on the market are establishing niche plays which are focused exclusively on these more alternative aspects of the market. Much of the industry conversation in relation to the design of open-end core funds over the last 12 months has focused on pricing mechanisms. However, whilst the manner in which units in these funds are priced for the purposes of subscriptions and redemptions 54 —

— ALFI— September/October 2019

tory agenda is the ever-evolving fiscal environment. Establishing and maintaining tax compliant structures is a major focus of all managers currently. One of the main differentiating factors of an open-end real estate fund versus its close end counterpart is that it provides the investors with a measure of liquidity. The process through which the manager balances the provision of investor liquidity with the inherently illiquid nature of the underlying asset class A COMPLEX REGULATORY AGENDA continues to be a lively talking point. The The European and global regulatory agenda, challenge which the manager must respond amongst other factors, has caused the chosen to is how to provide liquidity to certain invesstructure to become a more relevant deter- tors whilst not compromising potential for minant of their success in capital raising than value creation and the interests of all invesever before. The post-AIFMD environment tors collectively. means that intelligently implementing new Investor reporting too is becoming a far regulation into a manager’s global opera- more sophisticated and holistic process. Investing model is key to ensuring access to capital tors KPIs are no longer purely financial and markets. Overlaying this complex regula- they are keen to be provided with information on a wide range of topics that impact the reputational and financial risk of te their investments. Managers are hi W t Rober responding to this by developing partner, urg EY Luxembo more integrated reporting systems across their platform which allow them to respond to these demands whilst also, more broadly, utilising their data in more valuable ways. Overall, the future for open-end core funds seems bright. However, it is likely that this capital raising will be focused on a small number of market participants and there are clear challenges to face to be amongst the successful few. The pursuit of competitive advantage in this area will inevitably lead to innovation right across the European real estate funds market and should ultimately provide robust investment products capable of producing strong and sustainable investor outcomes. 

CONTRIBUTIONS

Marketing funds across the Atlantic The US remains the world’s largest asset management market, as such it is an attractive prize for European fund managers. However, the complexity of US regulation is typically off-putting.

o start, it is worth highlighting the difT ferences between European and US regulatory regimes. European regulations seek

Company Act of 1940 to register with the Securities and Exchange Commisson (SEC) and comply with the Act’s intricacies. There are to impose standardised environments for several exemptions available, though the two investment managers and their funds, while most common concern non-public offerings national rules still govern their marketing. to: (i) a limited number of persons (less than Consequently, European managers often 100); or (ii) limited types of investors who meet approach the US with the same mindset when minimum net worth thresholds (qualified puroffering funds in another European coun- chasers), but without a prescribed limit as to try. Marketing in the US, however, is quite number of investors. It should be noted that the straightforward as there is no notification minimum net worth requirements for qualified procedure as exists under AIFMD. Rather, purchasers are higher than those applicable to non-US managers should consider how US accredited investors, though most institutions regulation of investment advisers and funds are capable of satisfying both. applies to their proposed activities.

NAVIGATING US SECURITIES LAWS

WHO SHOULD REGISTER?

European managers marketing in the US will also be subject to regulation as an investment adviser. Historically, private fund managers did not typically register with the SEC. However, following the Dodd-Frank Act, the SEC generally required all advisers to register with the SEC, subject to limited exemptions. These exemptions include: (i) a foreign private adviser exemption applicable to foreign managers who oversee less than USD25 million in assets (among other requirements); and (ii) a private fund adviser exemption, which exempts advisers to private funds if they manage less than USD150 million in assets. Such “exempt reporting advisers” (ERAs) are required to notify with the SEC and file periodic reports, much in the same way that US managers are required to notify under AIFMD private placement rules, though they are not subject to full SEC oversight.

European managers can navigate US securities laws by using a framework of exemptions. The main ones, described in brief below, can significantly reduce, and in some cases eliminate the full scope of regulation imposed on the US funds industry. It is also important for non-US managers to understand how the tax status of US investors affects their decisions. However, there isn’t scope to consider those in this article. An offering of fund interests in the US requires registration under the Securities Act of 1933. Nonetheless, section 4(a)(2) of the act provides an exemption from registration for transactions “not involving a public offering.” Consequently, non-US managers may conduct private placements in the US. Rule 506 in Regulation D of the Securities Act provides standardised safe harbours for private offerings involving: (i) a limited number of US persons; or (ii) US persons who meet minimum net worth requirements (called “accredited investors”). CAREFUL PLANNING AND ORGANISATION As with any other type of issuer of securi- It is worth noting that there are other reguties, a fund is required under the Investment lators and ancillary laws applicable to funds

rs Ed Winte counsel, embourg e US-Lux head of th LLP ve n & O ry desk, Alle

in the US, such as the Commodity Exchange Act, which regulates most derivative transactions. As a result, fund managers may need to conduct analysis regarding the CEA and accompanying regulations, though again, many investment advisers are able to rely on recognised exemptions from full registration, or devise a structural solution if the manager is only trading a small amount of commodity interests. In conclusion, careful planning and organisation by European managers affords them significant latitude to raise capital in the US while still conforming to local rules.  September/October 2019 —ALFI—

— 55

CONTRIBUTIONS

Meeting Asian investors’ income needs Challenging market conditions, slower economic growth and trade tensions have adversely impacted investor confidence, risk appetite, and net new flows (NNF). In 2018, balanced funds were among the top asset classes by net flows in Asian markets, excluding China.

et flows to balanced funds increased in N Hong Kong, Taiwan and Korea as investors continued to seek diversification and

means to weather volatility. In Taiwan, even as balanced funds ruled, the new funds with the highest net flows were bonds. On the other hand, India received the highest NNF to equity funds in 2018 compared to other Asian markets. Income and diversification, coupled with capital protection and low volatility, continue to underpin Asian investors’ needs. To meet these needs, Asian asset managers are focusing on fixed-income funds and multi-asset strategies. Asset managers feel that differentiation via multi-asset solutions is key. By providing portfolios that attempt to meet specific investment goals of investors, asset managers hope to provide greater customisation for their investors, and cater to their needs. Similar to asset managers, distributors see features such as regular and steady income

payments, capital protection, and low volatility as most important to retail investors. Cerulli’s survey of fund distributors showed that fund performance and investment process are the top-ranked factors when selecting a fund. Distributors across investment channels demand products that can withstand different market cycles and generate stable and good returns. Regular interactions with fund managers, often considered integral by global bank distributors to gain a better understanding of the fund dynamics and investment philosophies adopted, are particularly important during market downturns. Distributors in Singapore and Hong Kong shared with Cerulli that among fixed-income funds, they are keen on fixed-maturity plans (FMPs) and Asian high-yield funds. FMPs witnessed considerable demand last year and could continue to receive interest in 2019 as well, as distributors are keen to onboard such plans, especially the ones with floating rate bonds.

CERULLI’S TRENDS SURVEY

Other niche ideas that distributors want managers to come up with over the next three years include structured products, retirement funds, multi-asset funds, and funds of ETFs, among others. Retirement and target-date funds seem to be getting more attention, especially in markets such as Korea and Taiwan, with their aging populations. However, as retirement products still form only a small fraction of the total universe of mutual investments offered in Asian markets, there is a need for both asset managers and distributors to educate investors on the importance of such products to generate traction. According to Cerulli’s survey, there has also been some interest by distributors in the-

Ken Yap , ing director ag an m ociates ss A li ul er Asia, C

56 —

—ALFI— September/October 2019

matic funds such as technology, clean energy, infrastructure, and healthcare. In Singapore, distributors are keen to onboard technology and infrastructure-focused funds. Even though Cerulli gathers from its interviews that sustainable investing is increasingly becoming a part of due diligence, distributors in our survey ranked it as the least important factor during fund selection. This could be because European private banks are the ones embracing ESG investing, but other distribution channels such as online platforms and independent financial advisors are late in adopting this. It could also indicate that demand from end investors in Asia is still low, given their penchant for fund returns over sustainability.

“Among fixed-income funds, distributors in Singapore and Hong Kong are keen on fixed-maturity plans (FMPs) and Asian high-yield funds.” Although asset managers continue to favour traditional mutual funds such as multi-asset and fixed income, they will need to continuously strive to bring out differentiated product features to stand out in the crowd and gain a better chance to onboard products with key distribution channels. 

„Meng Mamm mécht mir eng Selectioun vun Noriichten, déi si mir empfielt“ “My mother selects news for me and advises me to read it.” Anna (29)

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CONTRIBUTIONS

Data science as a driver of competitiveness With over 4,000 investment funds, 140 banks, 300 insurance companies and over $4.5 trillion of assets under management (AuM), Luxembourg is the world’s second largest investment funds domicile. Sitting on an impressive number of clients, market perspectives, and above all data, the Grand Duchy is facing an amazing opportunity to reimagine its distribution and asset servicing model in order to address market challenges.

minimise costs. Artificial intelligence models, far from the most complex, given that so much of financial services data is structured, can help the asset management industry better understand their investor needs and thus better tailor products for fulfilment.

performance measurement, market intelligence, or risk metrics. It is a powerful tool in the arsenal of any firm looking to stay a step ahead of the rest of the field. Consumer firms have for decades leveraged the power of data to help drive their business; it is somewhat ironic that the financial services industry has DATA AS A KEY SOURCE historically employed some of the best mathOF COMPETITIVE ADVANTAGE ematicians and statisticians the university sysMachine learning algorithms have for quite tem has to offer, yet is so far behind in terms some time been utilised by hedge funds and of harnessing the power of data to effectively other capital market practitioners for exe- manage its business and to best serve its cuscution, yet the method has not caught on in tomers. The asset management industry is a a major way within the broader asset man- bit behind most sectors in finance in its data agement industry. Data science, combining science sophistication; so, the sector needs AI and big data, can enable an unprecedented now to catch up.  iri efficiency in understanding market dynamics, Nasir Zuba T oF LH , EO C enhancing execution in portfolio management while significantly reducing costs. E ffective use of data and AI should be seen as a key ccording to PwC 1, we are on the precipice source of competitive advantage for asset of $30 trillion transfer of wealth from managers and as a core component of the baby boomers to generation X and Millen- growing market in robo-advice that caters nials. Of this, US$4.1 trillion are anticipated for the digital expectations and engagement to change hands over the next ten years alone, of the newer generations. ww.pwc.com/us/en/industries/financial-services/library/ AI can help make sense of large scale and 1. wmanaging-millennial-money.html specifically within the ultra-high net worth 2 (UHNW) segment . The demographic inhe- unwieldly data to produce descriptive and riting this windfall loves technology and predictive analytics on investor behaviours, 2. www.wealthx.com/five-countries-largest-wealth-transfers/ embraces change and disruption. Yet at the same time, “wealth management is one of the least tech-literate sectors of financial services”. This is a clear red flag for traditional service providers who must evolve to remain competitive. Data and the use of AI in many forms will be key to winning in the years to come.

DATA IS EVERYWHERE

New technologies and hyperconnectivity provide the opportunity to utilise data for superior decision making in order to drive revenues and 58 —

—ALFI— September/October 2019

“Data science, combining AI and big data, can enable an unprecedented efficiency in understanding market dynamics, enhancing execution in portfolio management while significantly reducing costs .”

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CONTRIBUTIONS

Taking responsibility by adopting an AML risk-based approach The concept of a risk-based approach determines the basis for the industry to apply effective risk-sensitive measures and allocate their resources in an efficient way. Whilst offering flexibility, it also renders all entities responsible for deploying the means which are necessary to mitigate the money laundering and terrorist financing risks they are exposed to.

he Financial Action Task Force (FATF), T as an intergovernmental body, issued its initial set of recommendations in 1990.

They have been reviewed and updated four times in order to reflect its extended mandate from anti-money laundering to include counter-terrorist financing and the fight against proliferation financing, as well as to consider threats emerging from new actors, businesses and technologies. These recommendations represent the foundation of our national laws and regulations.

SETTING THE BASIS

Recommendation 1, released in 2012 as probably the most material novation of the last FATF update, stresses the importance for

k Marco Zwic F director, CSS

60 —

—ALFI— September/October 2019

countries to “identify, assess, and understand the money laundering and terrorist financing risks for the country, and (…) apply resources, aimed at ensuring the risks are mitigated effectively”. It sets the basis for the other 39 recommendations in that it requires a detailed review of threats and vulnerabilities, which Luxembourg has done via its National Risk Assessment and will continue to detail further via specific sectoral risk assessments. It also focuses on the obligation for countries and financial institutions, as well as designated non-financial businesses and professions, to implement measures that effectively mitigate money laundering and terrorist financing risks. Hence there has been a shift from pure technical legal and regulatory compliance to the demonstration of the effectiveness of measures put in place.

SECTOR-SPECIFIC GUIDANCE DOCUMENTS

In addition, FATF has issued a number of sector-specific guidance documents to the industry and to supervisors. Notably, the Guidance for a risk-based approach in the securities sector, released in October 2018, includes investment funds in its non-exhaustive definition of “securities” and recognises the variety and complexity of securities transactions. It outlines key characteristics of the securities sector, as well as the role of securities providers and, in particular, intermediaries in securities’ transactions. The guidance is particularly relevant for the investment fund industry by describing the typical cross-border correspondent relationship in the securities sector as a “relationship between the securities provider (correspondent) with an intermediary (respondent), which is regulated and supervised by a supervisory authority”.

The correspondent generally does not have direct relationships with the customers of the respondent and, as such, there is no direct expectation or requirement for the correspondent to apply customer due diligence on a respondent’s customer (“KYCC”), which is instead the responsibility of the respondent. This approach is not synonymous with reliance. The guidance stresses the need to assess the risk of the underlying client base and to perform risk-based due diligence at the level of the intermediary, as shareholder in the fund register, as well as on its beneficial owners. It also emphasises the importance to conduct an enhanced due diligence on the correspondent relationship with the intermediary.

FUND MANAGERS REQUIREMENTS

Performing a risk-based approach to improve the effectiveness of the framework of supervised entities calls for a thorough understanding of the network of all involved delegates and securities providers. With that view, the CSSF circular 18/698 on the authorisation and organisation of investment fund managers outlines the need to perform enhanced due diligence on regulated distributors before opening omnibus or nominee accounts in their names. Besides, the circular stresses the obligation for investment fund managers to implement due diligence measures on clients, initiators of UCIs, portfolio managers and on investment advisers. This is a good example where regulations and guidance have been adapted to strengthen operational distribution models relied upon by the industry without the requirements of the standards being questioned. In addition to the distribution side, the circular requires investment fund managers to apply due diligence measures on the assets of the fund they manage. 

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AGENDA

24 September MORNING 09:35—09:40

Registration and breakfast

Chairperson’s introduction F reddy Brausch, partner, Linklaters LLP

09:40—10:00 News from Asia and the US

09:00—09:10 Opening N athalie Reuter, master of ceremony, TV presenter and journalist

09:10—09:20 ALFI welcome C orinne Lamesch, chairperson, ALFI

09:20—09:35 Government address H .E. Pierre Gramegna, Luxembourg minister of Finance

62 —

A discussion with the conference partners, NICSA and HKIFA, on the recent developments in their respective fund industries. C amille Thommes, director general, ALFI Panellist: J im Fitzpatrick, president and CEO, NICSA

distribution systems impacted not only travellers and intermediaries, but most of all the airlines directly. Prestigious brands disappeared and made room for low-cost airlines, airline mergers and alliances. Are there lessons to be learned by the fund industry? M ichael Gloor, senior director sales France, Luxembourg and the Netherlands, Lufthansa Group Interviewed by: G ermain Birgen, director, head of business development, Banque de Luxembourg

10:30—11:00 Coffee break

Sally Wong, CEO, HKIFA

10:00—10:30 Distribution trends: aviation as a reference industry Lessons to learn from air travel industry – fundamental changes in distribution channels, direct distribution, generational shift, innovative pricing, etc. GDS, AEA and IATA are acronyms that the fund industry might not be too familiar with. However, they belong to an industry that also underwent profound changes over the past decade. Changes in the global

—ALFI— September/October 2019

11:00—11:40 Data: distribution intel–data is big, intelligence will be augmented An examination of how data contributes to distribution. If investment decisions are based on data, for sure distribution decisions must be.

In fact, as data itself is becoming an asset class, is the asset manager becoming a data manager? Moderator: N asir Zubairi, CEO, Luxembourg House of Financial Technology (LHoFT) Panellists: A ndy Alexander, head of data science, J.P. Morgan V iktor Fischer, member of the Group Executive Committee, ACOLIN Fund Services AG S ascha Lingling, chairman openfunds and head Platform Design and Strategy, UBS Fondcenter

11:40—12:20 Integration of sustainability factors in fund distribution rules In the context of the EU Action plan on sustainable finance, the integration of sustainability risks and factors in MiFID II is envisaged via the introduction of mandatory assessments of client ESG preferences. How to match these subsequently with the right financial products? AIFMD and UCITS regulations will see similar developments. In practice, how will this affect distributors? Moderator: Anne Contreras, of counsel, Arendt & Medernach SA Panellists: Alice Martinou, head of impact

Agenda as of 17 September. May have been subject to modifications.

08:00—09:00

solutions, BGL BNP Paribas Wealth Management Natalie Westerbarkey, director, head of EU public policy, Fidelity International Sabine Otto, policy officer, DG FISMA, European Commission

12:30—14:00

13:15—13:45

Lunch in the exhibition area kindly sponsored by Pharus Manco

Lunch session by Actiam Sustainable investing is the New Core

investment portfolios? Some overarching trends can be observed. H ans van Houwelingen, CEO, Actiam

As ESG concerns increasingly dictate where people save, spend or invest, the momentum for sustainable investing will continue to grow. Question is whether sustainable investing will become the new core of broad

12:20—12:30 Chairperson’s wrap-up and closing remark

AFTERNOON 14:00—14:10 Chairperson’s introduction

gathering AUM, client and manager incentives become more aligned than ever before. Peter Kraus, chairman and CEO, Aperture Investors

management environnement. Sally-Ann Tschanz, senior vice president global human resources, diversity and inclusion, Capital Group

Steve Bernat, founding partner, ONE Group Solutions

14:10—14:30 Keynote speech: Using new strategies to improve returns on globally distributed funds Innovative digital marketing strategies are changing the way clients meet and interact with portfolio managers and investment teams. Investors and potential investors should know the people managing their money directly as the use of digital platforms and social media can disintermediate investor/client engagement. When these strategies are paired with an innovative investment approach that prioritises outperformance rather than

14:30—15:00 Young perspectives Talk to Millennials, not about them – thoughts about money and financial planning, the need for a fund shopping app, etc. – what is it the young clients want? Moderator: Nathalie Reuter, master of ceremony, TV presenter and journalist Panellists: Séréna Boukelmoun, Youth Leader Eric Weber, junior associate, Allen & Overy

15:00—15:20 Company culture A strategic advantage in advertising the challenges in today’s investment

15:20—15:50 Coffee break

15:50—16:00 Pressure on profitability Persisting pressure on costs and margins affects not only asset managers, but also distributors. New pricing structures, lower fees, distribution platforms or enhanced D2C... how do distributors cope? Dariush Yazdani, partner, PwC

16:00—16:40 Distributors take centre stage Do investors feel they get value for money? What sells and what doesn’t? Regulation, pricing, digitalisation, investor education... what really influences fund sales? Moderator: Dariush Yazdani, partner, PwC Panellists: Helen Lees-Jones, COO and head of business strategy, BlackRock EMEA Retail Business Gary Collins, head of distribution EMEA & Latin America, Columbia Threadneedle Investments EMEA APAC Mussie Kidane, head of fund selection, Banque Pictet & Cie

16:40—17:10 Everything you always wanted to know about distribution (but were afraid to ask)

September/October 2019 —ALFI—

— 63

AGENDA Ad-hoc session: expertise upon request Moderator: Hermann Beythan, partner, Linklaters LLP Panellists: Diana Mackay, managing director, Global Distribution Solutions, Broadridge Financial Solutions François-Kim Hugé, partner, Fund Registration Services, Deloitte Luxembourg Martin Vogel, CEO, MDO Management Company SA

17:10—17:30

17:30—17:35

17:35—19:00

Distribution achievement awards by Broadridge

Master of ceremony and chairperson’s wrap-up and closing remarks

Cocktail kindly sponsored by KPMG

ALFI is proud to host and looking forward to the third edition of this unique yearly overview of distributor-centric trends, dynamics and strategies. Debbie Brown, global vice president Marketing, Broadridge Financial Solutions

25 September MORNING 08:00—09:00 Registration and breakfast

09:10—09:20

Chairperson’s introduction

M ark Phillips, managing director, Aviva Investors Luxembourg SA

09:20—09:40 Keynote speech Dominique Byrne, investment strategist, BlackRock

09:00—09:10 Welcome and introduction N athalie Reuter, master of ceremony, TV presenter and journalist

09:40—10:30 AML in the distribution context Transparency in the investment chain: know your distributor, know your client and know your beneficial owner. With the implementation of the 4th AML directive, the coming into life of

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—ALFI— September/October 2019

the Ultimate Beneficial Ownership Register and increased scrutiny from the CSSF, notably through the new “Manco” Circular, what do the authorities expect from asset managers and service providers? Who reports what to whom and how is the process being vetted? Moderator: Noel Fessey, CEO, EFA Panellists: Elisa Alonso Sanz, head of control, governance and regulatory compliance, senior vice president, State Street Abdulla Abdin, senior director of operations, Bahrain Clear Michel Turk, substitut principal, ministry of Justice Marco Zwick, director, Commission de Surveillance du Secteur Financier (CSSF)

10:30—11:00 Coffee break

11:00—11:50 Tomorrow’s cross-border fund distribution in the EU As part of the Capital Markets Union project, the European Commission has initiated ways to facilitate cross-border distribution in Europe. The proposals strike a trade-off between removing distribution barriers and adequate investor protection.

How will these new rules modify European fund distribution? Moderator: F lorence Stainier, partner, Arendt & Medernach SA Panellists: A my Wareham, executive director, Legal, Goldman Sachs Asset Management W illi Müller, head of foreign distribution services, Union Investment Luxembourg SA

reputation as a fund domicile contribute towards distribution efforts? How much does image influence decision-making? Panellists: S asha Baillie, CEO, Luxinnovation N icolas Bideau, ambassador, head of presence Switzerland, Federal Department of Foreign Affairs (FDFA) C hristophe Folschette, partner and founder, Talkwalker

12:25—14:00

13:15—13:45

Lunch in the exhibition area kindly sponsored by BNP Paribas, Deloitte

Lunch session by the LHoFT Eduardo Gramuglia, senior

vice president, State Street Bank Luxembourg S.C.A A lex Panican, head of partnerships and ecosystem, Luxembourg House of Financial Technology (LHoFT)

11:50—12:20 Bad banks? The impact of reputation on marketing Nation branding and image building: how does the overall

12:20—12:25

Chairperson’s wrap-up and closing remark

AFTERNOON 14:00—14:30 Regional insights on distribution: Europe, Asia, Latin America Globalisation is dividing opinion at present, but there can be no denying the growing influence the interconnectivity of the planet’s economics is having on investment decisions. It is still the case that when the US sneezes, the world catches a cold, but other countries and regions can now also spark contagion. Which is why it is essential that managers have the big picture as well as local-market insights. This presentation will cover three key regions: Asia, Europe, and Latin America, highlighting certain markets and trends worth watching. A ndré Schnurrenberger, managing director Europe, Cerulli Associates K en Yap, managing director, Cerulli Associates

14:30—15:30

Parallel workshops on geographical distribution hot spots Workshop I: UK

Moderator: Said Fihri, partner, KPMG Panellists: Jean-Marc Goy, senior counsel, Capital Group Paul Van den Abeele, investment funds partner, Clifford Chance

Workshop II: Latin America

Moderator: Rafael Aguilera, executive director, EY Panellists: Laura Gonzalez, head of Iberia & Americas, Allfunds Sandrine Lilliu, conducting officer for marketing & distribution, J. P. Morgan Asset Management Europe sàrl Carlos Alberto Morales, CEO,

director of Adepa Global Services SA and Adepa Asset Management SA

Workshop III: Asia

Moderator: Valérie Mantot, head of business development, APAC, Sanne Group Panellists: Stewart Aldcroft, chairman Cititrust Limited, managing director and senior advisor, Citi Markets & Securities Services Armin P. Choksey, partner, PwC’s Asian Investment Fund Centre and market research leader, PwC Singapore Christopher Yik, head of product, EMEA, Nikko Asset Management Europe Ltd

15:30—16:30 Walking afternoon tea in exhibition area and expert round tables in conference room Don’t rush back to the office just yet! Tea will be served in the exhibition area after the end of the workshops. There will be ample opportunity to continue discussions and to network with other participants before heading home. At the end of the workshops, part of the audience roundtable seating area will be converted into “expert tables”. Find the expert for your distribution area − the UK, Latin America or Asia − as they make themselves available for your follow-up questions. Make the most of targeted networking and join the expert discussions over a cup of tea!

September/October 2019 —ALFI—

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FORECAST

Quels fonds suivre en 2020 ? Dans quels types de fonds investir aujourd’hui ? Comment concilier sécurité, rendement et innovation ? La réponse de trois experts.

M.P. Il convient de bien déterminer son pro-

fil d’investisseur, en tenant compte tout d’abord du risque que l’on souhaite prendre. On recommandera ainsi à un petit investisseur en détail d’opter pour un fonds UCITS (Undertakings for Collective Investments in Transferable Securities), conçu pour le protéger. Si, par contre, on recherche plus de profit, de l’ordre de 4 à 7 % par an, en tant que gestionnaire de fortune ou de compagnie d’assurances par exemple, on peut s’orienter vers des fonds d’investissement alternatifs. Ensuite, il s’agit de déterminer les types de biens dans lesquels on souhaite investir. On constate aujourd’hui un intérêt grandissant pour les fonds qui intègrent des critères environnementaux et sociaux. Si le pays a longtemps attiré des investisseurs en détail grâce aux UCITS, les autres fonds ont fortement progressé ces 10 dernières années. Le Luxembourg est d’ailleurs reconnu dans le monde entier pour sa grande variété de fonds.  66 —

— ALFI— September/October 2019

illet François M tégie ra st e bl responsa vation ESG et inno Lyxor ETF

F.M. Les ETF ESG (environnementaux, sociaux

et de gouvernance) ont aujourd’hui un rôle à jouer dans la construction de tout portefeuille. La demande émanant des investisseurs finaux est d’ailleurs croissante. Intégrer de tels critères permet de générer des rendements plus soutenables et de mieux gérer les risques à long terme. Se tourner vers de tels fonds permet également de donner un sens à ses investissements. D’autre part, la réglementation – plan d’action européen sur la finance durable, MiFID II, classification sectorielle, etc. – pousse à investir dans ce type de fonds et à faire évoluer les portefeuilles vers des flux plus responsables. Nous assistons à une transformation du marché, à une réorientation des objectifs de gestion de fonds et indices actuels. Les produits ESG ont explosé ces derniers mois. Au 30 juin 2019, les portefeuilles répondant à des objectifs principaux d’investissement ESG représentaient ainsi 1,8 trillion d’euros dans le monde, dont plus d’un trillion en Europe. 

S.T. En tant que banque privée, nous devons

faire face à une importante baisse des taux alors que les clients sont, eux, toujours à la recherche d’un rendement élevé. C’est pourquoi nous nous tournons vers des « actifs réels » qui, jusqu’alors, étaient réservés à des investisseurs institutionnels ou professionnels. Les ELTIF (European Long-Term Investment Funds) constituent ainsi un nouveau format de fonds intéressant et permettent à des investisseurs non institutionnels d’accéder à un univers alternatif, notamment au private equity et à la dette privée. Les ELTIF, investissant dans ces actifs réels, offrent une diversification de portefeuille et un rendement qui peut s’avérer supérieur à la plupart des actifs financiers traditionnels. Dans un environnement financier en constante évolution, notre rôle est plus que jamais de continuer à informer nos clients de la façon la plus juste et la plus transparente possible, mais aussi des nouvelles opportunités d’investissement qui s’offrent à eux. 

PHOTOS Nader Ghavami, Antoine Setter

er Marcus Pet partner mann GSK Stock

rti Stefano To set as of ad he p grou visory ad & t en managem d an ill av H Banque

Find out how the EY fully integrated and multi-disciplinary teams can help you explore the alternative funds world to reshape your business. ey.com/lu/aif-club

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