paperJam Economie & Finance - Septembre-Octobre 2008 Special Alfi & Nicsa Forum

September-October 2008 | Special ALFI & NICSA forum

A S C I N & i t f h n t Al e m t s e 1 7 v In l a b m G l o u r o s F d n u f

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Luxembourg

STRENGTHENING THE CENTRE Well positioned in the retail market, the Grand-Duchy is now increasingly recognised as a domicile of choice for institutional fund initiators as well, Luc Frieden, Luxembourg’s Minister of the Treasury, explains.

by Luc Frieden (illustration: Bob London)

For all the turmoil that hit financial markets, the recent months have been extraordinarily fruitful for the investment fund industry in Luxembourg. The temporary decline in net assets under management was luckily in no comparison to the major instabilities that have been experienced worldwide. Notwithstanding, if there is an overarching theme in our market at present, it is not about figures, but rather about new product development, diversification and innovation. This should not come as a surprise: Luxembourg has for a long time been reputed to swiftly recognise investors’ needs and accordingly take up market trends in a timely manner. The efficiency of the Luxembourg government in this regard has been showing no sign of abating. Especially the institutional investor has benefited from the latest legal and regulatory adaptations. Indeed, Luxembourg has long been well positioned in the retail market, inter alia, because of the success of UCITS, but the GrandDuchy is now increasingly recognised as a domicile of choice for institutional fund initiators as well.

LUXEMBOURG’S BRAND Over the last five years, the global service providers, all of whom are present in Luxembourg, have developed specialised departments to deal with non-UCITS products. This has been recognised by clients who are concentrating their product range in the financial centre. In the private equity area, the SICAR vehicle, introduced in 2004, has been a success. Various practical adaptation needs that have arisen with the industry’s experience of the SICAR have promptly been taken care of with a new law due to be adopted this autumn. Moreover, the real estate sector, adopting a variety of legal structures, has been experiencing a year-on-year growth rate of 50%.

The major development in the institutional market has been driven by the appearance of a new investment vehicle, the specialised investment fund or SIF. Introduced in February 2007, the SIF is designed to strike a balance between investor protection and flexibility for institutional and “informed” investors.

The SIF was immediately adopted, especially by the alternative investment community. No fewer than 355 SIFs were created between the implementation of the new law and year end, averaging more than one file per working day and demonstrating the efficiency of the Luxembourg regulator. Demand for the SIF is furthermore not limited to any specific geographical

Luc Frieden, Ministry of the Treasury, Luxembourg

regions but is coming from across the globe: Europe, Asia and the Americas.

I am particularly proud that the “made in Luxembourg” brand, which has led the export of European retail funds around the world, is now proving its value in the institutional market as well. As a result, Luxembourg is now considered a centre of excellence for the investment fund industry as a whole.

The Luxembourg Government strongly intends to continue to strengthen the financial centre in this way and thereby to place Luxembourg in the best possible position on the global market for financial services. In this spirit, I look forward to the debates of the 17th annual ALFI/NICSA Conference on the newest trends in the investment fund area, which I am convinced will bring about important inputs for the strategic orientation of our financial centre.

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5 contents

contents: ALFI & NICSA FORUM eDITORIAL 3

Luxembourg

Contributions 24

US funds industry

strengthening the centre

The virtues of change

Well positioned in the retail market, the Grand-Duchy is now increasingly recognised as a domicile of choice for institutional fund initiators as well, Luc Frieden, Luxembourg’s Minister of the Treasury, explains.

Theresa Hamacher, CFA, the President of NICSA explains what has changed in the past year in the US mutual fund industry. Indeed, changing to help investors meet the demands of change is, after all, part of the mutual funds’ tradition.

Interview 6

Claude Kremer / Charles Muller (ALFI)

“Trying hard to be the best”

Mid-way through his mandate, the Chairman of ALFI and its Deputy Director General review the sector’s major projects, both in Luxembourg and at a European level, in a somewhat special context for 2008: it is in fact the 20th anniversary of the Association.

exhibition Plan 18

Who? Where? Just look at the plan...

conferences Agenda 20

The whole programme at a glance

26

UCITS

the momentum For Jean-Baptiste de Franssu, the CEO of Invesco Continental Europe, the UCITS framework is a great achievement of European integration proving that sound regulation can translate into economic success...

28

Islamic finance

the Sharia’s stakeholder orientation “Islamic finance”, “Islamic banks” or “Islamic funds” are often misunderstood terms, says Abdel-Maoula Chaar, the Islamic Financial Management Institute director, at the École Supérieure des Affaires (Beirut)...

36

After the campaign

For Paul Schott Stevens, president and CEO of the Investment Company Institute (Washington DC), the new administration and Congress will have to act to modernise the US financial regulatory system.

38

Credit crisis

Capitalising on the turmoil Paul Kraft, partner at Deloitte & Touche LLP, Boston, analyses the causes of the recent credit crisis and details the major adaptations and changes, which may help investors weather the storm.

32

Technology

ubiquitous web 2.0 For Steven Miyao, the CEO of Kasina (New York), Internet is rapidly changing the dynamic of idea exchange and social interaction...

40

Asset Management

enormous Opportunities in China For Taylor Hui – partner at Deacons, Hong Kong – China presents without any doubt many opportunities and more certainly, challenges to tap into this underdeveloped market.

Picture report 42

30

US financial regulation

Edition 2007

Flashback

The previous Alfi/Nicsa conference took place on 25 and 26 September 2007 at the former Conference Centre in Kirchberg. .

Sovereign wealth funds

Living with the New Financial Titans Paul Kraft, partner at Deloitte & Touche LLP, Boston, analyses the causes of the recent credit crisis and details the major adaptations and changes, which may help investors weather the storm.

34

Fund Distributions

focusing on asia

Recently, there has been much attention highlighting the critical opportunities that the Asian region offers European investment funds. For Robert Grome, partner and Investment Management Industry Group...

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6

CLaUde Kremer CharLeS mULLer Claude Kremer / Charles Muller (ALFI)

“TryIng hard To be The beST”

Mid-way through his mandate, the Chairman of ALFI and its Deputy Director General review the sector’s major projects, both in Luxembourg and at a European level, in a somewhat special context for 2008: it is in fact the twentieth anniversary of the Association.

by Jean-Michel Gaudron (illustration: Bob London)

Elected Chairman of the Association of the Luxembourg Fund Industry in May 2007, Claude Kremer, partner at one of Luxembourg’s leading law firms, Arendt & Medernach, looks back into the first year of his mandate, during which he paved the way for a programme centred on four major themes: the promotion of the investment fund industry and, by extension, Luxembourg as the nerve centre of this sector; national and European regulation, human resources and infrastructures.

Overview and first interim review, accompanied

by Charles Muller, Deputy Director General of ALFI, former freelance journalist for RTL (radio and TV) and qualified lawyer, who left the Luxembourg bar in 1994 to work at BGL (now known as Fortis Banque Luxembourg) where he held several legal positions progressing to the role of Deputy Secretary General. He joined ALFI in 2003 as Director of Business Development and was promoted in 2007 to the position of Deputy Director General.

ALFI celebrates its 20th anniversary at the end of summer 2008. What are your thoughts on that? Claude Kremer – “Obviously it’s an event that we’re delighted by. A large academic session is scheduled for 7 October, in the presence of the Luxembourg Minister for the Treasury and Budget, Luc Frieden and with a guest speaker.

The entire financial community will be invited, as will our members. We want to celebrate it en famille, as it were.

The message that we want to put across is that 20 years isn’t 150 but, all the same, we’ve already come so far which we are very proud of. We’ve gone from 50 to 2,000 billion in assets, from several hundred funds and sub-funds to more than 11,000. Luxembourg has become a world-wide leader in global fund distribution and we are trying hard to be the best.

So we think that we should celebrate this event – which represents a significant milestone – in dignified fashion.

This anniversary will be marked by the publication of a jubilee book that will be a compilation of about thirty contributions written by a wide variety of actors involved in the financial sector, who will retrace significant highlights in the development of the Luxembourg funds industry, each with their own background.

The significance of investment funds for the Luxembourg economy is well known. Does the current sluggishness due to the subprime crisis represent a real danger? CK – “Obviously, we don’t live on an island here in Luxembourg.

So, the negative impacts facing the markets are affecting us just as much as the others. When the net assets of the investment funds are evolving in

a sawtooth fashion, we know only too well that this is due to the negative impact of the markets.

Nevertheless, there is a significant number of elements that remain very positive. First of all, throughout 2007 we had positive net sales, apart in September, with a higher overall increase in net assets than any other Member State of the EU. So far in 2008, except for January and June, the other months have also been positive. So there hasn’t been a fall-off in investors. In any case, we haven’t suffered a haemorrhage.

CM – But we do see a rather atypical situation in Luxembourg. In a significant number of countries, there have been marked reductions in net investments, but not in Luxembourg, nor in Ireland. Both these countries are riding the storm because they are specialised in cross-border distribution, also outside the EU, and not only in domestic distribution.

CK – We’ve also recorded a significant increase in the number of funds. Almost 800 new funds and sub-funds were created in 2007, that is, as many as in the previous three years taken together.

And the trend observed since the beginning of the year is in continuity. Even when the assets are decreasing, we are nevertheless seeing an increase in the number of funds. It’s reassuring!

What lesson have you drawn from the current situation? CK – “This crisis has certainly given }

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8 interview

Country

Data (in euros)

Weight in the economy

Revenues

5.584.174.672 (+23% compared to 2005)

6%

direct: 4.115.930.091 (+25%)

6 { us much food for thought. In particular, we have to

put more consideration into implementing valuation rules and the overall operation of those investment funds directly or indirectly linked to subprimes.

It’s important to be able to better anticipate and avoid such crises. We’ve also created, within ALFI, a special working group whose mission it is to analyse, in direct collaboration with the national financial supervisory authority (Commission de surveillance du secteur financier), how things could be better managed.

That said, it being an international crisis, it’s also at that level that measures have to be considered. Our European federation, EFAMA also set up a working group (that we participate in) so as to draw up European guidelines, in direct collaboration with the European Commission which is directly, and at the highest level, concerned by the situation. This resulted primarily in the project, currently under discussion, to regulate rating agencies. Finally, during its annual conference in Paris which ALFI attended, the International Organization of Securities Commissions (IOSCO) gave a detailed analysis of the issue and, for its part, set up a certain number of working groups between regulators.

Do you think that the worst is over or still to come? CK – “Sorry, but I don’t have a crystal ball…

In the meantime, the investment fund industry is currently very much in a phase of preparation for the implementation of the UCITS IV European directive. The draft directive was presented on 16 July by the European Commission. What do you think of it? CK – “The most important thing is that the round of discussions relating to the European passport for management companies has been taken out of the text. We can only wholeheartedly support this way of proceeding, considering that the complex issue of the passport has to be treated separately and not be included immediately in the directive.

It is now essential for this directive to be adopted before the end of the current European legislation, that is, before June 2009, for an entry into force scheduled for mid-2011. That is an absolute priority.

What about the European passport, exactly?

CK – The Commission submitted the file, for con-

indirect: 1.468.244.581 (+19%) Added value

3.990.899.874 (+36%)

12%

direct: 3.294.005.799 (+29%) indirect: 696.894.075 (+13%) Employees

21.095 (+9%)

7%

direct: 12.881 (+13%) indirect: 8.215 (+3%) Contribution

1.227.447.670 (+22%)

14%

direct: 1.111.487.432 (+24%) indirect: 115.960.238 (+19%)

Source: Etude d’impact de l’industrie financière sur l’économie luxembourgeoise – Octobre 2007 (Version chiffres de 2006) /Deloitte pour le Codeplafi

UCITS activity in Luxembourg in 2007, compared to 2005

The strong increase in the UCITS activity in Luxembourg also directly contributes to the d­ evelopment of part of the activity of the banks, p­ rofessionals from the financial sector (PSF) and management companies: nearly 25% of the industry’s direct results and 45% of tax revenues.

sultation, to the Committee of European Securities Regulators (CESR), which is therefore invited, by 31 October, to advise on the issue of the feasibility of the management company passport. Since CESR was put under pressure, it invited all interested parties to express, during August, all their considerations to be taken into account. ALFI set up a working group, under my chairmanship, that worked day and night to establish its position.

And what is it? CK – “Our opinion is unchanged since the publication of the green paper in 2007.

While we are not in principle opposed to a management company passport, we believe that the potential advantages could be outweighed by added legal and regulatory costs and risks.

We know too well that the devil is in the details.

Permitting a management company and a UCITS to be located in two different Member States would give rise to legal uncertainty, notably as to the fund’s domicile, to the fund’s nationality, to its place of submission to tax and finally, to its regulatory regime. Supervision of the fund by regulators and oversight by the depositary bank and auditors would necessarily become more cumbersome and complex, increasing direct costs and weakening investor protection.

All this has yet to be analysed in detail and, therefore, we have to caution CESR, that a badly thought through passport can jeopardise the entire quality of the UCITS brand the world over. It’s obvious that if these legal, fiscal and } 10

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8 { regulatory insecurities were not straightened

out properly, there would be a significant risk of seeing investors driven away from these UCITS funds.

So we’re calling for caution and we’re confident of being heard, hoping that our concerns are not perceived as purely protectionist efforts for the Luxembourg financial centre. Obviously, we are very directly affected by the issue, since at the moment three quarter of all true cross-border UCITS funds are from Luxembourg, which gives us a valid reason to speak up. But we think that speaking up to make the real problems known and to invite the entire financial community to resolve them constitutes a legitimate concern and certainly not a protectionist effort.

You have been at the head of the leading national association of investment funds in Europe for just over a year. What conclusions have you drawn from these first twelve months? CK – “It was definitely a very full year, with a programme centred around four strong themes: promotion, regulation, human resources and infrastructures.

The promotion aspect remains one of the key elements. We must ensure that our funds are well known in the various places where we sell them, whether within the European Union, or in Asia, the Middle-East or Latin America. We therefore asserted our presence in those geographical areas, during state visits or trips that we organised especially.

CM – It’s important to note that in 2007, EFAMA conducted a study of a sample of international asset managers. The result showed that 90% of the increase in assets under management from net sales came from Asia, while in Europe we are seeing a decrease. That’s the difference between a rapidly expanding market and an already mature market.

CK – In any case, this confirms to us that it’s a place we have to be. The UCITS brand is really starting to become visible and well known and investors from Asia are clearly taking a growing interest in European UCITS. The same is true for the Middle-East and Latin America.

How should these promotion efforts adapt to market growth? CK – “The main difference between today and yesterday is that the UCITS brand has become a global brand, and not only a European one.

CM – It’s also necessary to see where we have actually come from. The first promotional effort carried out consciously at ALFI dates from 2005, when we went to London. Since then, we’ve set up regular meetings there, but also in the United States, Frankfurt, Switzerland and Paris. We also go to Asia once a year where we tour the main financial centres: Hong Kong, Singapore, Taiwan and Beijing. We’ve particularly noted, over the past year, a much greater professionalism and coordination in terms of promotion.

Why wait so many years before setting up a formal framework for your promotion activities?

CK – “The investment fund industry in Luxem­ bourg has always been outward-oriented, since distribution is primarily carried out outside its borders. It’s true that professionalism in itself has come over the years. But we’ve for a long time organised international conferences, which have been a great success, and which remain an effective way to gain exposure. Considering all those new developments, we’ve considered it necessary to travel to meet potential and current investors face-to-face and sell the Financial Centre directly.

CM – It should also be noted that ten years ago, ALFI had three employees. When I arrived in 2003, I was the seventh. Now there are twenty of us! So it’s possible for us to implement actions that it really wasn’t possible to do five or ten years ago.

CK – In the meantime, the Luxembourg for Finance promotion agency (LFF) was set up and ALFI was one of its founding members. This agen- } 12

Communication

Varied media ALFI multiplies ways to get its messages throughout the financial community In its willingness to open itself up more, both to its members and to the international financial community, ALFI has put in place a certain number of communication tools and media. As a result, every two weeks, members receive an ‘E-Newsflash’, summarising the latest essential news items. The Newsletter (in paper format) has been revitalised and offers, on a quarterly basis, the most exhaustive review possible of the news (regulation, promotion, etc.).

This Newsletter contains a page called

Inside ALFI, which outlines more specifically what’s happening within the Association and provides the latest key market statistics.

Then, News Digests are regularly sent out, bringing together the information from the other two formats mentioned above, and intended for a broader and more international public, but with a direct connection to the financial sphere. A direct way, then, of raising awareness of the activity of ALFI and the Luxembourg financial centre beyond its borders. J.-M.G

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Evolution of net assets under management in Luxembourg (1998-2008) 2.500 (Bn eur.)

2.000

1.500

1.000

Source: ALFI

500

10 { cy’s mission is to conduct generic promotion both

of the financial centre and the nation brand.

But this certainly doesn’t prevent ALFI from continuing its own specialised promotion in the places where the funds are to be sold. Because no-one can do it better than us. So we continue to go on our very specific promotional trips, where we meet our clients directly to inform them regularly of recent regulatory and other developments in Luxembourg. Obviously, we’re happy that LFF can support us, to show our contacts how comprehensive the commitment of the financial centre and the country is.

CM – We’ve also made two of our employees available to LFF on a full-time basis in order to support the efforts of the agency.

In terms of regulation, is UCITS IV your only current project? CM – “It is one of the very significant projects, but there are other topics such as, for example, real estate funds or private investments and a new way of selling funds to the more

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sophisticated investors. We’re actively participating in European meetings on the issue, with the hope of setting up regimes that are in some small way harmonised.

CK – At the same time, we are not neglecting the domestic projects which are important. In October, for example, there will be amendments to the SICAR (Risk Capital Investment Companies) legislation, with the possibility of creating vehicles with multiple sub-funds. We support the public authorities in their efforts to continuously fine-tune this legislation so that it meets market requirements.

Recently, the CSSF adopted a new regulation in regards to securities lending, the text of which, broadly speaking, is based on work carried out by an ALFI work group. Also, together with the CSSF, we are working on a circular designed to clarify the boundaries of the role of a depositary in the context of funds using prime brokers.

In essence, we’re a driving force and a catalyst for regulatory and legislative improvements in Luxembourg and our relations with CSSF are con- } 14

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14 interview

12 { ducted, moreover, with excellent understanding

and efficiency. The law on specialised investment funds is a perfect illustration of that. We have recorded more than 700 new funds in barely a year and a half.

Obviously, where there’s strong growth, there’s a human resources need to support this growth.

Do you encounter the same difficulties as many business sectors in Luxembourg? CK – “We actually conducted a survey of our members, which established a personnel requirement of approximately 2,000 people, across the whole spectrum of the funds sector. We think that ALFI really has to help ensure that in Luxembourg we have personnel in sufficient quality and quantity to carry out all the work shown off during promotion. It’s a long-term project, that we have to strengthen and systematise with a range of measures. That requires working at several levels.

CM – For example, we’ve put an action plan in place, with the creation of a brochure distributed to young people at student fairs, targeting the soughtafter skills in Luxembourg. If they so wish, all our members can insert a page in the brochure setting out their particularly sought-after requirements.

We tested it out at two fairs before the summer and we’ve planned to attend half a dozen others during the 2008-2009 academic year, in the Greater Region, but also in London. The idea is, in time, to go to Germany, Belgium, France and England for student fairs specialised in finance professions.

What about the already established training institutions? CK –”Universities – the Luxembourg University, the Luxembourg School of Finance – and foreign universities established in Luxembourg – e.g. the Sacred Heart University and the Open University – wanted us to develop their programmes with them. So we organised, together with ABBL, a ‘University Day’, an open day where each of them could present their programmes to attract both students and people already in employment. The initiative was a success and we will do it again next year to show that, in Luxembourg, we also teach this subject of finance and funds and that it is possible to establish a body of expertise in this field.

In the end, it’s about a multitude of projects to be conducted in parallel, not over six months, but

over five or ten years, in order to build up qualified personnel in Luxembourg, whether trained here or attracted from abroad.

CM –We also want to intervene at secondary school level, via economics teachers, to make young people aware at the earliest opportunity, so that, in addition to studies in medicine or languages, they hear about finance professions and the career opportunities that are open to them.

One of the areas of development that you mention concerns infrastructures. What do you mean by that? CK – “There are two areas in which it is possible to act. Firstly, there is a development in the automation process for transmitting orders.

When there are transactions on securities, it goes through a chain of intermediaries who have to communicate between themselves so that all these orders are transmitted properly with the fewest possible errors. The more automation there is, the lower this risk of error. It’s essential. In this regard, the Luxembourg financial centre still has scope for development. The volume has become so large that there is a real need to improve these automation processes. Our TA (Transfer Agent) working group is currently focussed on the issue. It is high time to break away from manual and fax processes to move towards a truly automated world.

And the second aspect? CK – “The second aspect is standardisation. The fund processing passport (FPP), for example, which is a technical file summarising the key features of each fund accessible to any agent involved in the processing chain. It’s a bit like the fund’s ID card. It was EFAMA that set } 16

Articles of Association

A new Executive Committee The association is now better managed on a daily basis.

The Articles of the Association of the Luxembourg Fund Industry have been amended and updated. While the Association’s Board of Directors still has 24 members and the Strategic Committee still meets every two months to prepare the most significant portfolios, an Executive Committee has been set up, comprising four members. The Committee manages the Association on a day-today basis, with the support of the General

Secretariat. It comprises the Chairman, the two Vice-Chairmen, the Treasurer and the Director General.

Up to this point, this Executive Committee has primarily played the role of a forum of chairpersons of technical committees who have met to coordinate their work within a common body. This body is now called the Technical Committees Chairpersons Group (TCCG). J.M.G

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INCORPORATION OF COMPANIES COMPANY DOMICILIATION & OFFICE RENTAL QUALIFIED COMPANY DIRECTORSHIP ACCOUNTING SERVICES (LUX GAAP & IFRS) CORPORATE SECRETARIAL SERVICES TAX COMPLIANCE SERVICES CENTRAL ADMINISTRATION (SICAR & SIF)

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Origin of the promoters of Luxembourg UCIs (Situation as at 30.06.08)

3,2% NETHERLANDS

1,5% SWEDEN

1,3% JAPAN

3,5% Others 20,6% GERMANY

6,7% FRANCE

8,4% BELGIUM

19,2% USA

9,7% U.K.

17,5% SWITZERLAND

Source: CSSF

8,7% ITALY

By the end of 2006, the USA (18,8%) and Switzerland (18,6%) were the two most active countries in UCIs‘promotion in Luxembourg, followed by Germany (16,3%). In June 2008 the latter ranked 1 with 21%.

14 { up this standard form of passport to be developed

in order to facilitate transmission of these orders.

Luxembourg is an ideal candidate to play a role in this development. We have one or two initiatives that are developing currently. Personally, I think priority should be given to a marketplace solution. Clearly, we should not underestimate the fact that there are elements of competition and that actors involved don’t necessarily have converging interests. But the stakes are high, because the whole of Europe is watching to find out whether Luxembourg is capable of presenting future solutions in terms of FPP. In terms of communication, there have been some new developments… CK – “In fact, we thought that we should strengthen internal communication between our members, at all levels.

What we produce over the course of the year, we do also for our members who have to be continually informed of what’s going on. This is why we’ve put in place a certain number of new tools (see box), some of which are also intended for a wider public, particularly in countries that we work closely with.

CM – This stems from a need felt during our trips abroad, both by our sister associations and by our contacts and clients. Many of them regret not always being informed of the changes taking place. For example, we sent out a News Digest during publication of the proposed UCITS IV directive, summarising the proposals, but also summarising our own position. We found that a considerable number of people received the information without being the direct recipient of it and asked to be added to our distribution list.”

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Exhibitors Plan For the 1st time, the ALFI/Nicsa conference takes place in the new Centre de conférences in Luxembourg-Kirchberg.

31 39

WC

38

Lunch buffet Coffee bar

30

37

29 28

36 35

33

34

entrance

32

26

27

exit WC

ENTRANCE internet corner Ward robe

tea bar 40 41 42

registration Area

permanent bar

Lunch buffet

43

Speaker Lounge

25 22

Press room

23 20

24 21

Alfi Info desk 1

2

entrance 3

4

5

exit

coffee bar

6

7

8

19 18 17 16 15 14 9 10 11 12 13

How to find us?

by Bus:

By car:

With most bus lines to Kirchberg – stop at “Philharmonie / Mudam” – transit via Centre Aldringen, central station and boulevard Royal.

Further information can be obtained from the “Mobilitéitszentral” hotline (+352) 24 65 24 65

Direct and covered access from the “Place de l’Europe” car park; entry on Avenue John F. Kennedy From the “Trois Glands” car park; via Avenue John F. Kennedy and the Place de l’Europe tunnel; or via rue du Fort Thüngen.

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Company acarda GmbH

Booth 7

Company

Booth

PNC Global Investment Inc.

3

Alpheus Solutions GmbH

37

PricewaterhouseCoopers

34

BNP Paribas Securities Services

35

Profidata Group

30

5

Quartal Financial Solutions

22

Bravura Solutions

12

RBC Dexia Investor Services

19

CACEIS Investor Services

43

Reflow SICAV

18

CCLux

31

SIMCORP

23

CITI

40

State Street Bank Luxembourg

39

Clifford Chance

27

Stoxx Ltd

32

Co-Link

42

TietoEnator

36

Bowne

Confluence

4

CSC

33

DIAMOS AG

10

Ernst & Young

38

Euroclear SA/NV

8

FundConnect

11

GLENIC Group

29

HSBC

41

IFE/EFE

6

IGEFI Group Sàrl

2

Ignites Europe Imprimerie Centrale

20 9

Interactive Data (Europe) Ltd

25

IPS Ltd

17

JPMorgan

15

JPMorgan

16

KPMG

26

Morningstar

14

Phoenix Systems Inc.

13

UBS Global Asset Management – Fund Services

1

VLM Airlines

28

WTS Ag

21

ZAIS Solutions

24

Why should you be a sponsor or have an exhibition booth at the next event, in 2009? The Forum will offer you a unique opportunity to position your company as a major player in the investment fund area, to meet with an impressive number of professionals of the fund industry in a single place over a two-day period and, last but not least, increase brand visibility amongst key-decision makers.

More information on www.alfi.lu.

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CONFERENCES PROGRAMME Tuesday, 23 September 2008

REGISTRATION AND BREAKFAST 8.00 – 9.00 A.M

Panelists Gregory E. McGowan: Executive Vice President & General Counsel, Franklin Templeton Investments, Fort Lauderdale Pierre Bouchoms: Co-General Manager, Eurizon Capital S.A., Luxembourg

OPENING REMARKS 9.00 – 9.15 A.M. Theresa Hamacher: President, NICSA, Marlborough

Taylor Hui: Partner, Deacons, Hong Kong

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 3.20 – 3.50 A.M.

RECENT REGULATORY AND TAX DEVELOPMENTS IN GERMANY – IMPLICATIONS FOR THE DISTRIBUTION OF LUXEMBOURG FUNDS 3.50 – 4.25 A.M.

Claude Kremer: Chairman, ALFI, Luxembourg

Jens Tolckmitt: Managing Director, Association of Foreign Banks in Germany, Frankfurt

LUNCH 12.15 – 1.45 P.M. CHAIRPERSON’S INTRODUCTION9.20 – 9.15 – 9.20 A.M.

Lunch hosted by Ernst & Young and State Street

Scott McLaren: Managing Director Hong Kong; Head of Sales and Relationship Manager Asia Pacific Region, RBC Dexia Trust Services Hong Kong Ltd, Hong Kong

LATEST FUND DISTRIBUTION, TRENDS, CHALLENGES & OPPORTUNITIES IN ASIA 9.20 – 9.55 A.M. Robert Grome: Investment Management & Real Estate Practice; Leader for Asia, PricewaterhouseCoopers, Hong Kong

ACCESSING CHINA – A LEGAL AND REGULATORY OVERVIEW 9.55 - 10.25 A.M. Jeremy Lam: Partner, Deacons, Hong Kong

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 3.20 – 3.50 A.M.

ACHIEVING SUCCESS IN CHINA 10.55 – 12.00 A.M. Moderator David Sung: Head of Ernst & Young Asian Asset Management Practice, Hong Kong

CHAIRPERSON’S INTRODUCTION 2.00 – 2.30 P.M.

REGULATORY UP-DATE IN LUXEMBOURG – FOCUS ON THE MOST RECENT TOPICS IN THE REGULATIONS WHICH IMPACT THE LUXEMBOURG FUND INDUSTRY 4.25 – 4.55 P.M. Claude Niedner: Partner, Arendt & Medernach, Luxembourg

Scott McLaren: Managing Director Hong Kong; Head of Sales and Relationship Manager Asia Pacific Region, RBC Dexia Trust Services Hong Kong Ltd, Hong Kong

MODERNISING US FINANCIAL REGULATION: CHALLENGES FOR A NEW ADMINISTRATION AND CONGRESS 2.05 – 2.35 P.M.

Hermann Beythan: Partner, Linklaters Loesch, Luxembourg

UCITS IV – LATEST DEVELOPMENTS 4.55 – 5.35 P.M.

Paul Schott Stevens: President and Chief Executive Officer, Investment Company Institute (ICI), Washington, DC

Moderator Jean-Baptiste de Franssu: Chief Executive Officer, Invesco, Brussels Panelists: Freddy Brausch: Partner, Linklaters LLP, Luxembourg Jean-Marc Goy: Counselor to the Director General, CSSF Commission de Surveillance du Secteur Financier, Luxembourg E. Willem van Someren Gréve, Senior Executive, Vice President, Robeco, Rotterdam

CREDIT CRISIS, LESSONS TO BE LEARNT FOR OUR INDUSTRY 2.35 – 3.20 P.M. Moderator Paul Kraft:Partner, Deloitte & Touche LLP, Boston Panelists: Jean-Pierre Aventin: Vice President, Head of Risk Management, State Street Bank Luxembourg S.A. Russel Parentela: Managing Director ZAIS Solutions, Red Bank Shant Harootunian: Managing Director, Evaluations Services, Interactive Data Pricing and Reference Data, New York

CLOSING REMARK 5.35 – 5.40 P.M.

COCKTAIL RECEPTION AT THE PHILHARMONIE, LUXEMBOURG-KIRCHBERG 5.45 – 7.30 P.M. Sponsored by PricewaterhouseCoopers Luxembourg

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CONFERENCES PROGRAMME Wednesday, 24 September 2008

REGISTRATION AND BREAKFAST 8.00 – 9.00 A.M.

Karine Hirn: Partner & CEO, East Capital, Stockholm

Jean-Claude Wolter: Independent Director, Luxembourg

CHAIRPERSON’S INTRODUCTION9.20 – 9.00 – 9.00 – 9.05 A.M. Thomas Seale: Chief Executive Officer, European Fund Administration, Luxembourg

EMERGING TRENDS IN GLOBAL DISTRIBUTION 9.05 – 9.35 A.M.

LUNCH 12.10 – 2.00 P.M. Lunche hosted by BNP Paribas Securities Services and Deloitte

GLOBAL FUND PROCESSING - WHAT IS BEING DONE AND WHAT DOES THE FUTURE HOLD? 4.15– 5.00 P.M. Moderator François Genaux: Investment Management Advisory Leader.Pricewaterhouse Coopers, Luxembourg Panelists Michele De Boe: Regional Head, Funds Markets, SWIFT, Belgium Gary Janaway: Head of Operations Luxembourg Fund Services, Schroder Investment Management (Luxembourg).

President, Findel Group (Asset Managers Association) Caroline Prosperi: Senior Marketing & Communications Manager. CACEIS Bank Luxembourg and Representative, TASC Standardisation sub-group.

EFAMA FPSG Working Group Philippe Van Hecke: Senior Vice President, Market Management, Clearstream Banking, Luxembourg Ivan Nicora: Director, Head of Product Management Investment Funds, Euroclear, Brussels

CHAIRPERSON’S INTRODUCTION9.20 – 2.00 – 2.05 A.M.

James Charrington, Managing Director, Head of International. Retail Business, BlackRock, London

SOVEREIGN WEALTH FUNDS: THE NEW FINANCIAL POWER – HOW SOVEREIGN WEALTH FUNDS HAVE CHANGED THE MARKETS 9.35 – 10.10 A.M.

Theresa Hamacher: President, NICSA, Marlborough

INVESTOR 2.0: THE EVOLUTION OF THE WEB AND THE SHAREHOLDER OF THE FUTURE 2.05 – 2.35 P.M.

John Nugée: Managing Director, Official Institutions Group, State Street Global Advisors, London

Steven Miyao: Chief Executive Officer, Kasina, New York

SHIFTING CLIENT EXPECTATIONS IN GLOBAL FUND MANAGEMENT 2.35 – 3.05 P.M.

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 10.10 – 10.40 A.M.

Ben Phillips: Partner, Director of Research, Casey, Quirk & Associates, New York

INTRODUCTION TO ISLAMIC FUNDS – STRUCTURES AND TECHNIQUES 10.40 – 11.20 A.M.

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 3.05 – 3.35 P.M.

Abdel-Maoula Chaar: Project & Research Director, Islamic Financial Management Institute (IFMI), Beirut

MUTUAL FUNDS – SAVING AND GROWING INVESTORS’ CAPITAL IN RUSSIA – OVERVIEW OF CURRENT MARKET TRENDS, REGULATORY/ TAX ENVIRONMENT AND FUTURE DEVELOPMENTS 11.20 – 12.00 A.M Moderator Andrey Ganin: Partner Deloitte, Moscow Panelists Patrick Van de Steen: Co-Chairman.

KIT Fortis Investments, Moscow

Henry Kelly: Managing Director, KellyConsult S.à r.l., Luxembourg

CHAIRPERSON’S CLOSING REMARKS 5.00 P.M.

GLOBAL FUND DISTRIBUTION – IMPLICATIONS FOR FUND BOARDS 3.35 – 4.15 P.M. Moderator John Parkhouse: Partner, PricewaterhouseCoopers, Luxembourg Panelists Jacques Elvinger: Partner, Elvinger, Hoss & Prussen, Luxembourg Graham Goodhew: Vice President, JPMorgan Asset Management (Europe) S.à r.l., Luxembourg

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US funds industry

THE VIRTUES OF CHANGE

Theresa Hamacher, CFA, the President of NICSA explains what has changed in the past year in the US mutual fund industry.

Indeed, changing to help investors meet the demands of change is, after all, part of the mutual funds’ tradition.

by Theresa Hamacher (illustration Bob London)

“Change” was the watchword for the US mutual fund industry over the past year. The most visible change was in the financial environment, with the five-year-old bull market coming to an end as the US economy stumbled under the combined weight of declining real estate values and the soaring price of oil. Financial institutions were particularly affected by the turmoil as the drop in home prices translated into sky-rocketing defaults on mortgages which in turn ballooned into a broader credit crisis.

Mutual fund companies did not escape the tumult.

They faced not just a decline in asset values but also severe disruptions in critical securities markets, most visibly in the market for the auction rate preferred stocks used by many closed-end bond funds, perhaps least visibly in the trading of assetbacked paper used by money market funds.

While the winds of market change were at full force, the winds of regulatory and legislative change were also beginning to pick up. The past year saw a host of new initiatives ranging from the very specific (additional fee disclosure in retirement plans) to the highly dramatic (an overhaul of the entire financial regulatory structure in the US), from the local (a new approach to the assessment of the credit risk of holdings in money market portfolios) to the global (a new form of US-registered investment fund designed to compete in the world market). These proposals will be debated for some time to come. At the same time, fund companies continued to work to implement previously enacted directives, such as the FAS 157 accounting standard on valuing securities, effective in November 2007.

CHANGING TO INNOVATE Not all the change was external. Mutual fund companies continued to innovate to meet investor needs. The first “active ETFs” were launched in April 2008. These funds give shareholders the ability to buy and sell actively managed mutual fund shares throughout the day, rather than just at the market close. Previously, this flexibility was available only for index funds or funds managed using a quantitative investment approach.

Theresa Hamacher, CFA (NICSA, Marlborough)

Many fund complexes introduced “130/30” funds which use an increased ability to sell stocks short (normally in an amount equal to 30% of the net asset value) as a way to capture the benefits from superior security selection regardless of the market environment. And the industry continued to refine its line-up of the “life cycle” funds that have become a staple in defined contribution retirement plans; participants now may have the ability to choose not just their target retirement date but the risk level they prefer as well. Net new cash flow into these funds rose to a record 92 billion dollars in 2007.

Still, some things stayed very much the same.

Mutual funds remained at the heart of Americans’ financial planning, particularly their retirement savings plans. An estimated 50 million US households have invested in funds; over the past 25 years, mutual funds have steadily become an

increasingly important part of personal finances, and now account for almost one quarter of household financial assets. Funds now account for close to half of the assets in individual retirement accounts (IRAs) and in employer-sponsored defined contribution programmes, including 401(k) plans, the tax-advantaged vehicles that have become a key component of the baby boomers’ efforts to prepare themselves financially for retirement. Many US investors get their first introduction to saving and investing through the mutual funds offered in their retirement plans at work.

But is it any surprise that mutual funds have become a key tool that American households rely on to meet their most important financial goals, whether funding a child’s education or retiring comfortably? Changing to help investors meet the demands of change is a mutual fund industry tradition.

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UCITS

the momentum

For Jean-Baptiste de Franssu, the CEO of Invesco Continental Europe, the UCITS framework is a great ­achievement of European integration proving that sound regulation can translate into economic success.

With UCITS IV, the way forward is not just about improving regulations and the overall operating framework, but to develop self-discipline and a long-term vision for and by the industry.

by Jean-Baptiste de Franssu (illustration: Bob London)

For Jean-Baptiste de Franssu, the CEO of Invesco Continental Europe, the UCITS framework is a great achievement of European integration proving that sound regulation can translate into economic success. With UCITS IV, the way forward is not just about improving regulations and the overall operating framework, but to develop self-discipline and a long-term vision for and by the industry.

Since its creation in 1985, the UCITS fund industry has demonstrated that its strength is founded on its continued focus on serving investors, its embrace of a strong fiduciary culture and a highly regulated product that ensures a high level of protection, transparency, innovation and flexibility. Cross-border activity, which is one of the long-term objectives of the initial UCITS Directive, has significantly picked up in recent years as a result of the passport, with Luxembourg and Dublin being the largest cross-border fund domiciles in the European Union.

UCITS have progressively become the second largest fund market in the world after the US mutual fund market, with six trillion euros in assets under management that have more than trebled over the last ten years and represent 80% of total funds’ assets in Europe. Beyond its European foothold, UCITS have succeeded in becoming a global brand, representing a lingua franca for the global asset management industry and serving tens of millions of shareholders over four continents. The worldwide recognition of UCITS is proven by the high levels of sales into UCITS products currently stemming from Asia, Latin America or the Middle East. According to statistics from the European Fund and Asset Management Association (EFAMA), 90% of the net sales of the international UCITS – promoted by a pool of major asset management companies – originated from Asia in 2007. According to the

same survey, a large majority of respondents believe that the proportion of UCITS held by investors in Asia, Latin America or the Middle East will grow in each of these regions in the coming years.

Facing the challenges The UCITS framework is therefore a great achievement of European integration, proving that sound regulation can translate into economic success. Ensuring its continuity is critical because UCITS play a significant role in the European economy, representing over 50% of the European Union’s annual GDP. Nevertheless, the UCITS industry faces some challenges and cannot rely on past achievements alone if it wants to continue to grow.

With the evolution from UCITS I to UCITS III in 2002, the regulatory changes introduced then demonstrated how vital it is to keep regulations abreast of the market dynamics and requirements of the fund industry. One of the key features of UCITS III was to broaden the scope of eligible assets and investment possibilities. After its implementation, sophisticated products gained considerable momentum as the asset management industry was able to deliver products offering high levels of innovation and investor protection to its end investors.

Going forward, it is therefore crucial to continue improving the regulatory framework for those products. The series of potential improvements contained in the UCITS IV package respond to some core concerns expressed by members of the industry, which were reviewed and discussed at length in the extended consultation process and in-depth cost-benefit analysis led by the European Commission over the past two years.

UCITS IV has the potential to bring significant benefits to investors and the asset management industry thereby enhancing Europe’s global leadership in asset management. The series of reforms

proposed by the European Commission will allow significant improvement to the industry’s efficiency and competitiveness, ensuring UCITS funds’ success story in Europe and other parts of the world where the UCITS brand is widely sold and highly valued.

Facilitating cross-border fund mergers and allowing fund assets to be pooled cross-border would go a long way towards achieving the significant economies of scale that have been identified. Some of these improvements would allow, for example, the potential consolidation of domestic product ranges and therefore raise the average fund size in assets under management.

As a comparison, US mutual funds are on average five times larger than European funds.

Annual savings estimated at two billion euros to six billion euros could thus be generated by the European fund industry and ultimately delivered to the end investor.

Simplifying the notification process for crossborder distribution is another key improvement brought by the UCITS IV efficiency package. The notification procedure often amounts to a second fund re-authorisation in certain countries, resulting in long delays and additional costs for the industry estimated at about 45 million euros annually. Improving time to market of UCITS is crucial for the many European asset managers operating cross-border which have to compete in each domestic market with less regulated competing savings products.

Further to these efficiency gains, the provisions on key investor information can help solve problems related to the simplified prospectus. In particular they will improve the format for product disclosure and comparability between funds, which will ultimately enhance investor protection. This will further upgrade UCITS standards and maintain them as the highest ones in terms of product disclosure and information compared with other competing

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savings products, such as structured notes or unit-linked insurance contracts.

Part of the initial package, the management company passport, has potentially become an issue reflecting the competition between fund domiciles in Europe. The mandate given to CESR to clarify the supervisory arrangements on the passport should help, however, to find a consensual way forward. The EFAMA is playing a key role in this process.

At last, enhanced supervisory cooperation has also been raised as part of the UCITS IV package.

It is certainly an area where much is needed to go forward, being the keystone of the overall regulatory framework in an increasingly integrated panEuropean fund market.

Those substantial improvements created by the UCITS IV package will need to be vigorously embraced by the industry in order to deliver the expected savings and increased transparency.

cRucial YeaRs to come Beyond the UCITS framework and looking at competing retail products, it is also essential to analyse how to ensure a level playing field between comparable savings solutions, in order to avoid a patchwork of product regulations at a European level and provide a consistent approach for the end-investor at the point of sale.

Finally, the UCITS industry should take steps in the three critical areas of distribution, product and client. As far as distribution is concerned, the industry needs to continue to favour its independence as well as the provision of sound retail advice; on the product side, sustained innovation, the development of long-term savings solutions and fee adjustments are necessary; looking at clients, more clarity, simplicity and transparency will always be needed, as well as encouraging the development of a long-term savings culture.

The coming years are going to be crucial for the European fund industry. Although the UCITS funds

Jean-Baptiste de Franssu, CEO (Invesco Continental Europe, Brussels)

have fared relatively well following the liquidity crisis, one must be watchful of international competitors as well as other competing savings solutions in Europe. The way forward is not just about improving regulation and the overall operating framework but will require self-discipline and a vision for the longterm for and by the industry. This is necessary to ensure that one of the greatest successes of financial integration in Europe continues to prosper to the benefit of tens of millions of investors who want to invest wisely into products which meet their financial security and retirement needs.

1

2

3

Source: European Fund and Asset Management Association (EFAMA), data as of end of March 2008.

The results of the survey were released

by EFAMA on 4 July 2008; 28 fund groups participated, with combined assets of 770 billion euros invested in international UCITS. Source: EFAMA, IMF.

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Islamic finance

THE SHARIA’S STAKEHOLDER ORIENTATION

“Islamic finance”, “Islamic banks” or “Islamic funds” are often misunderstood terms, says Abdel-Maoula Chaar, the Islamic Financial Management Institute director, at the École Supérieure des Affaires (Beirut). Indeed, most people tend to relate them to a combination of economic and religious activities restricted to Muslims. However, differences in the physical setting of Islamic and conventional banks are not that fundamental.

by Abdel-Maoula Chaar (illustration: Bob London).

There aren’t any fundamental differences in the physical setting of an Islamic and a conventional bank. Furthermore, Islamic banks pursue the same main goal: channeling funds from the exchange circuits to the productive ones while generating income.

Indeed, the main difference between both institution types lies in the operational framework in use: Islamic finance operations fall within the boundaries of a set of rules and values defined by the Sharia.

The Sharia, which is usually translated as “Islamic law” derives from the main sources of Islam and plays a major role in the Islamic finance operations’ shaping. Also, the expression, “Sharia-compliant financial operations” would be probably more accurate when describing the Islamic finance. Uncommon terms such as “Halal” (permissible), “Haram” (forbidden), “Riba” (interest), “Mayssir” (gambling), “Jahala” (ignorance)... are often used to define the rationale of the Sharia operational framework. Those represent, however, some of the features that lead many observers to consider that Sharia-compliant financial operations are rather “exotic”.

Nevertheless, when analysing the Sharia’s guiding principles, the topic is not as exotic as it seems at first sight. In fact, there are strong convergences with some specific aspects of conventional finance. And these are even clearer when considering mutual funds.

Investment is totally permitted in Islam and nothing prevents a person from using his or her money to make profits. Following a set of proper rules remains the only condition. For instance, the first Sharia-compliant funds used a combination of specific financial instruments to insure that those rules were respected.

SCREENING PROCESSES However, in the early 1990s, the situation became more complicated with the creation of Sharia-compliant equity funds. This raised the question of the allocation of Sharia-compliant assets to the global stocks universe. The managers of such funds could not invest in just any stocks and needed to apply a series of filters to make sure that the companies they were choosing fit the Sharia investment universe.

The first filter used in Sharia-compliant equity funds is called “sin screen”, whose purpose is to insure that the underlying activity of the scru-

Abdel-Maoula Chaar, Islamic Financial Management Institute director (Ecole Supérieure des Affaires,Beirut).

tinised business is Sharia-compliant (“Halal”); banking and insurance are excluded due to the Sharia ban concerning money trading and interest (“Riba”) based operations. Companies involved directly or indirectly in businesses such as the production or commercialisation of alcohol, adult entertainment, gambling, weaponry or pork products are also banned. The rationale of those later prohibitions is linked to the social impact of the activities. A fund manager assessing the conformity of a specific company also evaluates the primary and secondary business of the firm.

A financial screen is also used to test the Shariacompliance of companies. The analyst conducts a review of the company’s financial statements to make sure that it falls within the limits of certain financial ratios. The purpose of this examination is to verify that companies are not over-leveraged, too exposed to credit risk or relying on interest income.

Screening processes are also used by Socially Responsible Investing (SRI) Mutual Funds and Christian Mutual Funds (CMFs) to make certain that the activities of the companies they are

selecting comply with their ethical beliefs.

Therefore, SRIs will not choose companies harming the environment and CMFs will reject firms working in fields considered as “anti-life”. When considering the screens used by each type of funds, it appears that some of the criteria of the Shariacompliant “sin screen” are similar to the conditions established by SRIs and CMFs. This convergence might seem odd but after further consideration, it is less surprising than it might seem at first.

All monotheistic religions advocate the same broad general ethical principle. It is then only normal to see some similarities in the screening processes used by religious principles-led funds.

As for the social responsibility part, one of the main originalities of the Sharia is its strong stakeholder orientation. Islam states that God entrusted Man with the development of Earth. As such, Man should act as a caretaker and use the resources of the Creation for his own and for the benefit of society at large. This convergence opens up interesting perspective for Islamic finance and Sharia-compliant funds, especially when social responsibility is on the rise.

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Credit crisis

Capitalising on the turmoil

Paul Kraft, partner at Deloitte & Touche LLP, Boston, analyses the causes of the recent credit crisis and details the major adaptations and changes, which may help investors weather the storm.

by Paul Kraft (illustration: Bob London)

Looking back on early 2007, the markets were fairly stable. However, concerns about market liquidity, as well as the valuation of certain securities, were already beginning to bubble up.

But, who could have foreseen the economic disruption that would follow in the next six months as the year ended and which, in many cases, still exists today?

What is now simply known as the “credit crisis” has turned into a global financial storm affecting all the actors of the global economy and financial markets.

What has actually happened? US housing prices had been trending upward over the long term to historic proportions, which created an environment where lenders were able to extend adjustable rate mortgages to high risk borrowers, with the confidence that the mortgages could be refinanced before the interest rate reset.

But as home prices began to drop, homeowners – who found themselves without the refinancing option and unable to make the higher monthly payments – began to default on their mortgages when the new, higher interest rates took effect.

While mortgage lenders and mortgage servicers were hit hard by the defaults through securitisation of the loans, the total effect of the defaults has been dispersed to many investors holding subprime mortgage-backed securities and collateralised debt obligations.

As a consequence, lenders across the financial spectrum tightened underwriting credit standards and raised interest rates.

The results are still unfolding: evaporation of liquidity, failure of finance-related institutions, market volatility, and a potentially long-term recession.

Lessons learned The credit crisis unveiled a series of weaknesses in the financial market systems that need to be

addressed to prevent a similar breakdown of the global financial infrastructure.

First, it is important to consider that the structural vulnerabilities were not concentrated in one area; a series of breakdowns involving a multitude of market participants led to the current situation.

Thus, the principal underlying causes, as identified by the President’s Working Group on Financial Markets’ Policy Statement on Financial Development and others include weak underwriting standards at the mortgage origination level, an erosion of market discipline by those involved in the securitisation process, flaws in credit rating agencies’ assessments of securitised assets, risk management weaknesses at some large American and European financial institutions, and failure of regulatory policies, including capital and disclosure requirements, to mitigate risk management weaknesses.

The “originate-to-distribute” model and the desire to transfer credit risk were the key catalysts in the credit crisis because they spread the risk of default beyond the borrowers and lenders.

Continued innovation in credit risk transfer is expected long term and there is no certainty that similar events won’t occur without a better understanding of the relationship between cause and potential effect of creating and syndicating these products. Credit Risk Transfer – Developments from 2005 to 2007, issued by the Joint Forum, provides a comprehensive review. It shows that some of the more complex credit risk transfer instruments developed since 2004 involve increased leverage and a high variance of loss or vulnerability to the business cycle. Some investors may not be aware of the higher risk nature of these products. Also, the failure to understand some of the risks in the credit risk transfer instruments contributed to the market turmoil in 2007. The “originate-to-distribute” model created incentives that resulted in weak origination standards for certain products. Additionally, some investors placed excessive reliance

on credit rating agencies doing minimal or no due diligence. Furthermore, organisations had few, if any, risk management processes in place to address risk exposures associated with offbalance-sheet entities such as structured investment vehicles. Supervisors remain concerned about several aspects of the credit risk transfer market: its complexity, valuation issues, liquidity, operational and reputational risks, as well as about the broader effects of the growth of credit risk transfer.

The implications The crisis’ effects are far ranging and have affected nearly every corner of the financial services industry. The steps taken to prevent a similar crisis from happening again will need to be equally as sweeping, with implications for asset managers, their regulators, and their investors.

Generally, areas such as transparency, risk and liquidity management, underwriting standards and market discipline, disclosure and valuation will all come into play.

For the asset management industry a few unique implications have developed. Valuation of investment securities, especially in the face of Financial Accounting Standard No. 157 – “Fair Value Measurements”, presents an opportunity for asset managers to proactively establish standards that benefit investors, increase transparency and manage risk. At the same time it challenges the process to determine investment security valuations and presents dramatic changes to company infrastructure and process that will be costly – both in terms of capital and time.

Both the Public Company Accounting Oversight Board and the US Securities and Exchange Commission continue to provide formal and informal guidance on the requirements surrounding the valuation of investment securities. Such continued regulatory scrutiny will continue to challenge asset managers and their service providers.

Along a similar vein, product development offers

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asset managers the opportunity to capitalise on the challenges created by the credit crisis. As many securitisation and credit risk transfer products have largely evaporated, asset managers must develop new ways to create the same investment opportunity they offered. Transparency and simplicity in future products will be as important as returns to investors.

Risk management programmes continue to be top of the agenda for the asset management industry. Even those organisations in the financial services industry viewed as the “best in class” found that their risk programmes did not provide the insight required to minimise the damage done by the crisis.

The models and assumptions that these organisations depended upon often proved to be ineffective in a rapidly changing environment and failed to comprehend challenges such as liquidity risk. As a result, many opportunities exist to strengthen risk management programmes.

Finally, the regulatory landscape will certainly change as numerous proposals and actions have begun to forever alter the role of the regulator. As an example, The Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience, issued by the Financial Stability Forum, contains general recommendations for enhancing the resilience of markets and financial institutions, which address key weaknesses that led to the credit crisis: 1 Strengthening prudent oversight of capital, liquidity and risk management 2 Enhancing transparency and valuation 3 Changes in the role and uses of credit ratings 4 Strengthening the authorities’ responsiveness to risks 5 Robust arrangements for dealing with stress in the financial system.

A modernisation of the regulatory framework in the US would create opportunities for cross communication between regulatory bodies, creating a more stable environment and a more nimble res-

Paul Kraft, Partner (Deloitte & Touche LLP, Boston)

ponse to signs of trouble. And for the asset management business, compliance, accounting and risk management policies will be as important as beating the Lipper figures for anyone considering an investment.

In sum, those asset managers who can respond to the need for greater transparency in both valuation processes and procedures, as well as in product development – and who can also enhance their risk management capabilities and adapt to regulatory changes – will be well positioned to capitalise on future opportunities as the credit crisis lessens.

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Sovereign wealth funds

LIVING WITH THE NEW FINANCIAL TITANS John Nugée, the managing director of State Street Global Advisors explains how the relationships between the sovereign wealth funds and the Western financial and political community have shifted from hostility to a constructive dialogue.

by John Nugée (illustration: Bob London)

Man has always been fascinated by money.

From the dawn of civilisation, the pursuit of money – and the power it represents – has dominated much of man’s social and economic history.

But there is a special place in history and in human interest for fabulous wealth, for those who have money beyond measure and sometimes even beyond comprehension.

Against this backdrop, it is not surprising that the stunning accumulation of wealth by a number of government funds – the so-called sovereign wealth funds or SWFs – has attracted huge comment and analysis. Both the scale of the wealth of the richer SWFs and the speed with which it has been accumulated over recent years place SWFs in a league of their own. Never before in history has so much wealth been accrued in so few hands, or so quickly.

And it is equally not very surprising that both the western economies and the funds themselves are finding it challenging to adjust to this new reality.

SWFs are no new phenomenon. The oldest fund recognised to be a SWF is the Kuwait Investment Authority, which dates back to 1953, and there are several other SWFs with a 20-year, 30-year or even longer history. But for almost all of that history, the funds were seldom if ever in the news: they went about their business quietly with a low profile and minimum publicity.

Since about the last 18 months, SWFs have become the topic of the moment. Articles on SWFs abound in the financial press and have even made the non-financial pages. Western governments have pronounced on their role and made sweeping statements on how they should conduct their business. The funds themselves found that they were in the spotlight as never before, their image oscillating between that of corporate raiders, rapaciously buying western companies and infrastructure, and white knights, rescuing and recapitalising the western financial system. Much of the tone of the debate was hostile.

For some months in the latter part of last year the dialogue between western governments and the SWF community bordered on the surreal. On the one side, there was a plethora of voices: every major western government held forth on SWFs, the EU stated its position, the OECD gave its views, the IMF was asked to opine. And on the other side, there was silence. Several of the funds have since confided

John Nugée, managing director, Official Institutions Group (State Street Global Advisors, London).

that they were taken aback (“stunned” was the word one SWF official used) at the assault on their operations: they were genuinely not expecting it and took time to formulate their response.

NEW CIRCUMSTANCES In fact, not the least of their concerns was knowing exactly how to respond. SWFs did not form a cohesive community and needed time to establish links among themselves to come up with a common position. And on a more prosaic level, as institutions which had never sought publicity, in many cases they had no experience or expertise in issuing public statements. It is revealing that when one of the world’s largest SWFs announced the appointment of a head of global communications in May of this year, his brief was specifically said to be “to oversee the fund’s relationship with the world’s media”. It is also interesting that this was a new post – the fund had not previously felt the need to have such an officer.

Since then the dialogue between the West and the funds has gone on behind closed doors, matured and – from all reports – become very much more positive and productive. For the West, it is now being led by the IMF, and for the funds, a number of leading SWFs are engaging positively in seeking a solution acceptable to all.

Hopes are high at this October’s IMF/World Bank meetings, the results of their discussions will be given to an eagerly awaiting world.

Underlying the evolution of this dialogue has been the fact that both the West and SWFs have had a major change in their circumstances. For the West, long-held assumptions about the invulnerability of western markets and indeed lifestyles have been challenged. The future for western economies is very much less certain than it was two years ago.

For SWFs, the change is as dramatic: the comfortable life of low profile and publicity, which they enjoyed, has also gone, and they are finding that life as the financial titans of the age entails public interest in and scrutiny of their every move.

This is the new reality. The good news is that both sides are adjusting to it. And with the more hostile elements of the debate giving way to more constructive dialogue, we believe SWFs will soon be able to resume their traditional role of long-term investors, benefiting their populations and markets alike.

The views expressed by the author are his own and do not necessarily represent those of State Street Global Advisors.

PAPERJAM | September-October 2008 | SPECIAL ALFI & NICSA FORUM

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Mét iers OPC FORMATIONS EN ORGANISMES DE PLACEMENT COLLECTIF S’INITIER, MIEUX S’INTÉGRER ET PROGRESSER DANS LE SECTEUR DES FONDS D’INVESTISSEMENT Le Luxembourg est aujourd’hui reconnu comme centre d’excellence pour la domiciliation, l’administration et la distribution des fonds d’investissement.

En permanente évolution, ce secteur doit pouvoir compter sur des collaborateurs bien formés et qualifiés.

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Pour obtenir davantage d’informations, visitez notre site Internet www.ifbl.lu ou contactez-nous par e-mail à customer@ifbl.lu ou par tél. au 46 50 16-1.

Association Luxembourgeoise des Fonds d'Investissement

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Robert Grome, Partner and Investment Management Industry Group Leader (PricewaterhouseCoopers Hong Kong and Asia)

Fund Distribution

foCusIng on asIa

Recently, there has been much attention highlighting the critical opportunities that the Asian region offers European investment funds. For Robert Grome, Partner and Investment Management Industry Group Leader at PricewaterhouseCoopers Hong Kong and Asia, these opportunities are available to those that construct and implement a clearly focused Asian distribution strategy.

by Robert Grome (illustration: Bob London)

Difficult market conditions together with growing industry competition is driving investment fund groups to increasingly focus on product innovation and enhanced distribution to maintain net sales, assets under management and profitability.

An interesting snapshot of just how important the Asian region is for many fund groups was highlighted in a recent member survey conducted by the European Fund and Asset Management Association (EFAMA). The survey sought to understand some of the future trends and views of members concerning their UCITS platforms, many distributed on a global basis. Members were asked whether they expected future growth in assets under management, what channels they considered critical to the distribution of their funds, where sales are currently being derived from and what would be the focus of their future distribution.

The survey results confirmed that fund promoters have a strong and increasing focus on the Asian region for fund distribution. Fifty per cent

of respondents said they were already distributing or planning to distribute their UCITS platforms into the Asian region, whereas less than 20% said the same for Latin America and the Middle East. Moreover, 60% of respondents said they would be increasing their focus on Asia over the next twelve months. The survey also revealed that whilst the current proportion of total assets under management gathered by respondents from Asia is only 14%, incredibly, over the six months prior to June 2008, a staggering 90% of their total net sales has been generated from this region. The reason for this may be due to the less negative impact of the credit crunch crisis, so far in most Asian economies which continue to enjoy strong economic growth.

For some time we have heard about the globalisation of European based fund distribution, especially into Asia. Looking at the extent of fund distribution overall, it is certainly true that the number of European cross-border funds have doubled over the past five years. Today, approximately 7,000 such funds (only 3,400 in 2003)

have received some 50,000 authorisations globally to distribute in more than 50 countries.

But what about the extent of UCITS distribution into Asia? In 2000, whilst some UCITS distribution into Asia occurred, it was, relatively speaking, quite limited, being neither widespread nor popular amongst the top 100 cross-border fund groups. For example, only ten such fund groups distributed into Hong Kong and nine into Japan.

regIonaL fragmentatIon However, as the table demonstrates, today the extent of UCITS distribution is substantially more in the five key Asian jurisdictions, although the degree of growth over the past few years has not been uniform. Moreover, these cross-border groups have today, between them, more than 5,000 authorisations for distribution in the Asian region, compared with only 2,200 in 2004.

Nevertheless, whilst representing a tremendous opportunity for growth, the Asian market is highly diverse and very fragmented. Unlike the US, and to a lesser extent Europe, there is no single market for

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investment funds in Asia. Each jurisdiction has its own regulatory and tax framework governing fund authorisation and distribution. Each has its own currency, distribution networks and local investors having, especially at the retail level, their own specific investment preferences. It is important to note that, other than China and Australia and Hong Kong, no mutual recognition schemes operate within Asia, making cross-border distribution difficult.

This degree of fragmentation makes implementing and operating an Asian distribution strategy complex. Market entry is more time-consuming and expensive than in Europe. The array of differing regulatory and tax requirements in each jurisdiction means that a bespoke solution is required to gain entry and establish an effective distribution strategy. For example, whilst some jurisdictions allow for institutional-only authorisation with no local prospectus requirements, other jurisdictions have complex market entry requirements, including detailed local fund documentation for investors and rigorous paying agent and distributor arrangements required to support the fund.

Moreover, for a multiple Asian jurisdiction distribution strategy to operate efficiently (especially in order to maintain costs within acceptable limits), a complex and rigorous client-servicing framework is required. This framework should link the various local providers (e.g. local transfer agents, distributors, etc.), which are processing subscriptions, redemptions, providing client details and making payments (some in local currency), to a centralised platform that manages the administration and accounting for the fund platform.

Key market trends It’s not surprising that regional fragmentation in Asia has led to significant differences on the level of direct penetration by foreign funds into Asia. For example, penetration into Hong Kong, Singapore and Taiwan is very high (approximately 80% or more of all authorised funds in these three jurisdictions are foreign domiciled). However, in other Asian jurisdictions, penetration by foreign funds is quite low or almost non-existent, for example, only 5% in Korea, and 5% in Japan, Malaysia, India, Pakistan, and the Philippines.

There are several factors behind such large variations in foreign fund penetration. In some jurisdictions the local regulations prevent access

altogether (e.g. India), or act as a barrier because the process is complex and/or expensive enough to make market entry marginal for some fund groups. In some jurisdictions the local tax environment operates as a disincentive for local investors to subscribe and in other countries the local fund market is well developed with a strong focus on domestic funds. In these markets, foreign promoters may consider it more commercially attractive to establish local funds rather than seek to distribute their cross-border platforms.

Such market diversity within Asia has produced many key market trends. Some trends apply to the region generally but others are more country specific. Nevertheless, fund groups looking to enter Asia for the first time or to expand an existing limited distribution footprint may need to consider all of these trends but analyse in detail their impact on a country-by-country basis.

Across the region the demand for more sophisticated products is very strong, more so than in most European jurisdictions. This demand is being driven by both the institutional and retail segments of the market. Moreover, in most jurisdictions, foreign funds generally offer more sophisticated products than do local funds. Thus, local institutional and client investors are increasingly seeking out foreign funds, typically European domiciled, meaning that in many markets sophisticated UCITS have an advantage over local products. The strength and recognition of the UCITS brand worldwide assists in this regard. In fact, we see increasing numbers of Asian-based fund promoters establishing UCITS products to distribute back into Asia and also the European markets.

Many Asian markets are experiencing high growth rates in the retail investor segment as

large middle and upper middle classes (high net worth individuals) emerge. This current and future growth of the retail segment will place even more value on fund promoters constructing efficient and well-leveraged local distribution channels.

Whilst a difficult challenge, this objective is more achievable because in many Asian markets a more open architecture distribution model has or is being embraced or at least the market is moving towards such a model. For example, although the Hong Kong and Singaporean banking networks are the major distribution channels for funds, there is a substantial level of open architecture used. Other jurisdictions are increasingly moving towards this model.

Asia offers significant growth potential and as such remains critical for most fund groups with global distribution aspirations. The key to unlocking the opportunities within Asia is to understand and appreciate the diverse and complex nature of the region and then to tailor a distribution strategy that is both flexible enough to encompass diversity and responds to each of the key trends or drivers, but is rigorous enough to generate the efficiencies needed to support a regional distribution approach. For most fund groups this means establishing strong and efficient partnerships with a series of local distributors, typically local banking groups supported by appropriate and robust administrative and compliance functions.

Also, for many groups, the recent ability to now access China through the Qualified Domestic Institutional Investors (QDII ) programme is in itself a significant incentive, giving rapid wealth creation in that country, and Chinese investors need to diversify away from domesticonly asset classes.

Number of Top 100 UCITS Promoters distributing in Asia Country

2000

2008

HK

10

43

Singapore

2

60

Japan

9

18

Taiwan

7

36

Korea

4

15

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US financial regulation

AFTER THE CAMPAIGN

For Paul Schott Stevens, president and CEO of the Investment Company Institute (Washington DC), the new administration and Congress will have to act to modernise the US financial regulatory system.

by Paul Schott Stevens (illustration: Bob London)

In January 2009, Americans will hail our 44th President and our 111th Congress. Awaiting our new national leadership is a litany of fiscal and economic challenges more daunting than any in recent memory.

On the campaign trail this summer and autumn, our political candidates are discussing a lot of these issues. One they’ve talked about less but which is vital to America’s economic well-being is the need for a serious examination of our system of financial regulation. The credit crisis, and the fact that regulators and market participants were unprepared for its scope and its dramatic consequences for the global financial system, offer fresh urgency, if any is needed, for a top-to-bottom regulatory review.

The credit crisis had multiple causes, but in broad outline it has familiar ingredients. Start with a highly complex and inter-related financial system. Stir in easy money and buoyant growth, in the form of a global housing boom. Add to that an environment in which individuals and institutions had economic incentives to take imprudent risks because they did not bear the full consequences of their actions. Mix in a shocking development or two, with a disparate and uncoordinated group of US and global financial regulators. Serve with a downward spiral of market sentiment.

Of course, the ingredients of any financial crisis or panic may change. This one features deteriorating credit standards, particularly for sub-prime and other high-risk mortgages, and a securitisation process that transferred risks away from decision-makers who were the most capable of monitoring them. Sub-prime mortgage lending and securitisation had been around for some time. Subprime mortgage lending has in fact given countless consumers access to credit and thus to home ownership. Banks also have long used securitisation as a risk-management tool and it also expanded their lending capacity. However, the packaging of the more recent sub-prime loans into mortgagebacked securities and collateralised debt obligations led us all into uncharted waters.

Banks and other lending institutions originated the mortgages and then moved to quickly securitise these assets, effectively pushing the risk of default away from them. As these securitised products changed hands again and again, buyers assumed that someone upstream had already put them under a microscope. Buyers

Paul Schott Stevens, President and CEO (Investment Company Institute, Washington DC)

also relied on the judgements of rating agencies.

Finally, many investors and home owners seemed to think the rising real estate values would never stop feeding the speculative boom.

ACTIVE PARTICIPATION But stop rising they did. And like a roller coaster that has reached the top of the ramp, they started to plunge. Thus began a chain of events that has yet to reach its end. Some borrowers as well as mortgage-holders, particularly those with subprime loans, failed to fully appreciate the risks that they had assumed. A rash of mortgage defaults and delinquencies ensued, depleting the cash reserves of commercial banks and investment banks. The ensuing turmoil has impacted global credit markets, reminding policy-makers around the world how inter-connected markets and economies have become.

We’ve learned some basic lessons. Technologies have reduced costs and facilitated the liberalisation of the financial markets and increased the flow of capital globally. Market participants now have a fuller appreciation for the risks associated with more fluid capital markets and complex instruments. On regulatory structure, we’ve learned that the missions and approach of US financial regulators need to be re-assessed, and their efforts better informed and coordinated.

Coordination with international regulatory counterparts also is vital and must be enhanced. The new administration and Congress are going to have to act to modernise the US financial regulatory system to address these challenges.

There already has been significant discussion over the past year, both in the US and internationally. Last March, the US Treasury put out a blueprint for modernising the US financial regulatory system. The Financial Stability Forum has analysed and provided recommendations relating to the market turbulence. European leaders also are offering important recommendations.

This expert global input will raise the level of debate that we anticipate on US financial regulatory reform. Any domestic reform initiatives will be unsuccessful without contemplation of global financial markets and greater coordination with foreign regulators.

We in the US fund industry must participate actively in this important debate. Our investment vehicles – professionally managed, widely diversified, highly transparent, and minimally leveraged – did weather the storm reasonably well. But we are not immune to the broad market impact of events like the credit crisis. We owe it to our 90 million investors to stand up to promote a more effective system of financial regulation, one that is more equal to the global challenges of the 21st century.

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Steven Miyao, CEO (Kasina,New York)

Technology

UBIQUItoUs WeB 2.0

For Steven Miyao, the CEO of Kasina (New York), Internet is rapidly changing the dynamic of idea exchange and social interaction. Asset managers will find their success hinging upon their ability to connect to investors via social networking applications and advanced web technologies.

by Steven Miyao (illustration: Bob London)

Social networking websites are rapidly gaining traction in Europe and the United States. In 2006 alone, more than 100 million MySpace accounts were created. In 2007, 127.3 million Europeans used social networking sites, which is about 56% of Europe’s online population. Wikipedia, for instance, ranks in the top ten most popular sites online, with 36% of adult Internet users.

These sites are gaining popularity, while defining a new generation, and impacting all spheres of relations: personal, professional, and commercial. Understanding these new trends is a key for businesses’ success. Also, the Investor 2.0 generations are the investors, who asset managers are looking forward to raising.

Therefore, some important issues are “What is Web 2.0?”, the re-personalising influences of

technology, the investor 2.0 and the generational adaptation gradient, or the asset managers 2.0.

What Is WeB 2.0?

Each generation is in part defined by its technology. In the first part of the 20th century, telephones were introduced and rapidly adopted. The end of the 1900s saw the rise of computers and mobile phones.

In the 21st century we see this trend continue, and one of its most powerful manifestations is online.

A new era of Internet usage has dawned, commonly referred to as the “read-write web.” Innovative concepts and technologies – lumped under the umbrella moniker “Web 2.0” – are making the online experience interactive and customisable and blurring the lines between producers and consumers of web content.

Through Web 2.0, younger generations – the Investor 2.0 generations – are engaging with Inter-

net content in previously unprecedented ways.

Rather than simply approaching the web as an encyclopaedic resource, they are interacting in real-time, sharing information, and generating content. They are using sites like Facebook (social networking and messaging), YouTube (streaming video), Wikipedia (user-generated encyclopaedia), Second Life (virtual world video gaming) and del. icio.us (social book-marking web service).

the re-personalIsInG InFlUenCes oF teChnoloGY on Investor 2.0 Citicorp introduced the first mechanical cash dispensing machine in 1939, and removed it six months later, due to lack of interest and the poor reception it received from bank customers. In 1967, Barclays re-introduced the ATM (automated teller machine) in London, and ever since, the ATM has revolutionised the way that individuals

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interact with their banks. ATMs not only streamline everyday transactions; they also depersonalise these tasks. Bank customers – similar to online shoppers – have become accustomed to interacting with machines instead of people.

However, the influence of technology goes both ways. In the past, automation and the Internet erased faces from transactions. Now they are adding interpersonal communication back into the interaction equation through information sharing. As Mark Penn points out in his book, Micro Trends, “nerds” on the periphery of society used to be the primary users of computer technologies.

Now, however, these technologies have been usurped by social butterflies who depend on the connective capabilities of these technologies to maintain contact and manage relationships.

Investor 2.0 and the Generational Adaptation Gradient Investors of all ages are using the web. For instance, in a recent study of over 500 financial advisors in the United States, kasina found that 78% of advisors aged 20-40, 61% of advisors aged 41-60, and 34% of advisors aged 61-80 use YouTube. The same study found that online retail banking is used by 89% of advisors 20-40 years old, 81% of advisors 41-60 years old, and 76% of advisors 61-80 years old.

On the investors’ side, 85% use the Internet to gather financial information.

However, these general usage statistics gloss over some important details. Individuals who grew up on AOL Instant Messenger use the Internet differently than those who saw their first web page at age 40.

Internet exploration was an organic process for today’s 20 year olds. This younger generation learned to use library encyclopaedias and online references simultaneously, just as they became accustomed to talking to their friends both on the phone and through emails. They use the Internet in times of leisure, as a mode of recreation and a way to actively engage with each other and share ideas.

Older generations, on the other hand, encountered the Internet as uncharted territory. They have learned the language of the web later in life.

Their exploration has been conscious, and their

adaptation often more uncomfortable and less seamless. Unlike their younger counterparts, older generations tend to use it solely as a resource for information and a tool for transactions. Consider: Compared with the average 35-54 year olds, today’s 28-34 year olds are: 45% more likely to download free video or audio 35% more likely to watch streaming video 25% more likely to use any type of multimedia application online.

Asset Managers 2.0 Investors under 34 years are becoming a larger part of the investor population. This forces asset management companies to increasingly understand the impact of Web 2.0 concepts and technologies on investor perceptions and behaviours.

Investor exposure to Web 2.0 has big-picture implications for design and interaction standards on asset manager websites. The investors who come to asset manager websites are not only comparing these websites to other industry sites.

Rather, their expectations for aesthetic design and usability are based on the entire assortment of sites they come into contact with.

Why it matters: in the very near future, asset management firms will have to figure out how to catch up with current Internet trends and incorporate social networking functionalities and Web 2.0 technologies into their interactions with investors.

The web must become a ubiquitous part of every asset management organisation’s DNA. Firms cannot afford to dally. A fast-follower mentality prevails in the asset management industry, both online and off. Moving forward, innovation on the web will stem from improved organisation and tagging of data, or the integration of back-end systems. These tasks cannot be completed overnight. To stay competitive in the future landscape of the web, firms must prepare and invest today for the necessary applications and capabilities of tomorrow. Although the costs of ignoring the web in the asset management industry may not be felt for several years, they will be significant, especially as the web becomes an increasingly central component of how investors choose and manage relationships.

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Asset management

ENORMOUS OPPORTUNITIES IN CHINA For Taylor Hui – partner at Deacons, Hong Kong – China presents without any doubt many opportunities and more certainly, challenges to tap into this underdeveloped market.

by Taylor Hui (illustration: Bob London)

Since China’s accession to WTO in December 2001 when foreign managers were allowed to form joint venture mutual fund companies, China has been presenting enormous opportunities for the international asset management industry. Whilst the domestic financial market and players are developing sophistication, the Chinese financial regulators are pushing ahead with financial market reforms and liberalisations, across the equity and bond markets, over banks, mutual fund companies, insurance companies, securities companies, trust companies and other financial institutions.

The growth in the Chinese mutual fund industry in the past five years has been tremendous with the industry AUM growing from merely ten billion dollars in year 2002 to around 450 billion dollars in 2007, comparable to the spectacles put up in the opening ceremony of the recent Beijing Olympics.

Certainly, this amount may only be a fraction when compared to the U.S. and European counterparts and to the Chinese industry which suffered market down turns in the first half of 2008.

But when one considers the industry was only officially incepted around ten years ago initially with ten domestic mutual fund companies, the development is truly significant. Evidently, China now has 60 mutual fund companies and half of them are joint venture companies with foreign shareholdings.

For inbound investments by foreigners into Chinese stock markets, the Qualified Foreign Institutional Investors Scheme (“QFII”) was introduced in 2002. The scheme has attracted much interest and foreign investments were allowed to be made directly in China A-shares of companies listed on the Shanghai and Shenzhen stock exchanges.

China is still subject to a strict foreign currency control regime and an approved QFII may apply for an investment quota to enable it or the investment funds managed by it to invest in Chinese stock markets. So far, around 55 financial institutions (including asset managers, banks, insurance companies, charitable foundations) have received investment quotas amounting to just over 10 billion dollars. The Chinese government had pledged to issue an additional quota of 20 billion dollars.

For those asset managers who have successfully obtained an investment quota, they may allow the

Taylor Hui, partner (Deacons, Hong kong)

investment funds managed by them to gain direct access to the China stock markets.

As regards the outbound investments from China, the much anticipated Qualified Domestic Institutional Investors Scheme (“QDII”) was introduced in April 2006. Under the scheme, Chinese banks, mutual fund companies, trust companies and securities companies, with relevant local regulatory approvals, may issue investment products and raise funds from Chinese investors and invest in overseas markets or offshore mutual funds. The QDIIs are permitted to engage foreign asset managers who are subject to different qualifying requirements depending on the type of QDIIs and to advise them in managing QDII investment products.

It has been reported that the total AUM for all QDIIs is over 20 billion dollars for all types of QDIIs, among which 17 billion dollars accounts for ten QDII funds launched by Chinese mutual fund companies.

As regards to QDIIs that are commercial banks, they issue investment products, namely wealth management products to investors, such as equities listed on permitted overseas stock exchanges, or offshore mutual funds (i.e. offshore mutual funds may be marketed in China indi-

rectly through banks). Such stock exchanges or mutual funds must be supervised by regulatory authorities which have signed a Memorandum of Understanding (MOU) with the China Banking Regulatory Commission on regulatory cooperation relating to the QDII scheme. Hong Kong was the first jurisdiction to enter into a MOU in May 2007. From December 2007 to date, the United Kingdom, Singapore, Japan and USA have followed suit. It was reported in March 2008 that Luxembourg had also entered a MOU with the CBRC, although the official announcement has not yet been released, awaiting the completion of certain formalities. The implication of this is that once Luxembourg has entered a MOU, most of the mutual funds would be permitted to be offered to bank QDIIs, hence indirectly to Chinese investors. Until then, Luxembourg-domiciled funds that are also registered in MOU countries such as Hong Kong would still qualify.

In the institutional investors space, China Investment Corporation (the sovereign fund), Chinese insurance companies and the National Social Security Fund (the national pension fund), have now appointed international fund managers to invest globally.

PAPERJAM | September-October 2008 | SPECIAL ALFI & NICSA FORUM

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Olivier Carre (PricewaterhouseCoopers)

Edition 2007

Flashback

Francis Pedrini (Citi)

The previous Alfi/Nicsa conference took place on 25 and 26 September 2007 at the former Conference Centre in Kirchberg.

Jean-Paul Gennari (UBS Global Asset Management – Fund Services)

Etienne Delorme (photos)

David Claus (The Bank of New York Mellon)

Michael Boardman (Blackock Merrill Lynch Investment Managers)

Pierre Weimerskirch (Ernst&Young Luxembourg)

Robert Hoffmann (ALFI)

Carole Miltgen (Prisma)

Jean Brucher (Brucher & Associés)

paperjam | September-October 2008 | Special ALFI & NICSA forum

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Jean-Philippe Bachelet (Deloitte)

William Lockwood (Franklin Templeton Investments)

Simon Vigor (Franklin Templeton International Services)

Stéphane Brunet (BNP Paribas Asset Management, Luxembourg)

Christopher Butterwick (Independant Risk Monitoring Limited)

Denise Voss (Franklin Templeton Investments Luxembourg)

Olivier Garnier (Société Générale Asset Management, Paris)

Hervé Coussement (Fortis Banque Luxembourg)

Niall Bohan (Commission européenne)

Decouvrez toutes les photos sur www.paperjam.lu

Georges Betzios (Legg Mason & Co.)

paperjam | September-October 2008 | Special ALFI & NICSA forum

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Martin Vogel (Julius Baerr & Co., Zurich)

Stuart Fross (WilmerHale)

Paul Whitehouse (State Street Bank, Luxembourg)

Charles Muller (ALFI)

Nicolas Buck (Victor Buck Services)

Markus Postler (RBC Dexia Investor Services, Luxembourg)

Antoine Kremer (ALFI) Marie-Christine Piasta (Lloydsa TSB Bank, Luxembourg) Philippe De Brouwer (KBC Towarzystwo Funduszy Inwestyjnych, Varsovie) Decouvrez toutes les photos sur www.paperjam.lu

Junaed Kabir (State Street Bank Luxembourg)

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06.11.2006

11:18 Uhr

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46

INSIDE COVER Bob London This publication is a special supplement to the September-October 2008 edition of paperJam

DIRECTOR OF PUBLICATION Mike Koedinger

ORGANISATIONS CITED A aIG 37 ALFI 3, 20, 42, 44 alter Domus 21, 23 AOL 38 Arendt & Medernach 6, 20 Association of Foreign Banks in Germany 20 Association of the Luxembourg Fund Industry 6

B Barclays Blackock Merrill Lynch Investment Manager BlackRock BNP Paribas Asset Management, Luxembourg BNP Paribas Securities Services Brucher & Associés

EDITORIAL STAFF EDITOR IN CHIEF Jean-Michel Gaudron COORDINATION Jean-Michel Gaudron COPY EDITOR

and Marc Auxenfants Nathalie Lemaire and Helen Horder ILLUSTRATIONS Bob London LAYOUT INgrid.eu

ADVERTISING PHONE (+352) 27 17 27 27 FAX (+352) 26 29 66 20 E-MAIL web@tempo.lu WEB www.tempo.lu ASSOCIATE MANAGER Aurélio Angius ASSOCIATE SALES MANAGER Francis Gasparotto ADVERTISING ACCOUNT MANAGER Sabrina De Nardi

PUBLISHER PHONE (+352) 29 66 18 FAX (+352) 29 66 19

38 42 22 43 22 42

C CaCeIS Bank Luxembourg Casey, Quirk & Associates Citi Citicorp Clearstream Banking Commission européenne Codex CSSF CTG

17, 22 22

20 22 22

F Fideos 15 Findel Group 22 Fortis Banque Luxembourg 43 Franklin Templeton International Services 43 Franklin Templeton Investments 20, 43 Fund market 4

38 22 43 45 20 13

20

IFBL 33 IMF 32 Independant Risk Monitoring Limited 43 Interactive Data Pricing and Reference Data 20 Invesco 20 Invesco Continental Europea 26 Investment Company Institute 20, 36 IQ Solutions 25 Islamic Financial Management Institute 22, 28

22, 43 20

E East Capital 22 École Supérieure des Affaires 28 EFAMA 22, 34 elite advisers 9 Elvinger, Hoss & Prussen 22 Ernst & Young Asian Asset Management Practice 20 Ernst&Young Luxembourg 42

J JPMorgan Asset Management (Europe) Julius Baerr & Co., Zurich

22 44

K Kasina KBC Towarzystwo Funduszy Inwestyjnych, Varsovie KellyConsult KIT Fortis Investments KpmG

22, 38 44 22 22 2

Luxembourg-Bonnevoie

© Editions Mike Koedinger S.A. (Luxembourg) All rights reserved. Any reproduction or translation, in whole or in part, without prior written permission by the editor is strictly prohibited.

Special guest: Bob London (illustrations) Graduate in Fine Arts, Bob London lives in London and works for numerous magazines (the LA Time, the Guardian...). After an exhibition of his paintings at the London National Portrait Gallery within the context of the “BP portrait award”, he took part in several international exhibitions. The last one has just ended at the StollenSpace Gallery in New York, where he exhibited his drawings next to H.R. Giger and Quentin Blake.

Ministry of the Treasury

3

N NGr Consulting NICSA

47 3, 20, 22, 24

O OECD

32

PricewaterhouseCoopers 20, 42 PricewaterhouseCoopers Hong Kong and Asia 34 Prisma 42

R RBC Dexia Investor Services, Luxembourg RBC Dexia Trust Services Robeco RTL

44 20 20 6

S Schroder Investment Management 22 State Street 20 State Street Bank Luxembourg 44 State Street Global Advisors 22, 32 SWIFT 22

T TCS Telindus The Bank of New York Mellon

48 11 42

U UBS Global Asset Management – Fund Services 42

L Legg Mason & Co. Linklaters LLP Linklaters Loesch Lloyds TSB Bank, Luxembourg Luxembourg School of Finance

43 20

V

20

Victor Buck Services

44

44 29

W WH Selfinvest WilmerHale World Bank

E-MAIL office@mikekoedinger.com WEB www.mikekoedinger.com POSTAL ADDRESS P.O. Box 728, L-2017 Luxembourg OFFICE 10 rue des Gaulois,

M

P

I

42

D Deacons Deloitte Deloitte & Touche LLP

Eurizon Capital Euroclear European Fund Administration

41

44 32

PERSONALITIES CITED A Aventin Jean-Pierre

G 20

B Bachelet Jean-Philippe Betzios Georges Beythan Hermann Boardman Michael Bohan Niall Bouchoms Pierre Brausch Freddy Brucher Jean Brunet Stéphane Buck Nicolas Butterwick Christopher

48 43 20 42 43 20 20 42 43 44 43

C Carre Olivier Chaar Abdel-Maoula Charrington James Claus David Coussement Hervé

42 22, 28 22 42 43

22 44 20, 26

E Elvinger Jacques

22

F Frieden Luc Fross Stuart

3, 6 44

N 22 43 22 42 22 20 20, 34

H Hamacher Theresa Harootunian Shant Hirn Karine Hui Taylor

20, 22 ,24 20 22 20, 40

J Janaway Gary

D De Boe Michele De Brouwer Philippe De Franssu Jean-Baptiste

Ganin Andrey Garnier Olivier Genaux François Gennari Jean-Paul Goodhew Graham Goy Jean-Marc Grome Robert

44 22 20, 30 6, 20 44

L Lam Jeremy Lockwood William

20 43

M McGowan Gregory E. McLaren Scott Miltgen Carole Miyao Steven Muller Charles

22 20 22, 32

P Parentela Russel Parkhouse John Pedrini Francis Penn Mark Phillips Ben Piasta Marie-Christine Postler Markus Prosperi Caroline

20 22 42 38 22 44 44 22

S 22

K Kabir Junaed Kelly Henry Kraft Paul Kremer Claude Kremer Antoine

Nicora Ivan Niedner Claude Nugée John

20 20 42 22, 38 6, 44

Schott Stevens Paul Seale Thomas Sung David

20, 36 22 20

T Tolckmitt Jens

20

V Van de Steen Patrick Van Hecke Philippe Van Someren Gréve E. Willem Vigor Simon Vogel Martin Voss Denise

20 20 20 43 44 43

W Weimerskirch Pierre Whitehouse Paul Wolter Jean-Claude

42 44 22

paperjam | September-October 2008 | SpeCIaL aLFI & NICSa FOrUm

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