Cross border distribution – Luxembourg’s challenge going forward

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Business Review
September 2011

Luxembourg was the first European country to transpose the UCITS I Directive in 1988.  Since then Luxembourg has grown to being the second largest mutual fund domicile in the world. The key factor which has driven Luxembourg’s success has been the growth in the cross-border distribution of UCITS, not just within the European Union but also to further afield markets such as Asia and South America. Such markets have led to Luxembourg UCITS becoming a truly international product whose reputation is now well renowned on a global basis.

Contributors to Luxembourg’s success
Luxembourg gained an early advantage by quickly developing the infrastructure and expertise required to develop its investment fund industry.  Its ability to service funds (in terms of fund administration, transfer agency and depositary bank services, and distribution) and meet the needs of asset managers as they innovate their products have contributed to managers choosing Luxembourg as the cross-border domicile for their UCITS products.  In addition, its stable economic and political environment, and government support for the industry initially drew, and continues to draw, managers towards it as an investment fund domicile. As a consequence, Luxembourg quickly evolved into a centre able to provide a variety of investment fund products encompassing diverse asset classes.

Its reputation as a domicile able to provide high quality services to highly regulated vehicles has led to it dominating the cross-border distribution market with a share of approximately 80 per cent.  Luxembourg’s UCITS are, today, distributed in over 50 countries.

Luxembourg well placed to face the challenges?
Competition, however, in the form of other EU centres and from Asia, as well as new regulation, will give rise both to future challenges and opportunities that Luxembourg, as the leading domicile, will have to deal with.

Regulation such as UCITS IV and the Alternative Investment Fund Managers (AIFM) Directive may favour established domiciles such as Luxembourg which already provide tried-and-tested cross-border distribution platforms. Managers, when choosing their domicile, will focus on issues such as cost, servicing and distributing capabilities, the ability to provide expertise in support services and the ability to evolve with managers as they innovate.  Investors’ behaviour suggests that while retail investors in certain countries (such as France and the UK) may have a preference for domestic products, institutional investors are more focused on finding products which meet certain criteria such as level of regulation, liquidity terms, quality of service.

Luxembourg will not be complacent and will certainly not assume that its UCITS cross-border distribution success will be automatically replicated in the alternative world following the AIFM Directive.  It will continuously review and enhance elements such as its service offering, infrastructure and training, to further meet the needs of alternative asset classes, which offer a significant opportunity for Luxembourg.

Conclusion
Luxembourg has benefitted from the early development of its investment fund industry and has an initial competitive advantage over other centres in the provision of cross-border distribution services. However, product innovation, investor needs and demands, and regulation mean that Luxembourg will need to remain vigilant and attempt to anticipate future operating changes to retain its current position.

par Kerry Nichol, Partner, Traditional and alternative funds, EY, Luxembourg