EY Luxembourg has just released its 2019 edition of Investment Funds in Luxembourg – A technical guide, designed to answer many questions on setting up and operating investment funds in Luxembourg. This internationally-renowned publication updated annually over the last 25 years covers recent legislative and regulatory changes.
Michael Ferguson, Wealth and Asset Management Leader, EY Luxembourg, comments:
“Notwithstanding that we are living in a world of ever heightened geopolitical tensions, the demand for investment fund products continues to create positive net new asset flows. The key underlying drivers generating this demand continue to be:
1. Ageing demographics - the world's population is getting older, there are more people now living over the age of 65 than those under the age of five
2. Responsibility for long term saving shifting to individuals - state pension schemes are under the twin pressures of ever-increasing ageing populations coupled with fewer working age people contributing to these schemes
3. Rise and demand of the middle class - it is expected that by 2030, more than half of the world’s population will be middle class. This is largely driven by the growing middle class in China, now spreading throughout Asia
4. Increasing cost of health care and education - the costs of education and health care have, on average, risen fivefold since the 1950s
Over the last 5 years, assets under management have increased by around 10% and revenues on average by 5% per year. Asset appreciation and net new asset flows reached an all-time high in 2018 of US$330bn, contributing to an overall US$80tn in assets under management.
This overall growth is being driven by the very significant growth in passive products, now accounting for over 25% of global assets. The active sector also generated net new asset flows in 2018 with average operating margins remaining at around 35%.
Notwithstanding these positive headlines, the average growth rate in assets under management is slowing down. This is primarily due to lower market performance, asset owners in-sourcing management of more assets themselves, draw downs on DB assets not being replaced at the same pace by the growth in DC assets and lower levels of saving by younger generations.
Cost pressures continue to exist with increases in compensation, increased spend on developing and seeding new products and markets, investment in innovation and technology transformation and the continuous costs of implementing the regulatory agenda.
Overall the difference between winners and losers is widening with 3 asset managers having 80% of all passive assets and the top 10 US asset managers taking 80% of all US fund flows.
- The overriding challenge for the asset management sector is how to deal with the structural shifts such as:
- the shifting responsibility for long-term savings from state to employer to employee
- the increasing questioning of value for money
- significant fee and related margin compression
- price becoming the determinant factor in driving asset flows
- the growing impact of big data and artificial intelligence on the investment decision making process
- increased tendency of investors (including specifically millennials) to receive advice and purchase products through digital channels
- regulation driving greater transparency and reporting, and
- investors increasingly focused on the non-financial returns of their investments.
Dealing with these structural shifts will involve:
1. Refocus around the client, including developing a much deeper understanding of who the end client is and their specific investment requirements, moving away from product provider to customized solutions and greater conversion of distribution and manufacturing
2. Redefining the investment proposition, being clear on the product strategy offering and pricing accordingly, ability to develop and offer smart beta and factor investing, development of big data and artificial intelligence to enhance the investment management process
3. Focusing on the growth areas, including the alternative sub-sectors, ESG compliant products, investing in high growth potential markets, especially China, India and Asia in general
4. Transforming the operating model - reviewing all parts of the value-chain to drive out unnecessary costs while enabling operations to serve and meet the ever-increasing requirements of the clients and regulators
5. Building scale through acquisitions, alliances, partnerships, joint ventures and hiring specialist teams with differentials in the areas of product manufacturing, brand and distribution credentials in high growth potential markets, and
6. Talent and culture - reimaging and redeploying talent and culture with clear and consistent focus on knowing who is the ultimate client and what are their specific investment needs and requirements.”
The Investment Funds in Luxembourg guide may be downloaded from the EY Luxembourg website: ey.com/lu
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