EY Luxembourg will publish its 2021 edition of the Investment Funds in Luxembourg – a technical guide on 30 September.
The 600-page guide serves as a reference for fund managers, not only in Luxembourg but also worldwide. Updated annually for more than 25 years, it covers the recent legislative and regulatory changes in the investment fund sector. Christophe Wintgens, Wealth and Asset Management Leader, and Kerry Nichol, Wealth and Asset Management Partner, share their insights.
Over the past year asset managers have been forced to rapidly navigate and adapt to disruptive market conditions as a result of the COVID-19 pandemic. Where in 2020 the immediate focus was on ensuring employee welfare and maintaining business operations in a remote work setting, the priority in 2021 has shifted.
On the one hand, the crisis has sparked among business leaders a renewed focus on innovation and product diversification in order to remain competitive and achieve post-pandemic growth. On the other hand, embarking on innovation-led initiatives while simultaneously managing short-term issues has required a smart balance between prudence and operational investment.
Christophe Wintgens, Wealth and Asset Management Leader, reflects:
“2020/21 was a challenging period for asset managers, yet even before the turn of the decade, the industry started its transformation. Over several years we have witnessed a growing focus on non-profit outcomes, experienced pressure from investors to reduce costs and have accelerated investments in digital technologies.
When the COVID-19 pandemic disrupted the financial markets, asset managers responded quickly to maintain operations and regulators intensified their efforts to protect investors’ savings and ensure financial market stability. Although many asset managers have so far successfully weathered the storm with remarkable resilience, the next few years are expected to be testing. We need to ensure that we rise to the challenge and take hold of emerging opportunities to create long-term value for clients, such as pursuing multiple growth avenues, differentiating product offerings and investing heavily in data and technology. The industry has shown impressive adaptability and leaders must use their learnings to strategically plan for the next five years and beyond.”
At the top of the agenda for the foreseeable future will be the ability to manage costs while still delivering value to investors. It is no surprise that financial institutions are therefore re-evaluating core versus non-core business activities and determining which of these can be outsourced, within the limits imposed by substance requirements.
Undue costs: Much has been written over the past 12 months on the supervision of costs applicable to UCITS and AIFs. Although actively-managed funds have outperformed passively-managed funds in terms of gross historical returns, the higher fees charged by active managers are in some cases offsetting this performance differential. In an effort to reduce the risk of regulatory arbitrage and better protect investors, the regulators have set up a framework of best practices with respect to fee structures and disclosures, governance and cost review processes. Now more than ever, the cost conversation is of paramount importance as we have witnessed a spike in transaction costs due to market volatility from the pandemic.
Digitalization: The pace of digital adoption has dramatically accelerated, with many companies being forced to totally transform their employee, customer and supply-chain models to an online compatible format in the short space of 18 months. With an increase in the volume and complexity of digital activities, many institutions have looked to outsource their IT functions, as well as other non-core tasks in the fields of tax, risk, compliance and finance, amongst others. This has led to the emergence of Managed Services, whereby data handling, service delivery platforms and client frontend systems are proposed to asset managers to turn their previous pain points into a new experience with both automation and control being top priorities. This experience includes running non-core functions from an easy-to-use and reliable techno-hub.
Growth and product diversification: Crises can act as a catalyst for creativity and innovation. This is in part due to the fact that novel problems require fresh thought and decisive action to replace previously fit-for-purpose problem-solving methods. Where some companies have halted their product launches, others have instead reacted by rethinking their existing offerings. Many fund managers are looking for ways to remain competitive, by offering differentiated products and services with a greater focus on alternative and long-term assets, which is driven by the growing demand of pension funds, insurance companies and a new generation of retail investors.
With climate change being one of the biggest contributors to new approaches to investing, asset managers are exploring avenues to invest in firms with strong sustainable performance and commitments.
In addition to aligning with regulatory guidelines, offering ESG investment funds will satisfy the increasing demand from investors to look beyond purely financial aspects towards generating a positive social and environmental impact. Companies that meet their investors’ demands are more attractive to potential clients and better positioned to secure a competitive advantage.
Changing regulatory environment: The regulatory environment has also been forced to respond to rapidly changing market conditions and disruption both due to the COVID-19 pandemic and the departure of the UK from the EU. As such, topics surrounding supervisory convergence and harmonization have also been at the forefront of the agenda, with the European Supervisory Authorities reevaluating the tools used to achieve a unified and effective single European market – the concern being that flexibility in the application of directives across EU Member States can lead to divergences which may trigger negative outcomes for investors. Consideration is therefore being given to the potential future scope of direct supervisory powers, the expansion of the supervisory toolbox, as well as some desirable improvements in the coordination of a fast-paced policy-making cycle.
This article has been published in AGEFI.