Luxembourg investment funds started the year on the back of a new record high. On 31 December 2021, assets under management in the Grand Duchy stood at EUR 5.9 trillion, representing an increase of 17.8% or EUR 886 billion compared to 12 months earlier. More specifically, a 9.9% increase based on market valuation was complemented by an impressive 7.9% organic growth rate stemming from net subscriptions from both retail and institutional investors. The Luxembourg fund industry therefore retains its leading role as the largest investment fund centre in Europe, a landmark first achieved in 1999, regained in 2005, and held ever since.
Nearly all asset classes registered inflows. UCITS, the definitive standard for retail investment funds with built-in protection and worldwide renown, are a perfect match for Luxembourg. The Grand Duchy, which can itself be characterised as an agile and yet stable, flexible yet safe, efficient yet reliable investment fund hub, shares its adaptability with the UCITS cross-border fund brand and multi-purpose solution which has become an export hit since its inception more than three decades ago. Of all true cross-border UCITS – those registered for distribution in at least three countries – Luxembourg is home to 57%. Investors from 77 countries have entrusted in excess of EUR 4.9 tn to Luxembourg UCITS, and the industry advocates the removal of any remaining or new barriers to cross-border distribution.
Less traditional asset classes often appear in an acronym disguise used for the corresponding vehicles, ranging from SICAR, SIF and RAIF to ELTIF and EuVECA. However, once the jargon is decoded, the asset classes grouped under the term “alternative investments” are often real assets and quite literally more tangible, as a general rule. The term “private assets” is preferred by some market participants, given that private equity and private debt play a major role along with infrastructure and property. Call them what you will though, investors have made it very clear that their demand for the asset class is only increasing. Although volumes in alternative funds are usually considerably smaller than in more liquid investment pools, the growth in regulated alternative funds that Luxembourg asset managers look after impresses with nearly 30% over the past three year – but perhaps this is not surprising given the unique expert knowledge the country has built up around all facets of servicing AIFs and their particular bespoke structures.
Early on, and with strong support from ALFI, the fund centre became one of the pioneers inflying the flag for sustainable investing. More than 15 years ago, in 2006, ALFI was a founder of LuxFLAG, a non-profit organisation awarding a series of recognised labels aimed at helping inform investors about fund investment and governance policies. Fast-forward to the end of 2020, and Luxembourg captured 44% of total net flows in sustainable funds made across all European domiciles, making it the leader in this important field too. Maintaining this position is a top priority for ALFI, as regard to ESG factors for many has ceased to be “nice to have”, but a matter of course that is also expected to be evidenced. ALFI engages in mobilising policymakers and market participants to make the quest for true sustainability the foundation of the entire fund value chain. Progress has been made, especially in the area of climate neutrality, but good governance and socially responsible business decisions should be equally self-evident. Good governance in particular is easily overlooked as an importantfactor in achieving fair business operations with long-term benefits for not just the market participants but society as a whole. The ALFI code of ethics, introduced in 1998, provides a framework of high-level principles and best practice recommendations for the governance of Luxembourg investment funds. A key ingredient in the recipe for a more sustainable economy, among which the financial sector and investment funds are crucial drivers, is quality data. How the ecological and social outcome and fairness of an investment can and should be measured remains one of the biggest challenges the industry faces. Technology can support the route from getting hold of the data itself to understanding the information and developing solutions from it. Luxembourg fosters innovative collaborations between experienced investment industry players and newcomers from the technological field that have the potential to propel the small country to the fore once again.
Most individuals who consider a first-time investment today expect to invest via electronic channels, often ideally a smartphone app. The concept of a (human) investment advisor is an anachronism for many, which means that the matter of investor education, which has long secured a prominent place on the local agenda, is only growing in importance. Asset managers have a crucial role to play in this, as there is still quite a way to go in terms of making the investment process appropriately transparent. Sustainable companies are often leaders in transparency, disclosing in considerable detail the projects they finance with the invested monies. This is a serious appeal to investors who aim to do good – or at least definitely no harm – with the money they entrust to the asset manager, such as their personal contributions to pensions or other long-term savings. In this context, coupled with the increasing need for individuals to take responsibility for their own financial security later in life, the pan-European personal pension product, or PEPP, is of pronounced significance. The PEPP is a long-term, individual, non-occupational personal pension product of the third pillar that savers subscribe to on a voluntary basis to provide supplementary income upon retirement. Luxembourg is very well positioned to support the speedy uptake of the PEPP, and this “European pension”, like UCITS, has the potential to become another recognised brand in the investment world.
In Luxembourg, investors on the one hand and asset management and investment fund players on the other find the perfect interface location, dovetailing products, processes and people. Here, the essential role of investment funds for the global economy becomes tangible, as the fund hub connects investors with market opportunities worldwide.