Upcoming legislation bringing challenges to the fund distribution industry – notably adding reporting requirements and increasing costs – will be a key focus on Wednesday’s Global Distribution Conference of the Association of the Luxembourg Fund Industry, known as Alfi. The conference, being held in a compressed, one-day format will address these challenges as well as opportunities, including the new European Long-term Investment Fund vehicle.
Investment Officer spoke with Master of Ceremony Steven Libby, a partner and Emea AWM leader at PwC and an Alfi board member, as the event approaches.
“Distribution is still the key to the success of the asset management industry,” he said. “If you don’t get distribution right, that won’t be good for the funds and therefore it won’t be good for the investor.”
Libby said he has seen “significant general interest” in this topic.
Know what to expect
“A lot of upcoming regulations are going to pose some challenges to the industry and therefore to have insight into what to expect is extremely important to be successful,” he said.
The conference will open with Libby introducing Anton Heese, a senior portfolio manager and research analyst at Morgan Stanley. “We have lined up a scene-setting, an economist’s view of the impacts of the market conditions.” Heese, Libby explained, will discuss the potential impacts of “untamed inflation” as well as the consequences of the higher interest rates, and the volatility that this brings to the markets. This, said Libby, would be one of the conference’s themes.
Heese will also discuss the changes in China and the challenges posed by that giant country’s economic environment, another conference theme.
Other themes included the return to fixed-income investing as interest rates rise and the potential impacts of generative AI.
Eltif opens up possibilities
The conference will also discuss the impact of the Eltif vehicle on Luxembourg’s fund industry.
“This really does have the potential to open up what has been generally asset classes restricted to institutional investors,” said Libby.
Libby stated that the final regulations will likely not be in place until the end of 2024.
The EU’s Retail Investment Strategy will introduce regulatory changes to facilitate the bloc’s effort to raise the level of investment from retail investors. Statistics show that approximately 90% of European citizens’ available capital sits in cash, for example on deposit in a bank account. He contrasted the 10% invested figure in the EU with the 22% in the US, usually through retirement savings accounts.
But some of the proposed changes, including a ban on inducements dropped from the Commission’s proposal, but which financial consumer groups still support, may have negative consequences, he said.
Platforms
He pointed to the rise of platforms, which he said “make it fairly easy for investors to invest.” He explained that asset managers pay the platform certain amounts which allow these platforms to reduce their costs and fees and make investment “a bit more reasonable, more attractive for investors.” Libby said that these payments could be blocked by an inducement ban, which might “reduce the interest in investing through platforms.”
At the same time, Libby pointed to the impact of ESG regulation and the development of the Sustainable Finance Disclosure Regulation (SFDR). “If you look at the intentions, they’re very good, but the regulations are extremely complex,” he said. “And they bring with them a lot of reporting requirements, which introduce a lot of costs for the funds.”
Asset managers, he said, “can only bear so much of these costs and therefore part of that gets passed on tot he investors”. This, Libby said would tend to dissuade investment at a time when public policy is to encourage ESG investment.
Due to the European Commission’s pivot away from an inducements ban to the “value for money” concept, the European Securities and Markets Authority has been charged with reviewing costs and charges in fund products.
Industry cost structure
Libby said that while this might seem positive, any challenge to the fund industry’s cost structure will affect the pricing of the investments. It will also involve a significant rise in reporting costs.
“Could it have potentially an adverse effect or the opposite effect in terms of cost perhaps rising and therefore additional costs being passed on to investors for a questionable improvement in returns for the end investor?” asked Libby.
Towards the end of the day, a panel will discuss “Liquidity mismatch, market stress and open-ended funds” based on the recommendations of the Financial Stability Board and the International Organization of Securities Commissions, which jointly hold the view that open-ended funds can “collectively generate systemic risk to financial stability” due to a liquidity mismatch – that the funds don’t have access to sufficient free capital in case of a run on the fund during stressed market conditions.
Liquidity issues like this have been cited during discussions of offering alternative investments to retail investors with relatively low amounts to invest.
This year’s event will feature the presence of Jim Fitzpatrick, the President and CEO of the US National Investment Company Service Association (NICSA) and Sally Wong, CEO of the Hong Kong Investment Funds Association, to give attendees a more global perspective.