While slowly getting back to normal, the priority of the country’s fund industry should be to review their operating models and reassess their risk, KPMG partners Ravi Beegun (pictured) and Alan Picone suggest. Meanwhile, asset managers should focus on cutting costs in response to the drop in revenues caused by the recession.
As the Luxembourg fund industry is exiting the lockdown, what should be its business priorities?
Ravi Beegun: ‘One of the most urgent priorities for asset managers will be reduce their costs and protect their margins, as their revenues are likely to have dropped during the confinement.
Covid has accelerated the pace of digitisation in a number of organisations. However, the asset management industry in general still needs to make progress in its digital transformation journey compared to other industries.
The Covid-crisis has also raised awareness that people can work remotely, that the way we consider mobility and commuting to work could improve and an added benefit is that pollution levels could drop significantly.
But the fund industry will have to review its operating models. For instance, the importance of risk management has emerged with the pandemic highlighting areas where outsourcing chains present vulnerabilities and where further reinforcement in the operating model are required. Risks such as a sanitary crisis will remain, but contingency plans can be improved with the experience already gained.
Some of Luxembourg’s relevant distribution markets have been deeply impacted by the virus, such as the UK, Italy and China. Hong Kong is facing political instability. How will this affect its fund industry?
Alan Picone: ‘It is difficult to predict to what extent Luxembourg funds will be affected by the economic situation in the countries which have suffered the most from Covid.
From what we understand, the Luxembourg fund industry hasn’t so far suffered that much from the pandemic. In March, as the stock markets plunged, funds’ net assets dropped as well. But the number of funds which were in real difficulty were much lower compared to what could have been expected. Today the levels of assets under management are more or less back to normal because markets have recovered.
Likewise, the alternative fund industry has not suffered much from the pandemic. There is still plenty of liquidity waiting to be invested. Investors are only waiting for more opportunities to invest in. When the virus hit, big names in private equity and venture capital were already identifying new opportunities and good deals that could sustain the economy. These players continue to hunt for market dislocations and distressed areas. This way, the pandemic has been a catalyst for new ideas of doing business. Those who are specialised in investing in companies at a very early stage, will be the first to take advantage of it.
What are your forecasts and expectations on the post-Covid era?
Ravi Beegun: ‘A second wave of the pandemic is still to be expected. An economic crisis is probably coming too. The level of savings will continue increasing, as the future remains uncertain. Whether some of those savings will eventually be channelled to funds, we don’t know yet.
Interests rates are and will remain ultra-low for a while. Therefore, pension and sovereign wealth funds that are looking for a certain amount of yield and need to deliver, will need to reallocate a higher proportion of their assets into alternative asset classes.
In that context, how does Luxembourg position and differentiate from other financial centres?
Alan Picone: ‘Alfi has identified five objectives together with the industry, that will help Luxembourg to differentiate itself: Sustainable finance; pensions and savings; expansion of UCITS around the world; alternative investments; and driving innovation and the digital transformation of the industry.
Luxembourg is also the second largest place in the world in terms of funds distribution and product engineering. As a natural distribution platform, the country can differentiate by processing and offering the financial solutions of tomorrow, such as new funds, new strategies and new products.
But, to remain in the top league, we need both people who are able to understand and develop and service those products, in combination with scaling-up on the digital side to deliver increase customer value at reduced costs. We remain confident, as Luxembourg has a good track record of getting the needed skills onboard. Even if these skills are not solely based here.’
Ravi Beegun is Partner, Head of Asset Management at KPMG Luxembourg. He is also a member of the Boards of the Association of the Luxembourg Fund Industry (ALFI), of the Luxembourg Association for Risk Management and of KPMG Luxembourg Foundation.
Alan Picone is Partner - Advisory & Consulting Solutions at KPMG Luxembourg and specialises in Risk and Asset Management.