Although its overall market share contracted slightly, Luxembourg last year held on to its number one spot among Europe’s top 10 investment hubs for both Ucits and Alternative Investment Funds, with a market share of 26.8 percent, compared to 27 percent that was reported for the previous year, according to the latest annual reported released by the Association for the Luxembourg Fund Industry, or Alfi. Ireland’s share of the pie increased to 18.6 percent last year from 18 percent reported for 2020.
When purely considering Ucits funds, so excluding alternative investments, the collective European market share of Ireland and Luxembourg stood at 57.8 percent in 2021. With 35.5 percent of the total, Luxembourg accounted for more than a third of the European Ucits market, while Ireland stood at 22.3 percent, or a little more than one fifth. Year-earlier market share data for Ucits was not immediately available.
Records set in 2021
During 2021 Luxembourg observed net flows at a record-breaking level. The record number for 5.86 trillion in assets under management in the Grand Duchy was achieved due to a year-on-year increase of 17.8 percent, or 886 billion euro. Ireland accounted for 4.07 trillion euro in assets last year. In the weeks after these numbers were first reported, markets started extending losses as sentiment reversed due to the Ukraine war.
The data in Alfi’s annual report showed that Germany, together with France and the UK, have remained particularly competitive in the market for alternative investments. With 2.91 trillion euro, Germany accounted for 13.3 percent of the collective Ucits-AIF market last year, while it only had 3.8 percent of the European Ucits market in 2020. France and the UK were top 5 contenders with respective shares of 10.2 percent and 9.8 percent each.
Luxembourg ‘could do even better’
Just on Monday, Luxembourg for Finance CEO Nicolas Mackel told the country’s parliament that “the Luxembourg financial centre is doing well, but it could do even better.” Financial services companies in Luxembourg - banks, asset managers as well as asset services providers - all find it difficult to attract qualified staff, while competition, digitalisation and the war in Ukraine also put Luxembourg under pressure. Mackel told parliament it is time to”review the value-added creation chain” and consider tax measures.
Alfi brings together Luxembourg-based asset management firms and interacts on their behalf with financial supervisors such as CSSF. During the beginning of the Ukraine conflict, Alfi liaised directly with the CSSF on how to deal with stranded fund assets in Russia, which eventually led to permissions to funds to use liquidity management tools such as side-pockets.
“We observed net flows at record-breaking level, in excess of 30 billion per month,” Camille Thommes, Alfi’s managing director, wrote in a foreword. “Half a year has passed since, and we have had to face the terrible reality of war in Ukraine. Despite our shock and concern, we seemed to remain limited in our course of action. Arguably our main foothold, the best tool for us as finance professionals, for this war or any other conflict, is that we do not finance it.”
“When the war began, we quickly established a contact channel for crisis-related questions. We have been helping to direct information, in our role as the interface between government and the supervisory authority on the one hand and industry players on the other. We are in regular contact with the CSSF to discuss operational and regulatory challenges.”
‘Sanctions can work’
Alfi also interacts with the government on issues such as sanctions against Russia.
“Arguably our main foothold, the best tool for us as finance professionals, for this war or any other conflict, is that we do not finance it,” Thommes said. “Sanctions can work. In our industry, the nature of investment funds means that following sanctions rules can require complicated mechanisms.”
Luxembourg’s finance minister Yuriko Backes recently informed parliament that the government has frozen 4.3 billion euro in Russian assets and that more than 90 persons and 1,100 Luxembourg-based entities have been identified as being on the EU sanctions list against Russia.
Sustainable investment solutions
Addressing Luxembourg’s ambitions in sustainable finance, Alfi’s chairperson Corinne Lamesch said that the association continues to explore best practices and strategies that can help with greening the financial sector.
“Together with our members, we are convinced that we can create truly sustainable investment solutions that are viable from a regulatory standpoint, conform to the increasingly sophisticated investor demand and satisfy business needs at the same time,” Lamesch said. “The ESG innovators can serve as beacons for the industry to be future-ready. Things will always happen that are difficult to prepare for, but that doesn’t mean we have to be unprepared.”
New pension products
Alfi’s annual report also noted that Luxembourg is keen to develop new savings and pensions products under the emerging European regime for Pan-European Personal Pension Products, known as Pepps. These financial products will be available for sale throughout Europe and will also include a specific ESG-label, Alfi said.
“Combining the long-term nature of these investments with sustainable (ESG) characteristics will further increase the attractiveness of these products as investors pursue environmental or societal objectives in addition to financial returns.” Alfi’s report said.