For a country that is well established as a global leader in investment funds, one might expect its people to embrace more risk when it comes to their financial investments. As it turns out, the love for cash deposits is as big as ever.
“Households in Luxembourg have a relatively high risk aversion profile, which is reflected in their high propensity to invest savings in bank deposits,” said an analysis section of the latest Luxembourg Central Bank (LCB) bulletin. “However, in recent years, they have shifted the structure of their financial investments towards riskier assets,” the report continues. But is this strictly true?
The report points to 46.7 percent of household financial assets in Luxembourg being held in a highly liquid form, with 92 percent in bank accounts and 8 percent in cash. This overall figure broadly matches that (46.2 percent in 2020) published by the OECD, which put Luxembourg households as the eighth most bank/cash-friendly among OECD countries.
This share was not far ahead of other countries with a Germanic culture, as Germany and Austria were at around 40 percent. In France and Belgium, less than a third of assets were in banks/cash, with the Netherlands and the US in the mid-teens.
Signs of change?
However, there is little sign of change in this risk adverse attitude to saving in the figures the OECD has published since 1995. The share was around 50 percent in 1995, falling to 41 percent in 2000, rising to 46 percent in 2008 and declining thereafter.
This curve neatly maps onto the rising and falling equity prices over this period. This suggests that the main driver of these changing percentages was the appreciation and depreciation of equity prices (and thus the relative share of these investments in the whole) rather than changing attitudes to bank deposits.
For those that do take a more active stance to investment, the BCL found evidence of households “investing more in equities, non-monetary mutual funds and unit-linked life insurance policies.
“The composition of the securities portfolio has gradually shifted from bonds to equities. This shift has been accompanied by a significant increase in the degree of exposure to global equity indices and exchange rate fluctuations.”
Funds and equities
Yet overall, Luxembourg being the world leading centre of investment fund distribution appears to have had marginal influence on the prevalence of these products in households’ saving and investment strategies.
At 12.4 percent in 2020, this was broadly unchanged since 1995 in the OECD figures. Luxembourg’s 2020 share was similar to that in Belgium, the US and Germany, with little change in these countries either.
This figure was nearer 5 percent in France and just 3 percent in the Netherlands. Notably, Ireland, the Grand Duchy’s main cross-border fund domicile competitor, was on just 0.7 percent, the lowest in the OECD.
Direct holdings of shares and other equity were more favoured in Luxembourg, accounting for nearly a quarter of household financial assets. This puts the country in the middle of the OECD pack. Nordic countries and the US were more enthusiastic, with Luxembourg in line with the likes of Belgium, France and Italy. Germany and the Netherlands were at around 10 percent.
Conservative stance
The BCL says that in Luxembourg, about three quarters of equity investment is in companies that are not publicly listed. “Direct investments in equities are more oriented towards the domestic market,” the report added. However, in recent years, they note that fund and life insurance policy investment has led to greater international diversification.
The share of life insurance in total financial assets has doubled in Luxembourg since 1995 from around 5 percent to 10 percent in 2020, putting the Grand Duchy in the middle of the OECD pack. French residents are most enthusiastic about these products, accounting for a third of household assets in the country, which is about double the figures seen in places like Belgium, Italy and Germany.
The BCL report says that 40 percent of life insurance assets are in unit linked products in 2020, that is those in which premiums are invested into underlying mutual funds. The remainder rely on the insurance firm to provide returns for the policy holder. The share of unit linked products is up from 34 percent in 2016, but whether this is to do with asset appreciation or changing behaviour is not explained in the BCL report.
Given the generous nature of Luxembourg’s public pension system it is perhaps little wonder that only 3.3 percent of household financial assets were in private schemes. This figure is broadly double that in 1995, possibly helped by the introduction of tax breaks for pension funds in the early 2000s.
Yet the Grand Duchy is clearly in the group of laggards, well behind Belgium on 8.4 percent 2020, Germany 13.3 percent, the US on 25.3 percent, with the Netherlands on no less than 61.7 percent of household financial assets being in private pension schemes.
Wealthy, but not so wealthy
Despite Luxembourg being routinely listed as one of the richest countries in the world in terms of GDP per head, this appears not to be born out in the OECD’s figures for household financial assets per capita.
Luxembourg is fifth with $205,700 (€180,000), behind the Netherlands and Denmark, and with Americans and Swiss in the lead, owning about $300,000 (€263,000) each on average. The BCL has a higher figure for Luxembourg though, at €194,015 in 2020.
These calculations exclude investment in land and property, for which there are no definitive statistics. Rent control laws restrict the attractiveness of buy-to let property investment, so anecdotal evidence suggests that this is limited in nature in Luxembourg.
In summary for Luxembourg, in 2020 cash deposits represented 46 percent of household financial assets, 22 percent in equity, about a ten each in life insurance and mutual funds, with pension funds around 3 percent.
And while there have been some subtle changes in the nature of these holdings, broadly these shares have changed little in Luxembourg and elsewhere.