State Street Luxembourg seems to have ridden out the first wave of the coronavirus crisis. Yet what of the return to work and a potential secondary shock? We asked Eduardo Gramuglia Pallavicino, State Street Luxembourg’s country head.
‘It all worked quite well. The regulators were quite pragmatic, simplifying some of the processes and allowing workload to be balanced across locations,’ Mr Gramuglia Pallavicino said confidently. ‘These changes were necessary, as in March transaction volumes were double the norm.’
As such, State Street in fact benefited from the crisis as transaction fee income rose substantially over the period. ‘Fee earnings indeed helped to mitigate losses that were the result of asset outflows. However, recently investments have started to return,’ said Pallavicino.
In particular, State Street’s business has been supported by sustained investor appetite for alternative assets. ‘Fund launches from Luxembourg have continued in private equity, real estate and infrastructure debt, following a trend that has been ongoing for 18-24 months, and this looks good for the future,’ he said. Nevertheless, strength in these asset classes will probably not have been sufficient to compensate for the fall-off in more traditional assets.
Human resources concerns
Back in March, State Street Luxembourg managed to move 98% of its 1,000 strong payroll to home-working within days. The return to the office has begun, with up to a 100 workers set to be working from the Kirchberg HQ as from this month.
‘We will invite certain staff back but they will have to be comfortable with this, and it will be on a voluntary basis,’ said Mr Gramuglia Pallavicino. With social distancing measures having reduced office capacity by about a third, currently the bank expects only 70% of staff to be able to return at any one time.
A central concern is – mirroring the situation for the Luxembourg economy as a whole – that half the workforce live in France, Belgium and Germany. These staff are currently benefitting from home-working without any income tax penalty, after the three neighbouring governments temporarily lifted their restrictions for this.
Covid commuting
However, from the autumn it is possible that these rules might be reimposed, limiting cross-border teleworking to only a few weeks a year. This could pose problems for staff concerned about the health implications of commuting long distances on public transport. The danger for operations like State Street is that a proportion of staff may not be prepared to take the risk.
‘From our perspective it is not only an income tax issue but also an issue around permanent establishment’, Mr Gramuglia Pallavicino conceded. ‘If we were to have so many jobs in certain functions across the border, then we might have to get a license there. But this is not something we are considering at this point.’ He acknowledged that such a move might also run into other questions, particular concerning social security.
Yet the quick move to working-from-home demonstrates how flexible the industry can be when required, and it is widely recognised that greater use of IT is needed for the sector to remain competitive. ‘We need to accelerate the technology programmes we have, whether that is digitising processes or investing in new technology.’
State Street survey finds return of investor optimism
Most institutional investors expect there to be minimal impact on their business from the coronavirus crisis, even though three in ten say their daily investment-related operations were disrupted by the volatility. These are the key findings of State Street’s ‘Volatility Study 2020’ – seen exclusively by investmentofficer.lu – which surveyed 640 mainly insurance and pension funds in April.
Of the other longer term impacts, 14% of those polled predicted headcount reductions, 10% increased technology or operational outsourcing, while 7% think they will need to restructure internal organisation or governance.
Two-thirds of institutions faced just one or two challenges related to their investment operations during the crisis, with just 14% having had no issues at all in this area. Concerns with securities valuation (37%), liquidity (34%), timely reporting (34%), and cash forecasting (30%) were the most common. Trade execution (19%) and reconciliation (18%) were less of a challenge.
Risk-on
As for their investment stance, the survey painted a clear risk-on picture with half of those surveyed expecting to increase their exposure to equities by the end of Q2 or Q3. Only 16% are planning a reduction, leaving a balance of +35.
There was also a positive balance for the following investments: private credit (+27), money market funds (+25), private equity (+10), and infrastructure (+6). But for real estate, 17% predicted reduced allocations, with just 10% foreseeing an increase, and there was a 4-point negative balance for fixed income.
Overall, two-thirds are confident in their asset managers’ ability to navigate the crisis. However, the same proportion also was found to believe their institution will fail to meet short-term investment objectives as normal economic activity is thought not to have returned by the end of this year.