The Luxembourg Ucits market, a cornerstone of the European investment landscape, demonstrated both its strength and vulnerability in the face of 2022’s economic turbulence, with fund managers navigating increased market and credit risks, while maintaining prudent leverage and liquidity management.
Luxembourg supervisor CSSF on Monday released its annual Ucits Risk Dashboard, noting tha, equity and bond funds took a smaller share of the total, while money market funds, or MMFs, became a bit more significant. CSSF said this move can be explained by the use of MMFs as short-term cash management vehicles by investors.
Equity Ucits account for 39%
Total net assets held in Luxembourg-based Undertakings for the Collective Investment in Transferable Securities, as Ucits are formally known, have shown a contraction in net assets to 4,082 billion euro from 4,928 billion euro at the end of 2022, with a notable decline in the equity funds› share of net assets to 39 percent from 41 percent, according to CSSF.
As of December 31, 2022, the Ucits fund count slightly decreased to 10,565 from 10,586 the previous year.
The CSSF’s full reporting scope, which provides a basis for a detailed overview of risks in the sector, now includes 1,980 funds, with net assets totaling 3,192 billion compared. The size criterion, with a NAV above 500 million euro, continued to guide the inclusion of funds within the CSSF’s comprehensive reporting segment.
This downturn is mirrored in the decreased proportion of equity and bond funds within the fully reported scope, as the market adjusts to a general decline in net assets, partially offset by an increase in the proportion of money market funds.
Volatility up
The year 2022 brought with it significant challenges, including rising inflation, an increase in short-term interest rates due to tightening monetary policies, and the ongoing geopolitical tensions stemming from the Ukraine/Russia crisis. This notable increase in market risk was evident with the annualised realised volatility climbing from 8.1 percent in the second half of 2021 to 12.1 percent in the second semester of 2022.
Despite these challenges, the use of leverage within Ucits remained modest, well within regulatory limits, underscoring a cautious approach by fund managers. The volume of Efficient Portfolio Management (EPM) techniques was fairly stable at 147 billion euro, with securities lending and reverse repo transactions constituting the bulk of this activity, CSSF said.
The results of stress tests on interest rates (scenario of +200 bps parallel shift remained stable for bond funds but deteriorated for mixed funds (from -2.9% to -4.0%), suggesting that the decrease in duration observed in 2021 might have come to an end and that the exposure of mixed funds to bonds might have increased.
Swing pricing
Liquidity risk profiles showed resilience, remaining stable under normal conditions on a one-week horizon. CSSF said the application of Liquidity Management Tools like swing pricing was broadly stable, and the use of gates and swing pricing in constitutive documents either remained stable or increased throughout 2022.
Credit risk assessments reflected a market leaning towards high-quality assets, with 90 percent of credit exposure allocated to assets with an internal credit rating between 1 and 5. However, credit exposures by credit spreads showed significant stress in the first semester, notably for bond funds where NAV impacts deepened from -7.1 percent to -10.2 percent, largely due to the Ukraine/Russia crisis and the Chinese real estate sector’s troubles. The situation improved in the second half of the year, easing down to -8.2 percent for bond funds, according to CSSF.