We see significant growth in global asset management (AUM) in 2019. However, fund managers are also facing the challenge of declining management fees and increasing operating costs, and the profitability of the fund industry is under great pressure. During the COVID-19 epidemic in 2020, fund managers faced a decline in assets under management. To be in the fund management business in today’s competitive environment, fund distribution has become a key success factor for managers. As Asian (including Chinese) fund managers have extensive experience in investing in the Chinese market, some of them are actively preparing or considering the establishment of Luxembourg-based funds and management structures to provide appropriate investment vehicles for European investors to invest in China’s capital markets and alternative investment assets.
In this third article in the Luxembourg Funds series, we will provide an overview of the current distribution of funds in Europe and the factors that Asian asset managers should consider when entering the European market.
1) What are the distribution trends of regulated investment funds and alternative investment funds in Europe?
Ucits are regulated funds that invest primarily in secondary market securities that can be sold to institutional and retail investors within and outside the EU, providing them with a large pool of potential investors. Given the current low interest rate market environment, retail investors and institutional investors (especially pension funds) continue to invest money in funds, seeking more stable returns in a volatile investment environment. Ucits sales appear to have been unaffected during the outbreak and remain popular with investors.
There is also demand for alternative investment funds (AIFs). AIF is primarily distributed to qualified investors (such as high net worth individuals and institutional investors) around the world. We are seeing general investor interest in real estate assets, particularly in Europe, the UK and the Middle East.
Investors are also interested in investing in private equity funds. They are willing to take higher risks in exchange for higher returns over a longer investment period. Private equity funds have suffered to some extent because many deals were delayed during the outbreak.
2) According to international statistics released by the European Fund and Asset Management Association in June 2020, Luxembourg is the second largest investment fund center in the world after the United States. Why is Luxembourg more popular with fund managers than any other country?
The political and economic environment in Luxembourg is very stable. The Luxembourg regulator is pragmatic and focused on economic development and is committed to promoting the healthy development of its financial services sector, such as funds and fintech. Luxembourg’s triple-A credit rating is a key element for fund managers and institutional investors to screen and target their investments. For example, some pension funds, such as those in Latin America, attach great importance to the credit rating of the domicile of the fund when making investment decisions.
For international investors, compared to other offshore fund center, Luxembourg funds (including UCITS and AIF) legal system and regulation to protect the interests of the investors, so many international investors more confidence to Luxembourg investment fund, when fund managers around the world or European investors consider raising, Luxembourg, become the natural choice registered fund.
In addition, Luxembourg’s tax regime and extensive network of tax treaties also benefit the onshore fund and fund management industry, thus encouraging global fund managers to set up funds and fund management vehicles in Luxembourg for global investment and enhancing investor returns through legal tax planning.
3) Luxembourg’s UCITS and Alternative Investment Fund (AIF) have achieved excellent sales in Europe. How is it doing in Asia?
We observe that Asian investors seem to be more interested in AIF than Ucits due to its higher expected return on investment, with real estate, infrastructure and credit assets as the target of the AIF attracting more attention. But for now, Asian investors are investing mainly in Ucits assets, with a relatively small amount under management invested in AIF.
4) What are the opportunities for Chinese fund managers?
Global investors seek a diversified portfolio. In recent years, more international investors are interested in investing in the Chinese market. In view of this, Chinese fund managers can take advantage of their rich investment experience and understanding of the Chinese market to actively participate in the China-themed investment portfolio and provide investment management and advisory services. In addition to the return on investment in the fund products, the ability to provide investors with a sustainable fund holding and fund management structure is also a key factor for international investors when making investment decisions.
Although investors who are interested in a theme funds to invest to China, but due to the funds may not be in front of the investment by foreign institutional investors conducted internal assessment on investment fund and comply with the relevant standards (including fund managers track record, asset management, scale and fund compliance, etc.), the institutional investors need to give up the investment opportunity. Foreign institutional investors usually require funds to provide information on the investment level of the fund, and investors enjoy the same investment rights.
To attract EU investors when investing in Chinese assets, fund managers could consider using internationally recognised Luxembourg-based funds. With a well-established regulatory framework, Luxembourg funds can provide investors with the protection they need.
5) What recommendations do we have for Asian fund managers to be successful in Europe if they want to distribute their fund products in Luxembourg?
Given the differences in fund sales across Europe, we recommend that fund managers in Asia should have a thorough understanding of the distribution channels of the countries (regions) in which they intend to sell funds and the behavioral preferences of investors in those countries, and keep in touch with local distribution personnel to obtain the information of the local fund market. Fund distribution is often the first window of engagement with investors to fully understand the strength of the fund manager and to create a customer-centric, relations-driven business model. Only by building closer and deeper relationships with customers can a customer-centric business model be realized.
In addition, brand promotion, good performance, local presence and economic substance are all key factors for a successful fund management business in Europe.
If a fund manager is considering raising money from global investors or developing a global investment strategy, Luxembourg is also one of the possible locations for funds and fund management vehicles.