Luxembourg continues to see significant increases in cross-border funds despite the influence of global regulation on Europes largest funds domicile. The center reported a record 2,297 billion in assets under management in July and net sales of 50 billion, showing resilience of the domiciles diversified asset approach.
A new survey produce by London-based market intelligence firm Spence Johnson, on behalf of the Luxembourg Funds Industry Association (ALFI), shows that despite the different challenges faced by large and small asset managers, all expect cross border distribution to grow over the next few years.
The survey was conducted in August 2012 and covered 60 asset management firms with an average distribution covering 30 markets each. The results are segmented by assets under management -large asset managers are defined as those with more than 100 billion, medium between 50 billion and 100 billion and small less than 50 billion
The findings show that a stagnant economic climate and competition from banks are encouraging asset managers to look for opportunities and growth in new markets, explains Marc Saluzzi, chairman of ALFI. This expansion to other markets increases the regulatory burden and administrative stress for asset managers, and places tremendous importance on economies of scale and business efficiencies. We are also seeing that distribution partners are becoming increasingly sophisticated, putting a greater strain on fund manager resources to meet demands.
Saluzzi continues: The UCITS IV toolkit promised solutions for streamlining cross-border distribution and facilitating scale, but this survey shows clearly that there are still challenging times ahead.
Key findings of the survey include:-Complexity and operational risk are serious challenges facing asset managers as they look to expand their marketplace. Whereas large asset managers find issues around complexity and operational risk more of a challenge than their smaller, more nimble counterparts, smaller managers find lack of scale to be the main challenge, in particular around demand for different share classes and costs of distribution commissions. As the size of the manager increases, and with that the number of markets operated in, so too does the burden of local regulation. Although UCTIS IV brings alignment on the regulatory side, the lack of a harmonized tax regime in the EU is a challenge for fund managers and brings significant risk.
-Currently just over a third of asset managers use the management company passport, but they are confident they will make more use of them in time, reaching a majority usage of 55% in three years. The passports advantages are efficiency of administration services through the acquisition of scale, as well as reduction of country risk through reduction in exposure to multiple national regulators. About 35% of fund companies are using management passports today.
-The majority of asset managers anticipate that they will use the master feeder structure in three years time because it will allow them to bolt on an additional feeder structure to an already existing master vehicle, thereby increasing speed to market. However, a major challenge to the adoption of master feeders is the fact that, currently, national bodies havent decided on how they would deal with a master feeder despite the UCITS IV measures already being in place. Customized share classes, an easier entry vehicle than installing a master feeder structure, will therefore remain the most widely used option for asset managers looking to distribute across markets.
Half of those fund managers surveyed will use the master feeder structure dud to the economies of scale or operational benefits. Despite the degree of divergence in take up of these funds from country to country, largely due to inconsistencies in the way regulation is implemented in each jurisdiction, certain markets are seeing the cost benefits, says Saluzzi. France is looking to leverage them as much as possible, he adds.
Nils Johnson, director at Spence Johnson, notes that the small fund managers are tapping more to master feeder structures and are making the most of UCITS IV by distributing into more markets. They have a specialist mousetrap of funds and can escape the complexities facing the large managers who are more focused on scale. They are reducing complexity in manufacturing and focusing on distribution complexity only. On the master feeder side, 32% of the population surveyed is using it today. We expect this to be 53% in three years time.
-The merger of cross-border funds brings significant advantage in the control of central and administration costs, but cross border fund mergers will remain a solution used by the minority, with just over 30% of asset managers expecting to merge funds. The major obstacle to cross border mergers is the lack of a harmonized tax regime in the EU. Cross border mergers facilitate costs control and product consistence through allowing two approved UCITS funds to be merged into larger funds, said ALFI.
-Fund distribution is becoming more institutionalized with stringent selection criteria and due diligence. Demands for track record and proven expertise mean that asset managers are trying to anticipate market needs three years in advance.
-On average, asset managers are distributing to 18 markets in 2012. This number is estimated to increase to 22 by 2015. Smaller providers are being ambitious in terms of their market coverage. On average, small asset managers are currently operating in 14 markets and in three years time they anticipate operating in 20.
-Medium and large asset managers expect relatively modest growth in market coverage in the next three years, and cross-border distribution partners will influence where managers place their resources as they request support in key markets.
Customized share classes and a dedicated range of funds will continue to find favor among but in three years time these solutions will be augmented with the UCITS toolkit, the research finds master feeders and management company passports will be used by the majority of asset managers in three years time. Cross border mergers will only be used by the minority because the major obstacle to these is the lack of a harmonized tax regime in the EU, making providers reluctant to expose themselves to these complexities.
Luxembourg and Dublin will remain the dominant distribution hubs in three years time, finds the research. On average asset managers are distributing to 18 markets in 2012. The number is predicted to increase to 22 by 2015.
Saluzzi concludes: ALFI continues to work on ensuring that cross-border fund distribution grows, as part of our Ambition Paper which we launched in September 2011. This survey enables us to prepare our programme of activity going forward, including negotiating with European and national regulators to ensure that measures are put in place to facilitate cross-border distribution.
ALFI has fine-tuned its strategy over the last two years in order to safeguard its funds industry from the wider regulatory agenda and to help institutional investors to leverage the regulated funds industry under AIFMD. Recent examples of how the domicile as reinvented itself is through the focus on microfinance and carbon funds. Also, the funds domicile continues to target key distribution markets with and roadshows regions such as Asia and Brazil to provide a better understanding of what UCITS are. We try to ensure we are the best partner for global asset management industry and come up with global solutions for funds even though they might not be based in Luxembourg, says Saluzzi.
-Janet Du Chenne