The Covid-19 pandemic has left an indelible mark this year on Luxembourg’s investment fund sector, as on the financial industry as a whole and many other aspects of human life. What must be seen as the new normal included the format of the ALFI Rentrée conference, spread over the week of September 14-18 and brought to participants online using streaming technology, in contrast to the customary packed gatherings in Luxembourg’s major conference centres.
Not everything in the funds world has been transformed. As ALFI chair Corinne Lamesch told delegates on the first morning of the conference, after financial market turbulence depressed Luxembourg’s assets under management in February and March, the total had rebounded to €4.6 trillion at the end of July, approaching the all-time peak set in January. At least for now, Luxembourg’s role as the world’s leading cross-border fund centre remains unchallenged.
Corinne Lamesch, ALFI Chairperson
Like the fund investors who barely blinked despite violently fluctuating asset prices, the industry adapted very rapidly to an unprecedented situation – as speakers admitted, in many cases faster and more seamlessly than they had dared hope. Staff kept working from home on their laptops, becoming accustomed to new communication tools; the Luxembourg government negotiated temporary tax agreements with its neighbours to prevent cross-border commuters being penalised for teleworking; e-signatures stepped in to fill the legal void left by the absence of direct contact; and the CSSF helped to keep the industry from seizing up by clarifying the use of liquidity management tools and showing forbearance with firms that struggled to meet some reporting deadlines.
The conference heard that larger asset managers were often better placed to cope with the constraints of pandemic and lockdown than their smaller rivals, because they had technological solutions already in place or were better placed to develop new communication channels to replace face-to-face contact with clients. It remains unclear how the tension will be resolved between the economies that can be made through remote distribution channels and evidence that proximity is still valued by clients.
Six months on, teleworking remains current practice across the fund industry, even if more staff are returning to the office at least part of the time. Whether or not further surges of the pandemic require fresh restrictions on working presence, it is already becoming clear that home working, or a mix of office and remote presence, will be a regular aspect of the industry’s operations in the future. What has yet to take place is the alignment of widespread teleworking with existing regulatory requirements, not least regarding substance, which have significant implications for a jurisdiction so dependent on a non-resident workforce as Luxembourg.
The substance issue is just one of the regulatory challenges facing the fund industry to be addressed by ALFI Rentrée speakers. Of particular importance to Luxembourg is the recent call of the European Securities and Markets Authority for closer oversight of the cross-border delegation of key asset management functions as part of revisions to the EU’s Alternative Investment Fund Managers Directive. The Grand Duchy’s finance minister Pierre Gramegna and the CSSF’s Claude Marx and Marco Zwick joined industry members in warning against hasty changes to a model that has served Luxembourg’s and Europe’s fund industry well over the past three decades.
All the more so, say alternative investment experts such as Jérôme Wigny, Partner at Elvinger Hoss, who argued that in a decade the AIFMD – little loved by the fund industry at the outset – has become a major success story, meeting a need among European institutional investors for alternative assets and strategies within a regulated framework comforting to their stakeholders. One result is the emergence in Luxembourg of a flourishing ecosystem that has attracted the world’s leading private equity and real estate investment houses.
But in one key aspect for the fund industry, regulatory change is advancing by leaps and bounds. From alternatives aimed at professional investors to UCITS funds for the retail market, sustainability issues are moving from the fringes into the mainstream, driven in part by European legislation. The first deadline is next March, when the EU’s Sustainable Finance Disclosure Regulation is scheduled to come into force, obliging all funds to report on sustainability risks in their portfolios – although industry members acknowledge that if the requirement is maintained, rather than being pushed back until 2022, the first disclosures are likely to be a work in progress rather than a definitive statement on climate and other risks.
What is inescapable is the pressure for the fund industry to embrace environmental, social responsibility and governance criteria in its investment strategies (and also in its own operations). Panellists told the ALFI Rentrée audience that the drive was coming as much from investor demands as legislative and regulatory requirements. James Broderick, a board member of the Impact Investing Institute, memorably observed that sustainability is “unfolding faster than anything I’ve ever seen in asset management.”
While the EU focus is on the threat to investors if asset managers fail to appreciate the risks, for example, of stranded assets in the energy industry, LuxFLAG's Denise Voss insisted thaz it's also about embracing broader trends in society, and particularly among the young people who make up the coming generations of investors and financial industry employees. ESG, she says, will be a make-or-break test for the industry to prove its relevance - and the stakes are high, with $71 billion in investment flows worldwide into sustainable finance products in the second quarter, significantly higher proportionately than flows to the non-sustainable sector.
Technology has proved critical over the past six months in enabling the fund industry to adapt to unforeseen constraints and challenges, and Luxembourg’s efforts to nurture the fintech sector is already starting to yield innovative products, services and processes for the future, argued Nasir Zubairi, CEO of the Luxembourg House of Financial Technology. From blockchain to regulatory compliance systems and artificial intelligence, he said, technology can help institutions manage rising costs and create value throughout their business.
Critical for the event itself has been the support by event sponsors, and the flexibility that they and the conference speakers have shown over the past months. ALFI would like to thank its speakers, sponsors, exhibitors and media partners for making the ALFI Rentrée possible, all journalists who covered the event and audience members who provided useful feedback as well as each and every attendee for their participation.