How did Luxembourg’s fund industry perform in 2020?

Luxembourg’s investment fund centre has shown impressive growth during the last year.

UCITS Assets under Management fell from €3.92 trillion at the end of 2019 to €3.37 trillion at the beginning of 2020, before rising to €4.16 trillion at end-2020. In the second quarter of 2019, Luxembourg counted €0.76 trillion in regulated alternative assets, accounting for 11.8% of Europe's total AIF assets.

Three main factors contributed to this growth. Firstly, the switch to teleworking went fairly smoothly for all players. Significant challenges during the early days (mainly resulting from financial markets) were resolved very quickly and cooperatively. The CSSF reacted swiftly and in a targeted manner.

Secondly, after a short dip in spring 2020, financial markets experienced sustained growth during the second half of the year. Finally, inflows from investors continued across all asset classes. The quick return to business as usual ensured that product innovation could be captured and implemented.

How can the fund industry build on its success this year?

The recent positive trends should not lead to complacency. In fact, recent data shows AUM growth in Luxembourg is beginning to slow relative to our competitors. We will need to keep an eye on our competition and continue to innovate at home. This should start by listening more closely to our clients. John Parkhouse, Territory Senior Partner and CEO of PwC Luxembourg, likes to use the phrase “Lux Inc.”. We need to be more customer-centric and this needs to be reflected in the services Lux Inc. can offer.

The funds centre also needs to upgrade and digitalise its operations. The Covid-19 pandemic brought to light some of the industry challenges. Luxembourg is developing an ecosystem of innovative IT firms. Despite significant investment in recent years, there is still a lot of work to do to ensure we digitalise processes and services. This will be essential if we want to compete in a global market.

What role will alternatives play in the evolution of assets under management in Luxembourg?

The Luxembourg financial centre has a strong brand in the alternatives sector. We are a hub for sustainable finance and our product innovations continue to attract clients. We also have some very successful products in the alternatives sector such as the special limited partnership (SCSp).

The SCSp was introduced as a legal form for alternative funds in 2013 and has quickly become the product of choice for many asset managers seeking to benefit from the AIFMD EU-wide passport. Key investors in all main regions are now very familiar with the SCSp. Ireland has just launched its own, which is clearly targeting the same market as the SCSp. This is a clear call to action for continued innovation in Luxembourg.

What are the prospects for the alternatives space over the next 3 to 5 years?

Overall, we expect alternative products to grow significantly over the next few years. This is true for well-established asset classes such as real estate and Private Equity, but also for emerging product categories such as debt funds, infrastructure products and sustainable investments. All major asset managers are extending their capabilities in this area.

In the past, alternative funds were mainly a product for institutional investors. But there is a growing appetite for these products among retail investors. Asset managers are now focused on the European Long-term Investment Fund (ELTIF). Should the ELTIF become more accessible – a revision of the ELTIF regulation is being discussed – the fund could experience a significant boost in demand.

Why are ESG funds overperforming? Is it a fad or a real long-term trend?

Sustainable finance is the opportunity of a lifetime. In the past decade, ESG has gone from a trend to the biggest revolution in the European fund industry since UCITS and AIFMD.

In fact, PwC recently published an extensive report on this topic - 2022 -

There is a major debate as to whether sustainable funds will outperform non-sustainable funds. Our view is they will in the long term. It is not just to do with protecting the environment and being more sustainable. This asset class is expected to show better financial performance in the long term. Looking back, one of the key barriers preventing greater ESG adoption and investment was the concern over ESG principles hampering financial returns. Nowadays, we are starting to see the opposite. It’s the resilience and the performance of sustainable funds that drives the ESG movement across the fund industry.

Companies that focus on sustainability are expected to be more successful in the long term as they respond to the needs of markets and clients. By this we mean not just the “E”, but also the “S” and the “G” in ESG. What is clear is the sustainability agenda is here to stay. Luxembourg and its financial players have a fantastic opportunity to play a part in this journey.