No doubt that multilingualism, a central location, a supportive government and an open-minded attitude have been crucial to Luxembourg’s ongoing success as a cross-border hub for the global investment fund industry. Yet for all this ALFI’s deputy director general Anouk Agnes recognizes that “first-mover advantage, being the quickest to tap into the opportunities, was also crucial”. It enabled Luxembourg to become globally identified as the place to centralize the administration and distribution of funds, and this reputation remains strong.

Early stirrings

European leaders have known for decades that most people are not saving enough for their retirements, and that not enough of what they do put aside is being reinvested directly into the economy. However, they also know that voters don’t appreciate being lectured on this subject. So they had the idea of using pan-European financial regulations to help encourage investment in shares and bonds.

The result in December 1985 was the European Economic Community passing the Undertakings for Collective Investments in Transferable Securities (UCITS) directive. This introduced the principle of enabling funds to be sold across borders, without the need to establish a company in each market. The goal was to create a large single market to encourage greater consumer choice and help drive down costs.

However, nothing much happened for a couple of years. Large countries with their own domestically focused fund industries did not consider this development to be sufficiently significant, and smaller member states did not immediately grasp the potential. By the mid 1980s, Luxembourg had developed a significant niche international financial sector based around eurobond listing and banking. Some industry players saw the potential, and they encouraged the government to transpose UCITS into national law on 30 March 1988. The Grand Duchy was the first country to take this step.

 It became clear to Luxembourg fund professionals that they needed a united voice in discussions with the authorities.

Anouk Agnès, deputy director general, ALFI

Quick-to-look outwards

This sparked local and international interest, and local and international players started to probe the possibilities. It became clear to Luxembourg fund professionals that they needed a united voice in discussions with the authorities and to promote the country internationally. Thus the Association Luxembourgeoise des Fonds d’Investissement (Luxembourg Investment Fund Association, ALFI) was founded on 9 November 1988.

As well as being a spur to the European industry, the single market in funds attracted the attention of big players from the United States. American and Luxembourgish professionals had a meeting of minds, as in countries it is second nature to base operations in one state and sell cross-border into others. And so it was as Luxembourg enabled US fund players in the EEC. Indeed, of the 67 countries that currently use Luxembourg as a European and global hub, American asset managers are still the leading initiators of Luxembourg funds. 

Hence, it was logical that ALFI’s first annual conference was organized in partnership with NICSA, their American counterpart. First held in autumn 1992, this Global distribution conference will see its 27^th edition on 25–26 September, now also held in conjunction with the Hong Kong trade association HKIFA. This event was designed to spread knowledge to local and international players, spark debate about best practice, and act as a shop window for Lux funds.

Ten years after the founding of ALFI, the industry had grown to ten times its original size.

Anouk Agnès, deputy director general, ALFI

Fast growth

Early growth was swift if from a relatively low base. Net assets under management in Luxembourg increased fivefold in the first five years of the UCITS era, reaching nearly €250 bn by the end of 1993. The industry continued to mature over the 1990s. ALFI organized its first spring annual conference in 1996.

A further boost to the sector’s credibility came with the establishment of the ALFI code of ethics in 1998, helping to set guidelines for how funds should be governed. Competition from Ireland emerged, adding to the credibility of UCITS and helping to spur Luxembourg to maintain its lead. 

Ten years after the founding of ALFI, the industry had grown to ten times its original size. By the end of the millennium, Luxembourg had become the largest fund domicile in Europe, overtaking France, and second in the world behind the USA. However, in the first months of 2000, the industry had to face its most serious test to date, when the dotcom crash dragged global markets downwards.

Luxembourg lost its lead to France, but the eventual recovery was proof of the resilience of the country and UCITS. Net assets under management in Luxembourg hit €1trn for the first time in 2004, and the following year, the country regained its European lead, a position it continues to hold by a wide margin to this day.

Broader focus

On entering its second decade, ALFI realized it needed to grow with the industry. Originally membership was restricted to funds and direct fund businesses, but it had become clear that service providers, consultants, lawyers and auditors were an increasingly important part of the story. In April 2000, the association opened membership to all interested parties. It also changed its name to the Association of the Luxembourg fund industry: thus reflecting its new focus and that most of its work was conducted in the language of global business.

Now, ALFI events in the UK capital regularly attract more than 1,000 guests.

Anouk Agnès, deputy director general, ALFI

Then, in 2003, ALFI’s board of directors adopted a mission statement to “lead industry efforts to make Luxembourg the most attractive international centre for investment funds”. These steps pointed the way to the development of the one-stop shop multi-skilled ecosystem we see today. This necessitated looking outwards, both to develop new markets but also to help shape industry rules.

A key part of ALFI’s work is spreading the message of cross-border funds and Luxembourg’s capabilities. Around ten roadshows are now organized each year, with Asia and South America regular destinations, along with trips to meet traditional partners across Europe and in the States. Yet this activity only began in 2005, with a roadshow to London in June, followed by trips to Frankfurt and the US in October.

“We didn’t know what to expect in these early days, and the organizers of the London roadshow wondered if anyone would turn up,” Agnes remarked. In fact, about 100 attended the first London event, where the Luxembourg delegations main task was to explain the basics. Now, ALFI events in the UK capital regularly attract more than 1,000 guests.

Most participants in the more familiar destinations now have sophisticated understanding of the cross-border fund industry and Luxembourg’s role. People now attend to hear about latest developments and potential future trends, even if when visiting new countries it can still be necessary to explain the fundamentals.

International outposts

With the advent of the euro came a stronger economic logic and political desire to create a true single EU market in financial products. The experience of working on UCITS III and other directives convinced ALFI that they needed to establish a permanent presence in Brussels. This office would be better able to gauge unfolding trends and help influence debate. Working together with colleagues in the Luxembourg bankers association (ABBL), ALFI founded this operation in the main EU capital in 2006.

Asia had become such a significant market for UCITS [...] that ALFI realized it needed permanent representation in the region.

Anouk Agnès, deputy director general, ALFI

The relevance of this move became clear as the EU began to work on UCITS IV and the first version of MiFID. However, after the 2007/8 global financial crisis, the workload became heavier as the EU member states sought to satisfy public clamour for regulation. AIFMD, UCITS V & VI, MiFID II, PRIIPS, BEPS and more, all had to be understood, digested and worked though with Europe’s political decision-makers.

By 2007, net assets reached €2trn, and UCITS had become a clear winner for cross-border operations, and the Grand Duchy was leading this drive. Indeed by this year, three quarters of all UCITS registered in at least three countries were Lux funds. They were also reaching a global market, with asset managers in Asia and the Americas using European-based funds to serve local clients.

Indeed, Asia had become such a significant market for UCITS (attracting around 15% of net sales of Ucits in 2009) that ALFI realized it needed permanent representation in the region. Its Hong Kong office opened in 2010.

New challenges

Responsible investing was a trend moving towards the mainstream in the mid 2000s, and ALFI realized it needed to be leading the debate. The topic appeared regularly during ALFI’s two annual conferences, it organized dedicated events, and was a founding partner in 2006 of the responsible investing labelling agency LuxFLAG.

This market has more than doubled in the 2010s, with Luxembourg in the lead, accounting for about a third of funds and assets under management. In May 2018, the European Commission announced plans to seek to make responsible investing easier to understand for investors, initially by establishing a common language. ALFI will be an important voice in these discussions.

ALFI launched its “Understanding Investing” website in 2015 to help provide knowledge of potential risks.

Anouk Agnès, deputy director general, ALFI

The global financial crisis wiped a quarter off the value of Luxembourg fund assets, but in just over two years, these losses had been recouped. Total assets under management reached €2trn in 2010, then €3trn in 2014, and €4trn last year. By mid-2018, they were in excess of €4.25trn, being sold into more than 70 countries.

Although impressive, these figures should be higher, as too many Europeans still remain wary of investing in collective investment schemes. ALFI launched its “Understanding Investing” website in 2015 to help provide knowledge of potential risks and rewards in an easy-to-understand format.

Maintaining the lead

One of ALFI’s key tasks now is ensuring this success does not lead to complacency. Fine-tuning national regulations is important to keep the country relevant to all types of actors. For example, the Reserved alternative investment fund (RAIF) introduced in 2016 eased regulatory bottlenecks without compromising consumer protection.

Also, after the Brexit vote, there was talk of EU regulators considering changes to the way the single market in funds operated. ALFI was the vehicle through which the Luxembourg industry could tell decision-makers not to try to fix something that isn’t broken. 

This is election year in Luxembourg, and ALFI intends to use this opportunity to have conversations about investment funds amongst voters and politicians, about how to maintain the country’s lead. “In cross-­ border­ funds, we have 62% of the market.

This is good, but just five years ago, we had 68%,” commented Agnes. “Competition is increasing and we have to respond. Helping our members adapt to a changing business environment will be one of our key roles in the next ten years,” she added.

It's annual Global Distribution Conference, gathering thousands of the industry representatives, begins this Tuesday at the European Convention Center.