Luxembourg, 9 October 2020. EY Luxembourg has just released its 2020 edition of Investment Funds in Luxembourg – A technical guide, designed to answer many questions on setting up and operating investment funds in Luxembourg. This internationally-renowned publication updated annually over more than 25 years covers recent legislative and regulatory changes.
Michael Ferguson, Wealth and Asset Management Leader at EY Luxembourg, comments:
“This year has been like no other year in our collective living memory. Everything we do in our personal and professional lives for the last 6 months has been influenced by the shadow of the on-going COVID-19 pandemic. Many are predicting a very deep recession with the more optimistic hopes of the so-called V-shaped recovery fading fast. The potential economic impact of the pandemic is further heightened by ever-increasing geopolitical tensions between the two global powers. At the same time, the EU struggled to come up with a cohesive response with splits and divisions between the so-called frugal members and the most impacted southern members.”
So, what does this all mean for the asset management industry?
The immediate focus was on employee welfare and safety, maintenance of operations through remote working strategies, dealing with market volatility and liquidity management challenges and enhanced communication with all key stakeholders including investors and regulators. From a financial point of view, there was an immediate significant fall in assets under management with a follow-on impact on fees and margins. Notwithstanding all the initial uncertainty and concern and acknowledging that there were certain fund suspensions and closures, the industry continued to function in a remarkably robust manner.
Once things had stabilized, there was further focus on how to reinforce the initial measures taken. This included steps to further enhance remote operational platforms, including formalizing work from home practices, renewed focus on liquidity management tools including updating communication with investors and industry supervisors, reviewing and updating valuation polices for asset valuations and developing alternative strategies to engage with clients and staff through a range of social media and other internal platforms.
So, given the background of COVID 19 and its impending fall-out expected to last several years, what is the likely longer-term impact for the asset management industry and, more importantly, what future role will the industry be required to play in the recovery of the World economy?
Provision and allocation of capital: given the severe impact arising from the pandemic, many good businesses are challenged and will be under severe financial pressure for several years to come. The industry has both the challenge and opportunity to identify and support these businesses so that in the first instance, they can survive, restructure and thereafter grow in a post pandemic era.
Meeting investors` needs; obviously not new, as it should be the overriding reason why asset managers exist in the first place, however the need is never greater than now, in an era of negative interest rates coupled with an impending pandemic-generated recession. Investors are looking for solutions that will generate a real rate of return while at the same time managing capital risk; all this being achieved in compliance with societal and environmental objectives.
Operations; over the last six months we have all developed new ways of working, including interacting with our colleagues and clients. These new ways of working are unlikely to be temporary, for many reasons. This will be driven by the on-going reflections on what has worked well over the last six months, for our clients? for our staff? but also the ever real need to manage costs given the pressure on fees and margins exacerbated by the pandemic crisis. What will this mean in practice? a significant speeding-up of the much-heralded investment in technology and digital solutions? regional offices rather that one-stop mega head offices? , formalization of working from home as standard work practice?.
Governance and engagement with investee companies; much has been written over the last 5 years on sustainability and how ESG principles should be incorporated into the design and creation of investment fund products. The regulators have been busy over the last few years in creating and building a framework to further facilitate this. The pandemic has given a real impetus and focus to this. ESG considerations are no longer viewed as a “nice-to-have” or a branding exercise, but something very real that needs to be truly embedded in the design and creation of investment fund products. On the other side of this discussion, those investee firms that don’t engage in addressing their ESG responsibilities will be severely punished through lack of further capital allocation.
Distribution and engagement with investors – much again has been written and spoken about over several years on the need to enhance technology and ensure clients and other key stakeholders are getting a digital experience.
Michael Ferguson adds: “The pandemic has accelerated the focus on this as there is little or no alternative in this non-personal contact environment but to further develop these technologies.
Consolidation – over the last number of years, some consolidation has happened, with very mixed results. The pandemic will again renew focus and speed this up with the likely consequence of the “Big” getting bigger, and the survival of those select managers who can distinguish themselves by providing their clients with real capital appreciation.”
The Investment Funds in Luxembourg guide may be downloaded from the EY Luxembourg website: ey.com/lu
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