Luxembourg looks East in bid to stay ahead of rivals

From Archive 11 April 2011

The Asian distribution market is the number one contributor of new assets for Luxembourg-based clients

Georg Lasch, BNP Paribas Securities Services

By Yuri Bender

Luxembourg is growing as an Islamic investment centre and is looking to promote Ucits products in Asia

Luxembourg enjoyed a successful decade in the 1990s, as Europe’s premier location for domiciling and operating cross-border mutual funds under the Ucits regulatory umbrella, now boasting 76 per cent of funds which can be distributed in at least three countries. The latest niche being carved out by the state’s product strategists is that of an Islamic funds centre.

As always, the country’s legislators and promoters have one eye on fiscal requirements. “One of the key ingredients in our legislation for Islamic investments is certainty of how these products are taxed or not taxed,” says Charles Muller, deputy director general of Alfi, the Association of the Luxembourg Fund Industry.

“We are now the biggest Islamic funds centre outside the Muslim world, but it is still early days,” says Mr Muller, aware that his country’s Islamic assets are dwarfed by products domiciled in Saudi Arabia and Malaysia. But Luxembourg has been there before in building up profitable businesses from a standing start, and he knows that once there is a strategy for growth, backed by a supportive financial services industry, you are on the road to success.

“We are not yet experiencing outstanding amounts of net inflows into Islamic funds, but it will be a niche for us,” he adds.

Already, Mr Muller’s staff have accompanied the Duchy’s Grand Duke and Prime Minister on industry roadshows to Saudi Arabia, Qatar and Lebanon. “We are presenting ourselves constantly in the Middle Eastern region, and if we have the means, we will consider opening an office there,” he says.

Alfi opened an office in Hong Kong in November last year, to establish a beachhead for importing Ucits-regulated products into Asia’s fast growing investment field, which is hungry for reputable, quality-controlled funds after Lehman-led product collapses.

“At the moment, there is no real competition for Ucits products in Asia,” believes Mr Muller. “But due to the crisis, Asian regulators are looking more closely at Ucits funds that arrive there,” with some concerns about high-risk strategies being distributed to retail investors.

“They are not saying no, but they are asking more questions,” states Mr Muller, who studied law in both Paris and London before practicing in Luxembourg and holding several senior positions at Banque Générale du Luxembourg, recently absorbed by French bank BNP Paribas.

“As soon a fund uses derivatives, there is a competence test for the retail customer, to see if he understands what he is buying and what the risks are.”

Industry bodies such as Alfi are often criticised for being aloof and divorced from consumer needs, but Mr Muller goes back to the first principles of protecting those customers who lost money in disasters and scandals, triggered by the likes of Lehman and Madoff.

“Lehman minibonds were sold as if they were equivalent to a bank deposit,” he ventures. “Those who bought them were surprised when their money was gone. There has been some compensation, but not everything. There are ongoing demonstrations in Hong Kong outside the banks and the regulator’s building. Obviously, this Ucits discussion comes from that crisis.”

Currently the Asian region, including hotspots in Australia, China, Taiwan and Singapore, is one of the key drivers of Luxembourg’s funds industry, which has reported assets back over the €2,000bn ($2,815bn) mark and hitting an all time high after a low-point of €1,550bn followed a 25 per cent fall during the 2008 crisis.

Alfi is likely to open another regional office in either the Middle East or Latin America to achieve its ambitions. Chilean, Columbian, Peruvian and Brazilian institutions are fast opening up to the notion of investing in Luxembourg-regulated Ucits funds.

A growing recognition of the expertise of Luxembourg-based custodians in Asia is a major determinant of the country’s success, says BNP Paribas Securities Services head of institutional sales, Georg Lasch. “The Asian distribution market is the number one contributor of new assets for our Luxembourg-based clients,” he admits.

But there are as many fund players fearing for the future of their business as those confident that the Ucits growth story is firmly back on track after the crisis. “Smaller players in the mutual fund and private equity space currently need a lot of hand holding,” he reveals.

At US back office giant State Street, there is less of a bias towards any particular funds domicile for cross-border clients. The company line is that there is very little to differentiate Luxembourg and Dublin as fund domiciles, although State Street employs 2,000 fund processing staff in Dublin and just 800 in Luxembourg, reflecting historical links with Ireland for many US companies. Dublin numbers are also swollen by State Street’s Irish hedge funds processing business.

“We don’t dictate to our clients where to put their products,” says the bank’s head of business development David Kubilus. “That’s what their sales teams are for. We just support them wherever they want to go.”

Many clients may have products domiciled in five or six different regulatory regimes, not just one or two, says Mr Kubilus. “Custodians must position themselves not just to meet regulatory demands, but to take advantage of them,” he says.

“The regulatory environment will determine where the growth goes. You hear talk about an Asian passport for funds and that could have significant implications for Luxembourg.”