EY Luxembourg has just released its 2017 edition of Investment Funds in Luxembourg – A technical guide, designed to answer many questions on setting up and operating investment funds in Luxembourg. The 2017 publication has been updated to cover recent legislative and regulatory changes.
The investment funds industry continues to be presented with both significant opportunities and challenges.
The industry is expected to generate a relatively modest growth rate of around 4-5% in assets under management over the next 4-5 years. This growth will be primarily driven by the ever increasing need for long-term savings due to changes in demographics, greater financial responsibility being placed on the individual to be responsible for their future pension and other savings requirements, the continued rise of the middle class in emerging countries along with their related increased demand for more sophisticated savings products, the need for asset management expertise during both the accumulation and decumulation life phases and asset owners diversifying assets in the search for yield in an expected medium-term low interest environment.
Alongside these drivers there are also a number of significant detractors to growth. These include certain asset owners increasingly moving to manage more assets internally, the withdrawal of significant assets by the sovereign wealth funds, the draw down of defined benefit assets which are not being replaced at the same pace by defined contribution schemes along with very low savings habits of younger generations.
Apart from the factors which will influence growth over the coming years, the industry is facing a number of specific challenges including:
Fee compression and operating margin decline
The asset management industry is currently experiencing significant fee compression and will continue to do so over the next three to five years. This fee compression is driven by continued flows into passive strategies where price is becoming an ever increasing factor in investors decision-making. Apart from pricing considerations, these passive flows are influenced by increased questioning by various stakeholders including regulators and policy makers of active management performance versus compensation models. Therefore, notwithstanding that assets under management will grow, margins will decline. These lower margins will drive further consolidation at all levels within the industry in addition to forcing the industry to reduce its cost base through review and redefinition of its operating models.
Value for money and the impact to active management
As mentioned above all stakeholders including regulators and investors are placing asset managers under much greater scrutiny when it comes to performance versus compensation models. While the traditional standard of risk-adjusted net returns is still important, there is much greater focus on “outcomes” and whether these are in line with investor requirements. Asset managers will need to place greater focus on the end investors’ needs and move away from being product providers to solution providers, with the real challenge being how to deliver these in a scalable way. Transparency, clarity and simplification – and at all times doing what is best for your customer in a way that is clearly understood – will be an important part of the new mantra to redefine value with an ultimate focus on financial well-being of the customer.
Digital and new technologies
Emerging technologies are disrupting every aspect of the asset management value chain and challenging asset managers to adapt. For the most agile players, these challenges will provide the opportunity to innovate ahead of the competition, and often in a more cost-effective way.
Digital and new technologies will transform the distribution landscape over the coming years. The industry as a whole will see the continued rise of execution only services, alongside advice platforms with existing players shifting towards more sophisticated wealth management. Alternative data, analytics and artificial intelligence will be used by asset managers to further enhance their traditional data and tools. Robotic technology will be used across the value chain to deal with high volume, high data intensive, and ‘prone to errors’ processes in order to improve overall operational efficiency. This will enable organizations to have a low cost virtual workforce which is able to work 24 hours a day, is scalable and performs with 100% accuracy, freeing up staff to work on higher value-add activities.
Implementing the regulatory agenda
The challenges around implementing the regulatory agenda have not gone away. This is further complicated by the current geopolitical situation across the global by events such as Brexit and the new US administration. In the US, the new administration is undertaking a wholesale review of post-crisis financial regulations while here in Europe we are dealing with the immediate implementation of MiFID II and the fall-out of Brexit.
Given these uncertainties, we will no doubt see changes in the global regulatory environment over the coming years which will necessitate the building of operating models so that they can be flexed to fit the changes as they occur.
Investment Funds in Luxembourg – A technical guide may be downloaded here.