Luxembourg’s fund industry eyes global expansion

Luxembourg has long prided itself as a forward thinking financial centre. So a delegation from Alfi, its promotional body for investment funds, were delighted that their annual London press conference coincided with an announcement from the Grand Duchy about plans to extract minerals from asteroids in outer space.

“Once the infrastructure is in place, we will build a funds hub on Pluto, with the aim of distributing cross-planetary funds by 2030,” joked a deadpan Camille Thommes, Alfi’s director general.

Yet Luxembourg’s push to have its financial products recognised in distant territories is not as far-fetched as some might believe, albeit in earthbound rather than inter-planetary terms.

China and Latin America have been earmarked as key markets for expansion, now that Luxembourg has established its position as Europe’s leading investment funds domicile, growing 13.5 per cent in 2015 to breach the €3.5tn ($3.9tn) barrier. European arms of Chinese banks ICBC and Bank of China have benefited from the granting of an RMB50bn ($7.6bn) quota to Luxembourg, facilitating investment in China by foreign customers.

Now Alfi is promoting its regulated Ucits funds in Brazil and Mexico to domestic Latin American investors keen to diversify portfolios away from home markets.

Among plans for 2016 will be updating the regulatory regime for alternative investments. Streamlining registrations and reducing costs could attract more institutions specialising in private equity and real estate.

An initiative for Luxembourg to become the “go-to” centre for financing clean energy projects is also a priority, says Alfi’s chairman Denise Voss. “There is strong political will from our government to support these initiatives, positioning Luxembourg as the centre for climate change financing,” she says.

But she is also aware of the history of financial centres launching well-intentioned projects, only for practitioners to lose interest. Luxembourg’s much-trumpeted Islamic finance initiative, aimed at putting the tiny country on equal footing with Dubai and Kuala Lumpur as a centre of expertise in Sharia financial products, has failed to achieve the expected growth.

“Islamic finance is happening, but much more slowly than we hoped,” admits Ms Voss, blaming redemptions from Middle Eastern Sovereign Wealth Funds for a stuttering start.

Rather than an experiment, she insists the environmental finance plan answers a real market need, building on Luxembourg’s history of setting up “green” bonds.

Her predecessor Marc Saluzzi, who relinquished the Alfi role in mid-2015, had become exasperated by the poor, low-tax image which financial centres attracted in the international business community. This was compounded by the so-called LuxLeaks disclosures of tax avoidance schemes benefiting multinational corporations.

Ms Voss is keen to dispel this image and points to the subscription tax of 5 basis points, levied on all Luxembourg-based funds, which brings in €1bn annually, accounting for 7.5 per cent of the state budget.

“The Luxembourg government is playing a lead role in explaining transparency, in the automatic exchange of information and in ensuring common reporting standards,” she adds. “There should be a level playing field. Everyone should apply these rules, not just the little countries that are easy to bash.”

Competition to Luxembourg’s leading funds registration role will come increasingly not just from old foe Dublin, but from Paris “which has grand ambitions to be the main financial centre in Europe”, plus Hong Kong, Shanghai and Southeast Asian capitals gearing up to become global financial centres.

In order to keep pace with rivals, Luxembourg is stepping up investments in both education and technology. Alfi is working with Luxembourg’s educational institutions to introduce Masters’ courses and raise skill levels. “Fund administration is not just about inputting transfer agency details any more,” says Ms Voss. “Currently, we have to go outside Luxembourg to look for risk managers, which is not ideal.”

Greater emphasis on the digital agenda means improving links with financial technology companies which have sought to turn Luxembourg into a hub for high-tech start-ups. “Fintech companies in Luxembourg are active in cyber-security and data management. Our objective is to develop solutions which can benefit both the start-ups and the fund companies. This is an opportunity for fintechs to access our funds community,” she says.

But Ms Voss also warns that global expansion is not the be-all-and-end-all for Luxembourg and that key markets will remain on its doorstep. “Up to 60 per cent of household assets in Europe are still invested in bank accounts, paying zero interest rates,” she says. “There is a lot of work for us to do, to explain investment funds and help people with their financial future.”