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September-October 2009 | Special ALFI & NICSA forum

A S C I N & i t n th A l f e m t s e 1 8 v In l a b m G l o u r o s F d n u f

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3 edito

outlook? mostly bright The financial crisis could have played havoc with Luxembourg’s fund industry.  But things could have gone worse and the expertise is here to emerge stronger.

Fernand Grulms (text), Annabel Briens (illustration)

The Luxembourg investment fund industry has weathered the financial storm pretty well. Luxembourg funds suffered from the global fall in stock market prices and from client redemptions, but the overall decline in assets under management was less than in many other markets. Despite the financial crisis, clients continue to have confidence in the UCITS product and label. The Luxembourg investment fund sector equally profited from the broad diversification of its clients, since many Luxembourg promoters distribute their funds on a global basis. As more and more promoters choose to set up a global hub, we have seen the arrival of promoters from South Korea, India, Canada and Australia. The annual Lipper & PricewaterhouseCoopers cross-border distribution study also confirms a trend towards creating “flagship” funds designed for distribution into multiple markets. The need to rationalise fund ranges will have been reinforced by the financial crisis, since falling assets levels have reduced many funds to a non-cost-effective size. Thus the latest EU directive on collective investment schemes, known as UCITS IV, comes at the right moment. Its principal objective is to improve the efficiency of investment funds and one way to achieve this is to facilitate crossborder mergers by funds. This enables fund managers to consolidate their assets and reduce management costs, which will ultimately benefit the investor. Centralisation of the distribution chain can bring additional economies of scale. Luxembourg is well placed to benefit from this development. With its umbrella fund structures and the possibility of creating different classes within a sub-fund, a promoter can create a flagship fund that offers sub-funds or classes designed (by their commission structure or investment policy) for any particular target market or type of client. In order for this strategy to be effective, the European Union must succeed in combating the current tendency by an increasing number of Member States to use protective measures as a way out of the financial crisis. It is the single market that has created economies of scale that have benefited promoters and investors alike. If Europe as a whole wants to be competitive in international financial markets we have to advocate open markets.

Fernand Grulms Chief executive officer (Luxembourg for Finance)

But promoters must equally offer “good” products. Fresh from their experience of the financial crisis, investors today seek products that are more transparent: simple, cheap and safe. This is a real challenge for fund managers who find themselves obliged to deliver this through ever more complex products. Fund managers already employ an increasing number of alternative instruments and strategies and the border between traditional UCITS and hedge funds is becoming increasingly unclear. The financial crisis may lead to a re-evaluation of traditional products and to renewal of the collective investment sector. This is all the more probable given the increasing competition from exchange traded funds (ETFs), which are passively managed and have a competitive fee structure. I have no doubt that the investment fund sector will rise to the challenge.

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5 contents

contents: 18 th ALFI & NICSA FORUM eDITORIAL   outlook? mostly bright The financial crisis could have played havoc with Luxembourg’s fund industry. But things could have gone worse and the expertise is here to emerge stronger. 3

Contributions 24

The outlook remains positive Mutual funds have demonstrated that they are responsible stewards for household assets, even in a difficult environment.

28

Interview 6

  Claude Kremer 

“To be closer to the investors” ALFI’s President details all the initiatives the fund industry has to take in the near future to be more efficient. For the second time, the ALFI/Nicsa conference takes place in the new Centre de conférences in Luxembourg-Kirchberg.

exhibition Plan 16

  Who? Where? Just look at the plan...

  Regulated investment funds

  UK asset managers and their products

The changing environment

As in any period of change, it will be the companies that best adapt to the current environment, whilst continuing to take a long-term view, which will succeed.

30

  US Mutual Fund Industry

Growth is likely to continue The fund market in the US is established, and some might argue saturated. But the growth is there, due to the shift towards personal savings for retirement.

32

  Ucits IV

What does it mean from a practical point of view?

38

  Chinese QDII fund launches

Are the days of record-breaking over? Today, the QDII scheme represents probably less than 4% of total assets under management in China…

40

  UCITS funds

The challenge of cross-border distribution and registration A number of potential obstacles may remain, notably in the complexity of host member state marketing arrangements.

42

  Asia’s Economies

Looking Ahead From Crisis To Recovery Governments across Asia are becoming aware of the benefits that more sustainable development models can offer.

44

  Asia

Managing the challenges of the fund distribution process Asian investors are not necessarily traditional “buy and hold” customers and local investors do not accept being restricted to a limited number of funds…

On June 19, 2009, the Council of the European Union adopted the UCITS IV Directive that recasts the existing UCITS Directive 85/611/EEC.

conferences Agenda 18

  The whole programme at a glance

34

  Evaluating the new world for asset managers

Rebuilding from ground zero

The fact that Europe has suffered a catastrophic withdrawal of investment is well trodden territory that does not warrant further repetition.

36

  Regulation

Picture report 46

  2008

Flashback The previous Alfi/Nicsa conference took place on 23 and 24 September 2008. It was its first edition in the new Centre de Conférences in Luxembourg-Kirchberg.

2009: the year of inflation? Such intense activity from the regulation bodies is animated by the desire to strengthen investors and market protection, drawing from the lessons learnt from the financial crisis.

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6

CLAUDE KREMER Claude Kremer

“ To be closer to the investors” ALFI’s President details all the initiatives the fund industry has to take  in the near future to be more efficient. Jean-Michel Gaudron (interview), Annabel Briens (illustration)

Mr. Kremer, one year after the beginning of the financial crisis, epitomised by the collapse of the Lehman Brothers bank, what condition is the funds industry in now? “Already at the beginning of this year, we have made clear that lessons would need to be learnt from the crisis. Especially, looking into the future, greater care would need to be taken of the needs and expectations of investors. In the meantime we have established an action plan to this effect, that we will implement during my second term as Alfi President. That being said, after a difficult year-end 2008, the first six month 2009 have been comforting. Not only have assets under management increased by 5% but net sales have returned to the positive with + 60 billion euros. For the month of July alone, we had an additional growth of assets under management of 70 billion euros, including 22 billion euros in net sales, our biggest increase since October 2007. In concrete terms, what do you want to achieve over the next two years? “All the stakeholders involved have clearly acknowledged the need to concentrate more on the investors’ interests and demands, much more so than on the offer itself. Today our concern is to be able to translate this observation and this desire to react through an

action plan over the next two years. We are consequently going to implement a series of measures to bring us closer to the investor and reduce the gap we have been able to identify between those who produce the funds and those who use them. It is precisely at this point of the value chain that Alfi can act. With this objective in mind, we have just created the Alfi Investor Forum. It is a platform of experts from different horizons that concentrate on the needs and demands of investors, by putting themselves in their shoes. This forum’s mission will be to offer answers to questions that investors may have and to then make recommendations. It is a matter of, for example, verifying that easily understandable information is available to the end investor. We created an initial inventory of what already exists on the subject, for example on the internet or in written form and we noticed that while there are a lot of things available, they are very scattered. We are thus going to establish our own documentation that will be one of the components of the new Alfi website that we plan to launch next January. This initiative is Alfi’s, in Luxembourg. What is your position regarding new European Directives that are underway? “We are of course going to position ourselves in relation to all these European subjects with still the strengthened protection of the investor in mind. I will point out }  8 paperjam  | September-October 2009 | Special ALFI & NICSA forum

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8 interview

  6 { two examples. The AIFM (Alternative Investment

Number of UCIs in Luxembourg 07/2004 - 07/2009

Fund Managers - Editor’s note) draft directive, to start with. The G20 recently declared that in the long term there will be no players or products that are not regulated. In Luxembourg, all investment funds must already be supervised by the CSSF. We are also working in close collaboration with Efama (European Fund and Asset Management Association – Editor’s note) and our primary concern is to ensure that this directive will create a harmonised regime in the European Union for alternative investment fund managers and the products they set up for private placement to professional investors. Then, there are all the discussions around the role of the depositary. Depositaries play a pivotal role in protecting investors: they supervise the fund and keep the assets safe. We believe that it’s the right time to build the inventory of all applicable regimes within the European Union concerning the statute, role and responsibility of depositaries. The European commission launched a consultation on this subject, which should enable us to see things a bit clearer. (It was concluded on 15 September - Editor’s note)

3.500 3.300 3.100 2.900 2.700 2.500 2.300 2.100 n. 05 Ap r. 0 5 Ju l. 0 5 Oc t. 05 Ja n. 06 Ap r. 0 6 Ju l. 0 6 Oc t. 06 Ja n. 07 Ap r. 0 7 Ju l. 0 7 Oc t. 07 Ja n. 08 Ap r. 0 8 Ju l. 0 8 Oc t. 08 Ja n. 09 Ap r. 0 9 Ju il. 09

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Assets under management in Luxembourg - 07/2004 - 07/2009 (Bn eur.)

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The French Minister of the Economy, Christine Lagarde, has suggested that the custodian bank should take complete responsibility. What is your opinion on this subject? “We consider that the regulation must strike the right balance between optimal investor protection and its affordable cost. If we expect depositaries to become ‘all risks’ insurers for funds, the cost of this insurance (which would be borne by the fund i.e. in the end by its investor) might be so high as to make investment funds financially unattractive to the investor. Investment is also about taking a }  10 certain level of risk.

Last term of office

“ MORE professionAl” Claude Kremer has just embarked upon his second and last term of office as President of the Luxembourg association of investment funds (Alfi), during which he plans to build on the success of his first two years in this role. “As my second term of office gets underway, the first chapter closes and we are embarking on the next chapter, with all the knowledge and experience we have gained in the past and with the desire for this second chapter to

unfold with the same drive and good teamwork, and, we hope, with as few unexpected surprises as possible in a world which we know is constantly changing.” A president is nothing on his own and Claude Kremer does not hide his satisfaction at being supported by a highly experienced team “which makes good teamwork possible. Everyone knows what they need to do and this enables us to get the job done well.

I hope that the next two years will be less turbulent than the last rather anxious and stressful twelve months. The lessons learnt have shown us where we can make progress and become more professional, including communications with members and the wider public. So I believe we are better prepared for the upcoming challenges, including the demonstration of our commitment to the investor.” J.-M.G.

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10 interview

The last edition of the Alfi/NICSA Conference was the first to take place in the new Conference Center in Luxembourg-Kirchberg.

  8 { Isn’t this economic aspect also a key question

Shariah compliant investment funds

Luxembourg: an ideal location Luxembourg is not a newcomer to the world of Islamic finance. As far back as in 1983, Luxembourg was the chosen domicile of the first Shariah-compliant insurance company in Europe. The Luxembourg Stock Exchange was the first European stock exchange to list a sukuk issue. Luxembourg is rapidly becoming a hub for Shariah-compliant investment funds, with promoters keen to harness the country’s strengths and expertise in cross-border fund distribution. The figures speak for themselves: Ernst & Young’s 2009 Islamic Funds & Investments Report ranks Luxembourg fourth as a domicile for Shariahcompliant investment funds, and it is the only non-Muslim country in the top 5. As Luxembourg continues to thrive as a jurisdiction for Islamic investment funds, Islamic awareness days were arranged by local finance industry bodies (IFBL, ALFI and Luxembourg for Finance) on 5 and 6 May with the aim of increasing knowledge and know-how on Islamic finance in the financial centre. This event was an overwhelming success with over 250 participants. Fernand Grulms, CEO of Luxembourg for Finance, addressed several messages from the Minister of the Treasury and Budget to an audience including local professionals as well as Islamic scholars and Islamic finance experts from across Europe, the

Middle East and Asia: - The Luxembourg Government is convinced that Islamic finance offers attractive scope for development. For this reason, in April 2008, Minister Frieden set up a task force bringing together key parties in Islamic finance. Its mission: to look at how Islamic finance can be further develo­­ped in Luxembourg. - The Government has asked the tax authorities to look into features specific to Islamic finance deals and come up with proposals to ensure the tax neutrality of these transactions compared with traditional banking and financial transactions. - Likewise, the Government is examining to what extent Islamic financial products, such as sukuk, could be used for funding purposes by the Government or by entities belonging to the Government. - The Government supports the Luxembourg Central Bank’s application to become the first non-regional associate member of the Islamic Financial Services Board, the inter­ national regulator of Islamic financial markets. The newly elected government made the development of Islamic Finance one of its priorities. This strong support from the authorities will certainly bring some interesting new developments to the local Islamic Finance scene in the coming months.

in the positioning of products and their market competitiveness? “In the future all products in fact need to be more competitive and better adapted to needs. Costs borne by investors need to come down. This is part of the priorities of the action plans we have established. Firstly we must build on all the economies of scales that are made possible by the implementation of the Ucits IV directive, which was ratified by the Council of the European Union, last June. The States now have two years to transpose it into their national legislation. The simplification of the notification procedure, the cross-border fund mergers or the master feeder principle are all measures that will enable fund promoters to envisage genuine economies of scale which they can then pass on to investors. In addition to product transparency, certain distribution or management costs may be reduced by these new mechanisms that will be put in place. These reductions will, evidently, benefit investors. In addition, we believe that a private placement regime for Ucits funds should be introduced; knowing that with the AIFM directive, there will be one for non-Ucits products. It is essential that a Ucits fund which, for legitimate reasons, does not wish to be registered in all Member States and wants to have a private distribution, can be subjected to specific harmonised rules for such a distribution without this triggering the need for a costly registration. How can you best satisfy, at the same time, the demands of investors who are increasingly turning towards new products that are currently very popular? “Indeed, we need to concentrate on these new investors’ requests, like Islamic finance, ETFs or socially responsible funds. At our level, we must think about how Luxembourg can position itself in the future as an ideal platform for welcoming these niche products. This is also true }  12 for pension pooling vehicles.

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Breakdown of UCIs according to Parts I and II of the 2002 law and SIFs PART I UCIs

PART II UCIs

SIFs

TOTAL

NUMBER NET NUMBER NET NUMBER NET ASSETS ASSETS ASSETS (in bn €) (in bn €) (in bn €) 31/12/2006

1,469

1,516.540 €

552

249.916 €

217

78.394 €

NUMBER NET ASSETS (in bn €) 2,238

1,844.850 €

31/03/2007

1,457

1,580.732 €

563

265.013 €

228

81.615 €

2,248

1,927.360 €

30/06/2007

1,492

1,675.029 €

584

283.491 €

276

88.502 €

2,352

2,047.022 €

30/09/2007

1,547

1,668.478 €

588

289.818 €

366

100.848 €

2,501

2,059.144 €

31/12/2007

1,653

1,645.341 €

643

295.939 €

572

117.115 €

2,868

2,059.395 €

31/03/2008

1,700

1,480.352 €

663

292.614 €

649

122.479 €

3,012

1,895.445 €

30/06/2008

1,755

1,480.895 €

682

292.539 €

716

128.658 €

3,153

1,902.092 €

30/09/2008

1,827

1,375.104 €

699

285.360 €

796

136.232 €

3,322

1,796.696 €

31/12/2008

1,826

1,169.389 €

708

259.809 €

837

130.455 €

3,371

1,559.653 €

31/03/2009

1,840

1,154.891 €

698

240.229 €

858

131.443 €

3,396

1,526.563 €

30/06/2009

1,846

1,255.762 €

691

232.770 €

898

142.724 €

3,435

1,631.256 €

31/07/2009

1,848

1,327.841 €

684

234.610 €

906

143.579 €

3,438

1,706.030 €

Luxembourg

ALFI’s Digest The Association of the Luxembourg Fund Industry (Alfi) acts as the platform on which members can discuss key industry issues, reach common standards, develop best practice recommendations and make joint feedback on initiatives from the European Commission. All this and more is achieved within the Alfi Technical Committees and Forums, which are open to all members. The association carries on an active lobbying role in Brussels. It works actively to maintain and raise professional practice standards in the Luxembourg financial centre, firstly by developing recommendations within Technical Committees and Forums that are then shared with Alfi members by means of Guidelines and Breakfast Seminars, and secondly by an exclusive contract to deliver technical training through the IFBL, Institut de Formation Bancaire Luxembourg. A key activity of the association is the promotion of the Luxembourg financial centre. It holds promotional seminars in cities around the world and participates regularly in the Financial and Economic Missions organised by the Luxembourg for Finance-LLF and the Luxembourg Chamber of Commerce. “It is a primary role of the Association to ensure that its members keep abreast of developments in the industry”, comments its President Claude Kremer. “This is achieved through the bi-annual Alfi conferences held in the Spring and Autumn, through one-day conferences on particular themes, and through open Breakfast Seminars on specific topics.”

 10 {

This requires a concerted action in collaboration with the government in order to deliver an adequate regulatory and fiscal framework that will motivate the use of Luxembourg for this type of product. The time is thus truly right for thinking, in very concrete terms, about new rules for certain types of funds. Likewise, we also need to act very quickly on the subscription tax for certain of these niche products. For example we expect our clients that want to invest in microfinance funds not to be taxed in Luxembourg. It makes no sense at all to tax recognized Socially Responsible Investment funds, certified by Luxflag for instance. The condition should be that the fund performs a useful social role that complements public services. Finally the crisis has shown us that certain investors do not want ever increasingly complex products but would prefer basic, easily understandable funds. We are therefore investigating the possibility to create, next to ‘sophisticated’ Ucits also ‘simplified’ Ucits that would for example waive the use of complex derivative instruments. Our intention is to work closely with all the relevant stakeholders to make progress on these issues rapidly. Is there a greater need for better information for the investor? “Of course. The famous KID (Key Information Document, Editor’s note) proposed by the Ucits IV directive will contribute to this and obviously we will participate in discus-

sions on a European level so that the contents of this KID complies with what we consider to be fair. It’s a complex subject as all the relevant information needs to be put in an easily understandable form, needs to fit on two pages, and should be readable without using a magnifying glass! More generally speaking, on this theme of investor information, we are preparing an entire practical information section for our new website. We know that an inexperienced investor does not always know what a fund is. There is a need for education and this should be set up with regulators, training institutes, universities, government authorities or any other parties with an invested interest. Within Efama, this education program is also amongst the priorities that we have defined. As Luxembourg players, we are especially well equipped to measure what a geographically diverse clientele must know and understand. Clearly we are going to actively participate in this activity. Why not imagine the creation of general-public brochures distributed in schools, universities or even at bus stations? We must also ensure that the dissemination of information by intermediaries, notably abroad, contains multiplier factors in order for our industry to develop. We are thus going to make the quarterly newsletter that we send to several thousand readers more complete and more profes}  14 sional.

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14 interview

net subscription/redemption (in EUR bn) - 07/2004 - 07/2009 40 (Bn eur.)

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 12 { One of your current priorities is also to increase

per­sonal contact with players abroad… “Yes, we want to increase the frequency of our visits abroad; we know just how effective this can be. People understand better and like it when we discuss with them face to face and respond to the questions they have. In fact, we have a visit to Asia scheduled for the end of October, when we’ll be visiting Beijing, Hong Kong and Singapore. These are large markets and so it’s vital that we go and visit them. With this in mind, our objective is to open representative offices in strategic locations to be also geographically nearer to our clients – in Asia, of course, but perhaps also in the Middle East and Latin America. This is, of course, going to cost money, and we hope that we can count on the support of our partners such as Luxembourg for Finance. In June you were elected as Vice President of Efama. Will this enable you to give Luxembourg a voice and make it easier to put across Luxembourg’s opinions in international discussions? “No, that’s not how it works. In my role as Vice President of Efama, I represent Efama.

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Camille Thommes and Charles Muller are Alfi’s representatives within the association. Since Alfi in itself, by its members and their clients, is a European association, I do not expect important diverging opinions between Alfi and Efama. It’s been one year now since the start of the economic crisis. Do you think that the 18th session of the Alfi & Nicsa Global Investment Funds Forum will take a particular form? “Yes, I do. The programme was decided upon before the summer, and has several objectives. First we want to establish the current state of the different markets, from USA to Asia, with all the crises they have gone through. Then we want to compare notes on the lessons learned from the crisis. Further we want to establish what the future could look like, taking into account the path set by the G20, the next Obama administration, the EU Commission… And last but certainly not least we would like to include the investor needs and expectations with among others a debate on ‘the perfect fund’. It is encouraging to see that, despite the crisis, registrations are at the same level as last year which shows that the industry wants to engage in this debate.”

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Exhibitors Plan Lu

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For the second time, the ALFI/Nicsa conference takes place in the new Centre de conférences in Luxembourg-Kirchberg. Av .J

Restaurant

Hotel Melia

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Hotels Novotel & Sofitel

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Internet Corner

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Speaker lounge

ALFI Info Desk

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Exhibitors How to find us?

Booth number Company

Booth number Company

17

Alpheus Solutions GmbH

3

by Bus: By car: HSBC Securities Services (Luxembourg) S.A. 13 PricewaterhouseCoopers Sàrl With most bus lines to Kirchberg Direct and covered access from the

46

BNP Paribas Securities Services Luxembourg

45

IFE/EFE

25

Bravura Solutions

9

5

CACEIS Bank Luxembourg

35

2

Clifford Chance

24

6

CO-Link S.A.

40

12

Confluence

26

1

Deloitte SA

14

Diamos AG

4

Ernst & Young Services S.A.

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Finesti S.A.

– stop at “Philharmonie / Mudam” – transit via Centre Aldringen, central IGEFI Group Sàrl station and boulevard Royal. Further information can be obtained Ignites Europe from the “Mobilitéitszentral” Kneip hotline (+352) 24 65 24 65

KPMG

Booth number Company

“Place car Group park; entry 39 de l’Europe” Profidata on avenue John F. Kennedy 30 Quartal Financial Solutions AG From the “Trois Glands” car park; via John F.Dexia Kennedy and theServices Bank 22avenue RBC Investor Place de l’Europe tunnel; or via rue 34 Reflow Fund du Fort Thüngen.

SA

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SimCorp

Metrosoft

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State Street

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MDO Services S.A.

31

Stoxx Ltd

15

much-net AG

23

TATA Consultancy Services Luxembourg S.A.

8

Phoenix Systems Inc.

7

Tieto Corporation

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Company

Booth number

Booth number

Company

Alpheus Solutions GmbH

17

Quartal Financial Solutions AG

30

BNP Paribas Securities Services Luxembourg

46

RBC Dexia Investor Services Bank SA

22

Reflow Fund

34

Bravura Solutions

25

SimCorp

29

State Street

28

Stoxx Ltd

31

TATA Consultancy Services Luxembourg SA

23

CACEIS Bank Luxembourg

5

Clifford Chance

2

CO-Link SA

6

Confluence

12

Deloitte SA

1

Diamos AG

14

Ernst & Young Services SA Finesti SA HSBC Securities Services (Luxembourg) SA IFE/EFE IGEFI Group Sàrl

4 18 3 45 9

Ignites Europe

35

Kneip

24

KPMG

40

Metrosoft

26

MDO Services SA

32

much-net AG

15

Phoenix Systems Inc.

7

Tieto Corporation

8

PNC Global Investment Servicing (PNC)

10

PricewaterhouseCoopers Sàrl

13

Profidata Group

39

Why should you be a sponsor or have an exhibition booth at the next event, in 2010? The Forum will offer you a unique opportunity to position your company as a major player in the investment fund area, to meet with an impressive number of professionals of the fund industry in a single place over a two-day period and, last but not least, increase brand visibility amongst key-decision makers.

More information on www.alfi.lu.

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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AGENDA Tuesday September 22, 2009

DAY 1

MANAGING THE DISTRIBUTION CHALLENGES IN ASIA 10.05–10.45

REGISTRATION AND BREAKFAST 8.00–9.00

Moderator KK Tse, Executive Vice President, State Street Corporation, Hong Kong Panelists Joseph Barnes, Director, Head of Sales and Client Relations EMEA, Deutsche Bank AG London, London Martin E. Beaulieu, Director of Global Distribution, MFS Investment Management, Boston Nicolas Buck, Partner, Victor Buck Services, Luxembourg

OPENING REMARKS/WELCOME AND INTRODUCTION 9.00–9.15 Theresa Hamacher, CFA, President, NICSA, Marlborough Claude Kremer, Chairman, ALFI, Luxembourg

Tilman Fechter, Executive Director, Head of Sales and Relationship Management Investment Funds Services Clearstream Banking, Frankfurt

CHAIRPERSON’S INTRODUCTION 9.15–9.20 KK Tse, Executive Vice President, State Street Corporation, Hong Kong

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 10.45–11.15

WHAT NEXT AFTER THE FINANCIAL TSUNAMI IN ASIA – TRENDS AND REACTIONS 9.20–9.40 KK Tse, Executive Vice President, State Street Corporation, Hong Kong

OBAMA’S NEW WORLD ORDER: RE-INVENTING AMERICA IN THE SAME OLD WORLD 11.45–12.25 Martin Walker, Director, Global Business Policy Council, Editor in Chief Emeritus, United Press International

CHAIRPERSON’S WRAP UP 12.25–12.30

LUNCH HOSTED BY ERNST & YOUNG AND STATE STREET 12.30–14.00

CHAIRPERSON’S INTRODUCTION 14.00–14.05 KK Tse, Executive Vice President, State Street Corporation, Hong Kong

A CEO’S PERSPECTIVE ON THE CHALLENGES AND OPPORTUNITIES AHEAD FOR THE ASSET MANAGEMENT INDUSTRY 14.05–14.50

LOST IN TRANSLATION 11.15–11.45

EVERYTHING YOU EVER WANTED TO KNOW ABOUT QDII BUT WERE AFRAID TO ASK OPPORTUNITIES IN CHINA FOR CROSS BORDER FUND PROMOTERS 9.40–10.05

Charles Beazley, President, Nikko Asset Management Europe Limited, London

Martin Gilbert, CEO, Aberdeen Asset Management PLC, London Interviewer Michael Ferguson, Partner, Asset Management Leader, Ernst & Young, Luxembourg

Sebastien Chaker, Vice President, Brown Brothers Harriman Investor Services Ltd, London

PAPERJAM | September-October 2009 | SPECIAL ALFI & NICSA FORUM

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AGENDA Tuesday September 22, 2009 and Wednesday September 23, 2009

THE CHANGING ENVIRONMENT FOR ASSET MANAGERS AND THEIR PRODUCTS IN THE UK – WHAT ARE THE CHALLENGES AND OPPORTUNITIES? 14.50–15.30 Moderator Michael Ferguson, Partner, Asset Management Leader, Ernst & Young, Luxembourg Panelists Jamie Hammond, Senior Director International Advisory Services, Franklin Templeton Investment Management Limited, London Charles H. Eppinger, Chairman, Cofunds Limited, London Ross Whitehill, Business Manager, BNY Mellon Asset Servicing, London Gary Marshall, Head of Collective Funds, Aberdeen Asset Management PLC, London Roger Leslie, Tax Partner, Ernst & Young Financial Services, London

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 15.30–16.00

UCITS IV – POTENTIAL NEW BUSINESS OPPORTUNITIES AND CRITICAL CHALLENGES FOR THE INDUSTRY 16.00–17.05 Moderator Thierry Blondeau, Partner, PricewaterhouseCoopers, Luxembourg Panelists Marc Raynaud, Global Head of Mutual Funds External Distribution, BNP Paribas Investment Partners, Paris Chris Sinclair, Head Operations Luxembourg and Member of the Luxembourg Management Committee, RBC Dexia Investor Services Bank, Luxembourg Wolfgang Mansfeld, Member of the Executive Board, Union Investment, President of the BVI, Germany Carlo Cavazzoni, Deputy General Manager, Generali Investment Italy Spa SGR, Italy

DAY 2 DAY 2 – REGISTRATION AND BREAKFAST 8.15–9.00

CHAIRPERSON’S INTRODUCTION 9.00–9.05 Shoqat Bunglawala, Managing Director, Product Development, Goldman. Sachs Asset Management London (Tbc)

STATUS OF THE US FUND INDUSTRY 9.05–9.45 Todd Ruppert, President and Chief Executive Officer,T. Rowe Price Global Investment Services Limited, Baltimore

REGULATION REGARDING INVESTMENT FUNDS: A WORKING PROGRAMME FOR THE YEARS TO COME 17.05–17.45 Moderator Jacques Elvinger, Partner, Elvinger, Hoss & Prussen, Luxembourg Peter De Proft, Director General, EFAMA European Fund and Asset Management Association, Belgium Gareth Adams, Principal, GSA Associates Limited, Kent

CLOSING REMARKS 17.45–17.50

COCKTAIL RECEPTION AT THE PHILHARMONIE (NEXT DOOR) HOSTED BY PRICEWATERHOUSECOOPERS 18.00–19.30

PAPERJAM | September-October 2009 | SPECIAL ALFI & NICSA FORUM

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24 & 25 November 2009 ALFI Conference

European Alternative Investment Funds Centre de ConfĂŠrences Kirchberg, Luxembourg

Private Equity

Hedge Funds

No Plain Vanilla

Real Estate Funds

Association Luxembourgeoise des Fonds d’investissement - Association of the Luxembourg Fund Industry

For the programme and information refer to www.alfi.lu (events section) or contact events@alfi.lu Ann EAIF-238x300.indd 1

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AGENDA Wednesday September 23, 2009

POST-CRISIS ASSET MANAGEMENT IN THE MIDDLE EAST 11.40–12.10

TODAY’S CHALLENGES, TOMORROW’S SOLUTIONS: THE REGISTRATION AND DISTRIBUTION OF UCITS 9.45–10.40 Moderator Lou Kiesch, Partner, Deloitte, Luxembourg Panelists Gareth Adams, Executive Director, Regulatory Strategy, FIL Investments International, London Mark Evans, Partner, Fund Distribution Services, PricewaterhouseCoopers, Luxembourg Jean-Marc Goy, Counselor to the Director General, Commission de Surveillance du Secteur Financier, Luxembourg Didier Millerot, Deputy Head of Unit, Asset Management, European Commission, Brussels

REFRESHMENT BREAK AND VISIT OF THE EXHIBITION AREA 10.40–11.10

Nigel Denison, Executive Director and Head of Markets, Bank of London and the Middle East, London

Diana Mackay, Chief Executive Officer, Lipper FMI, London

Maurice Leo, Managing Director, Securities Finance, State Street Bank & Trust Company, Dublin Eamonn Lennon, Vice President, Securities Finance, State Street Bank & Trust Company, Dublin

CHAIRPERSON’S WRAP UP 12.10–12.15 LUNCH HOSTED BY BNP ARIBAS ET DELOITTE 12.15–13.45

HEDGE FUNDS AND UCITS: DREAMS VS. REALITY 14.50–15.20 CHAIRPERSON’S INTRODUCTION 13.45–13.50 Shoqat Bunglawala, Managing Director, Product Development, GoldmanSachs Asset Management London (Tbc)

REGULATORY UP-DATE - FOCUS ON REGULATION: WHAT ARE THE SIGNIFICANT DEVELOPMENTS FOR ASSET MANAGEMENT? 13.50–14.25

REBUILDING FROM GROUND ZERO – EVALUATING THE NEW WORLD FOR ASSET GATHERERS 11.10–11.40

THE TRANSFORMATION OF THE SECURITIES LENDING INDUSTRY SINCE THE BEGINNING OF THE CREDIT CRUNCH AND WHAT IS THE FUTURE OF THIS BUSINESS 14.25–14.50

Philippe Lespinard, Partner, Brevan Howard, London

THE IDEAL FUND – RE-DESIGNING THE FUND VALUE PROPOSITION FROM AN INVESTOR-CENTRIC PERSPECTIVE 15.20–16.20 Moderator José-Benjamin Longrée, Managing Director, CACEIS Bank Luxembourg Panelists Rafik Fischer, Head of Global Investor Services, KBL European Private Bankers SA, Luxembourg Noel Fessey, Managing Director, Schroder Investment Management (Luxembourg) SA, Luxembourg Marc Saluzzi, Partner, Global Investment Management & Real Estate Leader, PricewaterhouseCoopers Sàrl, Luxembourg Camille Thommes, Director General, ALFI, Luxembourg

Panelists Francine Keiser, Partner, Linklaters LLP, Luxembourg Michèle Eisenhuth, Partner, Arendt & Medernach, Luxembourg Nathalie Dogniez, Partner, KPMG, Luxembourg

CLOSING REMARKS 16.20–16.25 COCKTAIL RECEPTION 16.25–17.30

PAPERJAM | September-October 2009 | SPECIAL ALFI & NICSA FORUM

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Regulated investment funds

The outlook remains positive Mutual funds have demonstrated that they are responsible stewards for household assets, even in a difficult environment. Theresa Hamacher (text), Annabel Briens (illustration)

The outlook for the US mutual fund industry has brightened considerably since the darkest days of the credit crisis. The good news: assets under management rose almost 5% in the first five months of this year – recouping about one-fifth of their 2008 decline. The even better news: the increase wasn’t just a function of market action, the merely mechanical result of the rebound in stock and bond prices. Instead, investors were demonstrating renewed confidence in both the outlook for the world economy and the safety of fund investments by adding to their holdings of mutual fund shares. While bond funds saw the greatest interest from investors still concerned about taking too much risk, even equity funds have experienced recent inflows. Yet while there is light on the horizon, the fund industry will be dealing with the fallout from the financial turmoil for some time to come. There are three principle areas of uncertainty: Regulation. It’s clear that regulation of financial products in the U.S. will be substantially increased, but the exact form of that enhanced overview has yet to be decided. The Obama administration has presented its blueprint for the new regulatory scheme, but specifics will change as legislation moves through the two houses of Congress. While mutual funds – already very heavily regulated – will probably not see much of a difference in the level of review, other segments of the investment management industry could be affected significantly. Even though the proposed imposition of SEC registration for hedge funds has received the most attention in the press, the increased regulation of investment advisers – through additional requirements for licensing and review – may have an even greater impact. Standardization. Many of the proposed changes in regulation could well lead to greater standardization of fund products. For instance, the calls for a centralized clearing house for over-the-­ counter derivatives might lead to less variation in the terms of those instruments, making it more difficult for managers to distinguish their investment approach. Similarly, critics have demanded greater consistency in the asset allocation of target date funds, the multi-asset class funds that have become a key component of many US retire-

Theresa Hamacher, CFA, President (NICSA, Marlborough)

ment plans. Again, this will make it harder for investment advisors to distance themselves from the pack of competitors.

Greater price competition Increased standardization of funds – like a move toward commodization in any other industry – will most likely result in greater price competition. Pressure on pricing, in turn, could result in even more consolidation within the investment management industry, as companies look to reduce costs by achieving economies of scale. The only other escape route from increased price competition? Product innovation. New product introductions will be even more important in the next few years. Investment managers will attempt to break out of the commodity pack by introducing funds that give individual investors entry to unique investment capabilities, whether access to a class of investments or the talents of a portfolio manager previously available only to large institutions. Retirement. The expansion of the US mutual fund industry in recent decades would not have been possible without the growth in self-funded retirement plans. But will retirement savings con-

tinue to increase? It’s true that, throughout the crisis, individuals continued to leave their money in – and even continued to contribute to – their retirement accounts, despite the losses they have suffered. But will investors remain as committed to funding their long-term retirement goals as the economic recession drags on and more immediate needs take precedence? And will they continue to add to their retirement savings account once their employers reduce support for these plans, as many have done already by eliminating matching contributions to those programs? Expect to see investment firms experimenting with product offerings that decrease the uncertainty of outcomes through some sort of guaranteed return. Yet, despite all the clouds in the sky, the outlook for regulated investment funds in the US remains positive. Mutual funds have demonstrated that they are responsible stewards for household assets even in a difficult environment. This proven value will give them the opportunity to build market share in the coming years as they introduce new products to meet investor needs.

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UK asset managers and their products

The changing environment

As in any period of change, it will be the companies that best adapt to the current environment, whilst continuing to take a long-term view, which will succeed.

As we move into the second half of 2009, change is the order of the day within the asset management industry, both at a global and a national level. Merger and acquisition transactions are moving back into vogue again for asset managers. Governmental influence and regulation is more prevalent as governments step in to both rescue and assist companies, and be seen to protect investors. And at a more granular fund level, consolidation of funds has been prevalent throughout the industry as managers look to reduce costs and also, in part, regain strategic investment focus. The UK, of course, has been part of this. From an economic perspective, the UK has experienced a steady slowdown in growth, from a cooling property market and weaker pound, to manufacturing and service sectors experiencing reduced growth. The Washington-based International Monetary Fund (IMF) recently suggested that the UK economy would contract by 4.2% this year, down from the 4.1% proposed earlier this year. Interest rates have been kept on hold for some time, and overall, economic fundamentals for the UK are benign. However, few expect a full blown recession despite indications that business confidence is on the wane, and the IMF sees growth of 0.2% in 2010, up 0.4 points from its previous forecast. UK asset managers, in turn, have seen their fair share of change. The UK asset management sector plays on a global stage and trends at a global level will tend to have a similar impact in the UK as in other countries and regions. At this national level, however, there are a number of specific changes underway within the current environment that could have a significant impact on the UK asset management industry in particular.

“comprehensive and effective regulatory and super­ visory framework” for AIFMs at the European level. This directive has given rise to a particularly vehement reaction from within the UK asset management industry, with suggestions that the outcome of the proposal may prove to be unworkable regulations that stifle investment and market access at a time when they are most needed. As an example, some 60 per cent of all private equity business in the EU occurs in London, and the directive goes a long way to undermining the attractiveness of Europe for the international private equity industry, thereby having a greater negative influence on London and the UK than other European locations. Other regulatory influences have also been coming to the fore within the UK. In May 2009, Hector Sants, the chief executive of the Financial Services Authority (FSA) told firms to be “very afraid” of the regulator as it made plans to step up its enforcement programme. For example, the FSA recently proposed fines that could treble in size to act as a “credible” deterrent to firms that breach the rules. Proposals include imposing fines of up to 20% of the income from a product or business area linked to the breach, as well as up to 40% of an individual’s salary. Additionally, there will be a minimum fine of 100,000 pounds for market abuse cases. The FSA also plans to introduce a wide range of reforms to its structure in October 2009, that are intended to better align its internal operations with its core activities of identifying risk, supervision and enforcement. It will ultimately have a greater role in the area of macro-prudential analysis, international regulatory engagement and consumer financial education to take account of its evolving responsibilities and the environment of change in which it operates.

The rise of regulation

Here comes the Government…

In April 2009, the European Commission proposed a directive on Alternative Investment Fund Managers (AIFMs) with the objective to create a

Taking this one step further up the chain, the UK Government is increasingly both commenting on and applying influence within the UK asset

Michael Ferguson* (text), Annabel Briens (illustration)

management industry. Recently, UK Government Business Secretary, Peter Mandelson, openly voiced his disapproval of the AIFM directive. UK Financial Services Secretary to the UK Government Treasury Office, Paul Myners, suggested that the directive needed “major surgery” before it would meet the UK objective of allowing efficient, well-run and well-regulated fund managers to compete for business without restriction across the EU. In July 2009, the Treasury Office issued a white paper, in which it clarified how it will put into action recommendations made by the FSA chairman, Lord Adair Turner, in his report on regulation published in March 2009. The white paper addressed topics such as macro-prudential regulation and oversight, higher capital requirements, liquidity rulings, powers to limit hedge fund leverage, and long-term remuneration guidance, all of which infers significant industry intervention within the UK.

The introduction of UCITS IV Whilst the UK is facing a number of challenges at a regulatory and governmental level, opportunities do exist. One of the new features of UCITS IV is that it provides funds with a “passport” that entitles them to freer movement between the nation states of the European Union. This suggests an increase in the local registration of many more offshore products currently not available to UK investors. UCITS IV also creates an even more radical rival opportunity for the freer distribution of offshore products through master/feeder funds. It is currently illegal to sell a UK fund that is, for example, fully invested in a Luxembourg “master” fund. Through feeder funds, asset management companies will be able to create onshore clones of offshore funds at a reduced cost. This could lead to an increase in fund launches, as UK asset managers suddenly find that it could be profitable to create a UK onshore version of their Dublindomiciled Middle Eastern fund, for example.

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Accordingly, various specialist funds domiciled within the UK now look to become a viable proposition. Overall, however, it is likely that a large number of UK asset managers will pursue a strategy of only creating feeder funds where they think the proposed client would require the reassurance that the vehicle is officially sanctioned by the FSA. Prior to the introduction of UCITS IV, the real upcoming challenge for asset managers will be to identify the optimal operating model afforded by the new possibilities under the scheme. Many possibilities exist, and some asset managers are already reviewing their existing structures in order to make changes where appropriate and leverage the possibilities of UCITS IV.

What’s in a reputation? Finally, UK asset management’s awareness of risk is on the increase. In March 2009, Ernst & Young carried out a survey of Chief Risk Officers (CROs) from some of the largest asset management firms in the UK. Whilst liquidity, counterparty, and operational risk are all growing in importance, most CROs pointed to reputational risk as most likely to keep them awake at night. Most firms had no clear idea of how to define, measure or monitor reputational risk, and no specific procedures in place to deal with events which could threaten the firm’s brand.

Conclusion The UK asset management industry is clearly operating within a period of fluidity. Pressures are coming from a number of angles, some of which are common across the global stage, but others, as highlighted above, are operating and/ or impacting at a very specific national level. The influence of regulation will continue to rise, as the FSA looks to bring about a sense of stability within its own backyard, whilst the UK Government will continue to apply further pressure until it feels that its hands can effectively be taken off the “rudder”. The EU will continue to

create both challenges, as through the AIFM directive, and opportunities, as through UCITS IV. Risks abound within the industry with reputational risk being foremost in the minds of UK asset managers. Ultimately, as in any period of change, it will be those companies that best adapt to the current environment, whilst continuing to take a longterm view, which will succeed. As the saying goes; “You must welcome change as the rule, but not as your ruler.”

Michael Ferguson, Partner, Investment Management Leader (Ernst and Young, Luxembourg)

* This text was co-written with Dean Brown, Director, Investment Management Advisory (Ernst and Young, London)

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US Mutual Fund Industry

Growth is likely to continue The fund market in the US is established, and some might argue saturated. But the growth is there, due to the shift towards personal savings for retirement.

R. Todd Ruppert (text), Annabel Briens (illustration)

The US mutual fund industry suffered in 2008 like much of the rest of the global asset management business. Assets shrunk 20% over the calendar year, buoyed by money market funds comprising 40% of all assets, ending at 9.6 trillion dollars as of December 2008*. The fund market in the US is established, and some might argue saturated. Almost half of US households own a mutual fund, up from only 5% of households in 1980*. This 2008 penetration rate maps closely to the proportion of US households that earn more than 50,000 dollars, often set as a base income level necessary to be an investor. But growth in the US mutual fund industry is likely to continue due to the shift towards personal savings for retirement. Social Security, the federally funded first pillar scheme, provides a maximum individual benefit of $27,876 a year1. Employer provided defined benefit (DB) pension plans have dwindled rapidly in private sector employment, though these plans still dominate the public sector workforce. Defined contribution (DC) plans are the growing source of retirement savings in the US. The mutual fund industry benefits in two ways from the growth of DC plans. First, a significant portion of DC assets are invested in mutual funds, totalling 1.5 trillion dollars in fund assets as of the end of 2008*. Second, one of the benefits of DC plans is their portability. As US workers change jobs they can roll over their DC plan assets into an Individual Retirement Account (IRA) and maintain a tax deferred status. These rollover IRA assets are another significant driver of flows in the US mutual fund industry, keeping retirement assets in the mutual fund industry throughout an individual’s working and retirement years. Tax exempt or tax deferred assets, including retirement assets, account for 47% of all mutual fund assets*, acting as a stabilizer for the industry. US fund investors access the market through a variety of channels. Professional advisors dominate with 56% of the assets*. The defined contribution channel accounts for another 26% of the market*. Discount brokers and fund supermarkets make up 6%, while 14% of the assets are invested directly with the mutual fund provider*. This last 20% of the market is often referred to as

Todd Ruppert, President and Chief Executive Officer (T. Rowe Price Global Investment Services Limited, Baltimore)

the “self-directed” segment and is not typically replicated in other global markets where advisors and banks tend to dominate. As the US mutual fund industry has grown over the last three decades, investors have benefited as fees have declined. Equity funds now average a 99 basis points total expense ratio (TER), down from 232 basis points in 1980. Bond funds now average 75 basis points TER, down from 205 basis points in 1980*. The growing popularity of no load funds, increased competition, and decline in the use of sales loads have all pushed fees down. Recent attention has been focused largely on overall account losses. While the overall fund industry was down 20%, those invested in equities saw much larger losses. With the burden of funding one’s retirement now falling largely on the individual, these losses are felt by millions of households and the prospects for a secure retirement feel uncertain. Only 13% of workers felt very confident about having enough money for a comfortable retirement in 2009, down from 27% in 20072.

Need for better education for investors Individual retirement savings responsibility has also brought to light the lack of financial literacy in the US. One solution to the problem of appropriate asset allocation has been an increase in the use of target date funds, both within defined contribution plans and individual retirement accounts. These funds have a dynamic asset allocation that shifts toward more conservative holdings as the investor ages. However, they are not guaranteed and there is no capital protection. Many investors with retirement dates in the next few years saw substantial

losses in 2008. This has brought to light that even with simplified solutions such as target date fund, education and understanding the risks of the market are needed.The outfall of the financial crisis of 2008 will likely lead to regulatory changes in the US financial services sector that may reach the mutual fund industry. There continues to be a need for better education for investors and simple, understandable product solutions. Substitute products such as ETF’s are currently small in assets but will likely have some impact on the industry, while structure products are not a factor in the US. I believe the US mutual fund industry will continue to grow as funds remain the most effective and efficient way for most investors to access the securities market, which they will continue to want to do for their individual retirement savings. This material is provided for informational and educational pur­poses only and is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. This Investment Dialogue provides opinions and commen­tary that do not take into account the investment objectives or financial situation of any particular investor or class of investors. Investors will need to consider their own circum­stan­ces before making an investment decision. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Past performance cannot guarantee future results. The views contained herein are as of 15 July 2009 and may have changed since that time. * ICI Fact Book 2009 1 Social Security Administration 2 EBRI 2009 Retirement Confidence Survey

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3:56:33 PM

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32

Ucits IV

What does it mean from a practical point of view? On June 19, 2009, the Council of the European Union adopted the UCITS IV Directive that recasts the existing UCITS Directive 85/611/EEC. Thierry Blondeau* (text), Annabel Briens (illustration)

Although the related implementing measures are still under discussion at CESR1 level, UCITS IV is an important step forward likely to have implications on the business model of promoters of UCITS.

The faster registration process and Key Investor Document will increase competition between UCITS and favour restructuring needs The faster notification procedure will significantly reduce the time-to-market of cross-border UCITS: a regulator-to-regulator process will indeed be put in place based on the principle of approval of the home country regulator and will not last more than ten working days. Thanks to UCITS IV, one may hope that existing European distribution barriers will be removed and promoters of UCITS would be able to market their products on a crossborder basis more easily. The Key Investor Document (KID) will replace the existing and often over-long simplified prospectus in order to provide investors with shorter and more understandable investment decisionmaking information. In addition, the fact that no civil liability will be attached to the KID should significantly reduce risks inherent to the issue and publication of such a pre-contractual document. However, in the current context of transparency improvement, sales and advice for retail investment products2, the KID would ease comparisons between UCITS and potentially between UCITS and other retail investment products (unit-linked life insurance products, structured notes, etc). Performance and cost efficiency based competition would consequently be increased between domestic and cross-border promoters and issuers

of financial products. Likely UCITS IV business implications must then be considered, in particular in terms of restructuring needs to achieve economies of scale.

The current UCITS environment and UCITS IV amalgamation solutions At the end of 2008, 30% of UCITS had less than EUR 10 M3 assets under management and the size of 65% of UCITS didn’t exceed EUR 50 M2! The European investment industry is characterised by a high number of small or medium-sized funds and European funds are on average approximately six times smaller than US ones. Unfortunately, the current financial turmoil will not improve the situation. One of the reasons that could explain the relative small size of the European UCITS is inherent to the fact that many promoters offer domestic rather than cross-border UCITS to their European investors. 66% of the top 30 promoters in terms of number of countries of distribution have launched UCITS in at least four different countries of domicile and 7% of them have domiciled their funds range in more than eight European countries! It does not come as a surprise that UCITS IV will favour restructuring for the purpose of rationalising UCITS by allowing “Master-Feeder” structures and by developing a new set of European rules related to mergers of UCITS. The Master-Feeder solution of UCITS IV consists in adopting an investment strategy by which one UCITS (the “Feeder fund”) invests at least 85% of its net asset value in another UCITS (the “Master fund”). Promoters will then be entitled to pool the assets of their UCITS into one so-called Master fund. The advantages of such a restructuring solution are at least twofold: - The management and the administration of the Master fund (i.e. the pool of assets) will be

centralised in one country of expertise and promoters should be able to rationalise their platforms and consequently reduce inherent costs charged to the UCITS and indirectly paid by the investors. - The impacts on the existing investors in domestic UCITS are limited: with the exception of the modification of the Feeder’s investment policy (from a diversified investment policy to a MasterFeeder investment policy), the investors will remain in the same “local” vehicle. From a fiscal point of view, investors should not be subject to any tax resulting from this restructuring. Tax impacts will be somewhat different when promoters decide not to amalgamate the assets of domestic UCITS with another UCITS but to interpose a Feeder fund between one existing fund (that will become the Master fund) and the final investors. In that case, the latter will be transferred from one UCITS to another and potentially taxed on their capital gains. The merger solution of UCITS IV consists in merging, on a domestic and/or cross-border basis, the funds range of one promoter in order to merge the assets of several disappearing UCITS as well as their investors with only one receiving vehicle. By merging their UCITS, promoters will then benefit from the opportunity to significantly rationalise their European funds in order to manage, administer and market only one range of products from a single European platform. The merger of UCITS is probably the restructuring process generating the most economies of scale and cost reductions. However, impacts on investors are potentially more important than the Master-Feeder solution: investors will indeed be transferred not only from one structure to another one but also, in case of a cross-border merger, from one country of investment to another.

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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33

Such a transfer may potentially be considered as a taxable event at the level of the investors, except where tax reliefs could apply. In addition, a onemonth prior notice will have to be observed, during which investors of both the merging and receiving UCITS will have the possibility to redeem their investments free of charge. Risks of asset flight are then not negligible. Obviously, the location of the Master fund (in case of Master-Feeder structure) or of the receiving fund (in case of merger of UCITS) is key and subject to various and complex criteria. Since all administrative tasks (multiple classes of shares, valuation of investments, cross-border distribution and registration, tax reporting, including German tax, etc) will be centralized within one UCITS (the Master fund or the receiving fund), the latter must be administered in a country which has the experience of such international and complex products.

Current management company environment and UCITS IV management company passport solution As a consequence of the current obligation to have local presence in the country of the UCITS, more than 65% of the top 30 cross-border fund promoters have management companies domiciled in more than three EU countries3 and 20% of them have UCITS management companies in more than five European Member States3! In that context, UCITS IV will finally introduce a full management company passport. There is no doubt that promoters will benefit from this new regulatory flexibility to review and rationalize their value chain on a cross-border basis in order to reduce existing and costly duplication of resources and capital requirements across the EU, potentially combining it with the above described UCITS restructuring solutions.

Thierry Blondeau, Partner, European UCITS IV Champion (PricewaterhouseCoopers, Luxembourg)

Since UCITS IV is not, however, a tax directive, the success of the management company passport is strictly linked to potential tax impacts/ reliefs in connection to the provision of crossborder collective portfolio management services and the related substance impairment of the managed UCITS. The management company passport should indeed not be at the origin of tax challenges around the location of the UCITS management and its tax residency, or raise transfer pricing issues. Consequently, and in the absence of harmonisation between the related European regulatory and tax rules, the management company passport is still subject to tax controversies that must be closely considered before making a restructuring decision. UCITS IV will be effective as from July 1, 2011. The implementation measures should be proposed by CESR as of October this year. We recommend the market start doing its homework now.

The Committeee of European Securities Regulators (CESR) 2 The Commission intends to create consistency of approach for all different Packaged Retail Investment Products, so as to help to ensure consumers always receive the right information and treatment. For further information, please refer to the following website: http://ec.europa.eu/internal_market/ finservices-retail/investment_products_ en.htm 3 Source Lipper/PwC analysis: Figures as at end 2008 1

* This text was co-written with Nicolas Schulz, Director (PwC Luxembourg)

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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34

Evaluating the new world for asset managers

Rebuilding from ground zero The fact that Europe has suffered a catastrophic withdrawal of investment is well trodden territory that does not warrant further repetition. Diana Mackay (text), Annabel Briens (illustration)

Very recently we have seen some small sparks of life in the cinders of this devastated landscape, so it is very timely now to question whether we are simply dealing with a cycle that will simply turn or whether the old world is dead and a new one beckons. In simple terms the “cyclical” and the “new world” lobbies are probably both correct but I would argue that long-term success lies in making way for profound change. And the prize is large; our estimate is that the high net worth/ advised market represents around a third of total net assets or €1trn1. This is a worthwhile pot of money but the bigger opportunity is clearly in the mainstream investor segment. Banks are the gate-keepers here, controlling access to the €6trn2 or so that currently sits in European low-interest deposit accounts. There is a high degree of certainty that the wealth advice segment is in the first stages of recovery. Non-existent or negligible interest rates are putting pressure on the affluent and on those reliant on income from their savings. And, fortunately for the fund industry, they are the products of choice because asset allocation is favouring sectors e.g. emerging markets and commodities that are best accessed through funds. In the dotcom recovery period this sector was nowhere to be seen – their preference then was hedge funds, real estate and other alternatives accessible without the mutual fund wrapper. The high net worth field is the traditional feeding ground of fund managers in search of third party business and this business will return. The more questionable but larger client segment belongs to the less-sophisticated mainstream investor that has, over time, been fed on a diet of government bond funds in the 1990s, proprietary equity funds during the tech bubble period and latterly, absolute return promises and structured notes. With the exception of the UK, these clients are led by bank sales initiatives and their return to funds will therefore be determined by the role that banks either choose, or are forced, to take in the post-financial crisis world. The choice they make is critical to the sales strategies of many asset management groups that positioned themselves, in the first half of this decade, to take advantage of the blossoming guided architecture platforms.

Diana Mackay, CEO (Lipper FMI, London)

The data now suggest that, with the exception of guaranteed activity and some funds of funds, new business from mainstream investors has been marginal in many markets since the height of the dot com bubble. Those that were in, stayed in until they could escape without loss and this contributed to some of the frighteningly large redemptions that we saw last year. These investors are most unlikely to return. The option to assemble products like funds of funds encouraged some new mainstream support but it was actually quite small compared with the fund rush that occurred in the late 1990s before open/guided architecture existed.

New strategies My fear now is that the guided architecture door is also closing; that the number of preferred partners on each platform will contract and that “pay to play” will become the new strategy. But even with these restrictions, the banks will need to develop new strategies for enticing their clients back into funds and right now there is no evidence of such strategies. This means that the pace of industry growth will be slower in the coming years than we have experienced in the past. The pressure will definitely be on the fettered domestic groups. Unless

they are able to adapt to the new world they will see their assets continue to shrink. Each country will be different but the overall impact will be one of contraction for many of the traditional banking giants of the industry. The survivors will be those that have cut their reliance on their proprietary sales channels and are competing with the rest in delivering product quality but they will be fighting for a smaller pool of assets. For the mutual funds industry to develop significant critical mass it must develop strategies to attract the attention of mainstream investors and secure access to a larger part of the Euro 6trn pool of savings. This will require the support of governments in incentivising long-term savings, regulatory focus on the conflicts of interest that pervade distribution structures and, finally, a willingness amongst asset managers to support distribution channels that offer independent advice to their clients. 1

2

Based on data at end April, including third party funds of funds but excluding institutional/Dedicated and ETFs, which are primarily institutional vehicles European Central Bank

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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e t vo t r e v i s i o n d ev i e n t e n t r e p r i s e

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16/02/09 17:53:38


36

Regulation

2009: the year of inflation?

Such intense activity from the regulation bodies is animated by the desire to strengthen investors and market protection, drawing from the lessons learnt from the financial crisis. and on the KID (Part 2), the remaining measures (fund mergers/master-feeder structures and notiIt is still premature to assess whether 2009 fication) being considered as less of a priority due will be a positive year in terms of asset inflow to the fact they are not required under the UCITS and performance but we may definitely conclude Directive. The Part 1 consultation on the Managethat the salient feature will be the increase in ment Company Passport aims at ensuring that regulation and consultation papers piling on managing funds on a cross-border basis will not everyone’s desk or mailbox. Such intense activ- expose investors to additional legal and operaity from the regulation bodies is animated by the tional risks. desire to strengthen investors and market protecThe approach followed by CESR is to align, as tion, drawing from the lessons learnt from the much as possible, UCITS management company financial crisis. requirements to MiFID level 2 provisions. Whilst Whilst investor and market protection are clearly CESR recognizes the importance of the “proportioncommon features of all the regulations currently ality” concept, one could fear that these requireunder debate, the most intense activity is noticeable ments, if not implemented wisely, would increase in the UCITS 4 implementation area. When the significantly the operating costs of the smallest directive was discussed and developed in 2007­ management companies and thus challenge the /2008, the objectives of the proposed enhancement current operating model of most of the managewere to facilitate further cross-border UCITS distri- ment companies and in particular the “self-manbution throughout Europe. Since the draft directive aged” SICAV’s. was approved by the Council and the European This consultation paper has also to be read in Parliament in December 2008 and January 2009, conjunction with that issued by CESR on June 15 the world has changed drastically and investor pro- in relation to global exposure risk measurements. tection has replaced market efficiency as the top Following rumours that the Value-At-Risk (VAR) priority item on regulators’ agenda. approach would be abandoned for sophisticated funds, hence significantly reducing their potenAdditional safeguards tial market exposure and their ability to operate The UCITS 4 following the Lamfallussy pro- some strategies. This paper was awaited impacess, the Commission has asked CESR’s advice tiently by the industry. on some items pertaining to the level 2 impleThe good news is that the concept of VAR has menting measures relating to the Management not been abandoned but additional safeguards Company Passport, format and content of the are proposed for the relative VAR calculation, Key Information Document (KID) and fund merg- characteristic of the reference portfolio. It is proers/master-feeder structures and notification. posed to simplify the calculation of the OTC counCESR has to provide its advice by the end of terparty risk exposure. “Add-on” for future credit October 30, 2009 and the Commission to issue exposure and the use of risk-weightings should its level 2 implementing measures by July 1, no longer be required. The “sophisticated/non-so2010 (with the view of implementing UCITS 4 by phisticated” definition would be replaced by the July 1, 2011). requirement to adapt the risk monitoring to the CESR has just released its public consultation overall risk profile of the fund, and not just the on the Management Company Passport (Part 1) use of derivatives. Nathalie Dogniez (text), Annabel Briens (illustration)

The Part 2 consultation of CESR aims to improve investor disclosure for UCITS. These proposals result from two intensive years of industry consultation. The KID should be a document of two pages maximum, providing key information to the investors, clearly expressed, written in plain language and presented in an esay way to read. These two pages will have to describe the objective and investment policy of each UCITS, its risk and reward profile, a chart of its charges, disclosure of past performance and other practical information. Fitting all this information into two pages, under an easy-to-read format will be quite a challenge for marketing people… UCITS 4 only marginally impacted the role and responsibilities of the depositary. Indeed, these definitions remained unchanged from the initial UCITS Directive in 1985. Meanwhile, the nature of the assets eligible for a UCITS have significantly evolved (OTC derivatives, deposits, funds, emerging markets,…) leading to additional risks and requiring a revisiting of the framework. These risks were revealed by the debate around the Madoff fraud and the Lehman defaults. The commission then decided to clarify and strengthen the regulation and supervision of UCITS depositaries, launching a public consultation on July 3rd.

Intense debates It is proposed to clarify the safekeeping duties for listed financial instruments and for other eligible assets, to clarify the supervisory duties and to confirm that all the assets of UCITS funds can only be entrusted to one depositary. It is also proposed to harmonize the liability regime and, in case of failure, to invert the burden of the proof in favour of the investors, similarly to the current proposal of depositary liability for alternative funds. It is further proposed to restrict the function to institutions subject to the Capital Require-

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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ment Directive (as is already the case today in Luxembourg). Another interesting proposal of the directive is to require, in light of the increasing complexity, that the net asset value be calculated by an independent valuator, who could bring more expertise and objectivity to the process. Isn’t it a paradox that, after attributing under UCITS 3 and UCITS the Net Asset Value calculation responsibility to the Management Company, we move back to the “old” central administration “Luxembourg” concept? Non-UCITS funds have also been affected by the “increased regulation epidemic”. Hedge funds were perceived, rightly or wrongly, to have played a role in the financial crisis. As a result, European countries decided to regulate not only hedge funds and their managers but also all alternative funds/managers. As it was difficult to define “alternative” funds, this proposal extends to all non-UCITS funds following a “one-size-fits-all approach”. This embraces all non-UCITS funds, from the more highly leveraged hedge funds to the “plain-vanilla” retail products, placing them into one category: microfinance investment funds would for instance be considered as “alternative products” under this definition. The proposed Directive applies to all managers that manage and market non-UCITS funds in the EU, unless their total assets under management do not exceed a certain threshold. The possibility to manage and market funds across the 27 European countries is the reward for compliance with enhanced transparency, reporting and organization. The directive intends to restrict the marketing of alternative products to professional investors. Whilst the concept of regulating alternative funds and managers is generally accepted by the industry (and already applied in Luxembourg), European asset managers voiced serious concerns about some inconsistencies within the proposed text (disproportionate requirements for profes-

Nathalie Dogniez, Partner (KPMG, Luxembourg)

sional investors, “one-size-fits-all approach”). The text is currently under discussion and we will have to wait and watch-this-space. Several other pieces of proposed regulation could be mentioned, such as the regime of disclosure of short selling and the discussion about packaged investment products. We will obviously have long hours of interesting reading and intense debates around the proposed regulations in the coming months – let’s hope that all these efforts will result in a framework where the ultimate objective, enhancing investor protection, is achieved while still complying with the “cost-benefit” principle. The proposed regulations will definitely impact the operating model of most of the players and the fear is that the increase in regulations would result in an inflation in operating costs, ultimately harming the investors’ return. It is therefore critical to ensure that the new requirements imposed are proportionate to the risks faced by the investors. paperjam  | September-October 2009 | Special ALFI & NICSA forum

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Chinese QDII fund launches

Are the days of record-breaking over? Today, the QDII scheme represents probably less than 4% of total assets under management in China…

Sebastien Chaker (text), Annabel Briens (illustration)

When the People’s Bank of China launched the Qualified Domestic Institutional Investor (QDII) scheme in 2006, it created high expectations from both Chinese investors and foreign fund management companies (FMCs). Indeed, for the first time, this scheme allowed a select number of Chinese financial institutions to invest their fast- growing pool of client and proprietary assets in foreign markets. This major step created an enormous opportunity for foreign FMCs now able to tap into one of the fastest growing asset management markets, evolving from virtually nothing to over 400 billion US dollars in less than five years. After a cautious start in 2006, mainly due to investment restrictions, the QDII program really took off in 2007 and showed the world the tremendous asset gathering power held by Chinese banks. Late 2007, four product launches raised 4 billion US dollars each, in a record time, with most having to return money to investors to avoid exceeding their allocated quotas. Unfortunately, the QDII euphoria soon came to an abrupt end as the initial excitement turned into disappointment as all QDII funds went well under their issuing price. Chinese investors passed their frustration on to the Chinese authorities who, in turn, decided to put the program on hold temporarily, by not approving additional quotas. Today, we estimate that the QDII scheme represents less than 4% of total assets under management in China. Although about 60 billion US dollars in quotas were awarded to more than 70 players, only a small fraction of these, estimated at 11.5 billion US dollars1, have been put into use. The main purpose of the QDII scheme was for China to try to ease the pressure on their local stock market, reduce the pressure on appreciating local currency, the Renminbi, and the quick build-up of their foreign exchange reserves, and to allow Chinese investors to diversify their investments globally. It is also a first step towards the opening of the Chinese capital markets.

Three initiatives In our view, the uneven start of the QDII program can be attributed to several factors. Firstly, there probably could not have been a worse time to expose, for the first time in recent history, Chinese investors to foreign markets. Secondly, as the severe market downturn hit their investments, Chinese investors lost confidence in the scheme. Finally, the expected appreciation of the Renminbi, and the strong performance of the

Sebastien Chaker, Vice President, Fund Solutions global business development (Brown Brothers Harriman, London)

local stock market, reduced incentives for Chinese investors to invest abroad. That said, Chinese investors are likely to emerge from the current market crisis painfully aware of the benefits of diversification. Also, the factors leading the Chinese authorities to launch the QDII program in the first place have not gone away, and to date China remains fully committed to this program. Three new policy initiatives confirm this commitment and should be of immediate interest to any foreign FMCs. Firstly, the decision to allow QDII segregated accounts may be the best thing to happen since the program’s launch. Secondly, CSRC’s recent indication that it would lower the asset management requirement for FMCs should generate more participation in the scheme. Thirdly, the regulator’s move to allow managers to draw on their unused QDII quotas for subsequent fund launches will also help by reducing time-tomarket for new product issuance. We see three main opportunities for foreign fund managers hoping to capture part of the outflow of domestic funds. The first one is to provide investment advisory services to Chinese fund managers launching QDIIs. The second is to target the growing institutional market such as the NSSF, CIC and SAFE2, who are increasingly awarding mandates to foreign FMCs. Finally, the

last main opportunity is to seek investment by QDII fund-of-fund schemes into an offshore fund. There is clear evidence that the QDII program is soon to resume and has a bright future ahead. Although its short-term prospects may not be as good as first experienced in 2007, the QDII scheme remains the only access to global markets for Chinese investors. Foreign FMCs have a great opportunity to make their mark in this area before it becomes too crowded; however, the growth is only for the prepared. A strategy of tapping the market from abroad may suffice in the short term for those wanting to test the water but in the long run there is still a strong case for local presence. That is precisely the route that Brown Brothers Harriman has taken with the recent opening of our office in Beijing; to demonstrate our commitment to assisting our clients develop in the region, further improve our ability to scan the local environment and to capitalize on developing trends and be well positioned to support financial institutions preparing to jump on the QDII train.

Source: Z-BenAdvisors, Cerulli Associates, KPMG NSSF = National Social Security Fund; CIC = China Investment Corporation; SAFE = State Administration of Foreign Exchange

1 2

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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DO YOU KNOW

EDNA?

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40

Lou Kiesch, Partner Regulatory Consulting (Deloitte, Luxembourg)

UCITS funds

The challenge of cross-border distribution and registration

A number of potential obstacles may remain, notably in the complexity of host member state marketing arrangements

Lou Kiesch (text), Annabel Briens (illustration)

In an effort to gather assets under management fund promoters have for many years been registering their European investment funds for sale in other countries. In the early days of UCITS investment funds, from the first transposition in 1988 onward, the target markets were close to Luxembourg, such as France and Germany. Now the net is being cast further each year as fund promoters seek to service clients in various countries with the same investment fund and thereby gain economies of scale. Evolution of the UCITS market now leaves us in no doubt that Luxembourg is the domicile of choice for the crossborder distribution business model. However, the management of this business model entails significant costs and complexity. Recently, the European Commission has acted on pleas from the fund industry to reduce the costs and delays in the industry, and has amended the UCITS regime with what it calls an “Efficiency Package”. The aim of UCITS IV, which is due to be implemented into member state law by 1 July 2011, is to underpin further the single market, and to reduce time delays and costs. One aspect of the UCITS IV Efficiency Package is the revised UCITS

cross-border notification procedure. Under the existing UCITS regime, which allows for a twomonth approval period, on occasions there are delays of up to eight weeks implying a turnaround time of 16 weeks. Deloitte estimates the costs of maintaining these cross-border registrations to be approximately EUR 50 million given that the 60,000 foreign registrations by Europe’s 26,000 UCITS funds are stemming from fund promoters active in up to 40 countries, according to Lipper FMI data. The current draft of the UCITS IV proposal includes a revised mechanism for the way in which the UCITS passport should be deployed. The UCITS IV text states that the notification should be conducted in “no more than ten working days”. UCITS IV certainly accelerates the notification process for fund promoters but there are several issues which need to be examined, prior to celebrating an unmitigated success. The new regime is limited to the initial notification, so what happens with subsequent submissions? Furthermore, it is not foreseen how the transition from the old UCITS III rules to the new UCITS IV rules will be conducted prior to the 1 July 2011 implementation date. Going forward, the profusion of European investment funds may be reduced via the UCITS

IV mergers mechanism while the number of cross-border registrations may be reduced via UCITS IV master feeder arrangements.

UCITS IV regime The simplification of the cross-border notifi­ cation procedure is one of the main elements of the UCITS IV Efficiency Package. With UCITS IV the home state regulator, in Luxembourg’s case the Commission de Surveillance du Secteur Financier (CSSF), will grant the cross-border passport; in contrast the European Union “host” member state regulators will no longer have powers of delay or veto. The UCITS IV proposal foresees a simple instruction in the form of a standardized notification letter (accompanied by various supporting documents) to be sent by the UCITS to its home state regulator, largely consistent with the MiFID, Prospectus Directive and UCITS management company notification procedure. It is important to note that the home state regulator is not responsible for the verification of marketing arrangements with respect to the host member state regulations. Therefore, it will be the UCITS itself which must ensure the marketing arrangements are compliant prior to instructing

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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12.000

1.600 1.400

10.000

1.200 8.000 1.000 800

6.000

600 4.000 400 2.000

200 0

Ge

rm

an y Ita ly A Sw ust itz ria er lan d Ne Fra th nce er lan ds Sp ain Sw UK ed Be en l Sin gium ga po Fin re la No nd rw I ay Ho rela ng nd Ko Po ng rtu De gal Lu nma Cz xem rk ec bo h R ur ep g ub Gr lic ee Lie Ta ce ch iw te an ns te Slo in va k Po ia l Hu and ng ar y Ja pa Tu n r Slo key ve Bu nia lg Ro aria ma nia

0

Source: Lipper and EFAMA, 2009

number of foreign fund registrations made by European domiciled funds number of funds AUM all funds USD M (rhs)

the home state of its wish to distribute in the host member state. A significant success is the option in the UCITS IV proposal to make all UCITS documents, with the exception of the Key Investor Information document, available in the English language. This may contribute to reducing further the time to market as fewer translations will be required. In practice, many fund promoters targeting retail clients will continue to translate the prospectus and annual report in order to better service clients and compete with domestic funds. In Luxembourg, it is possible that more UCITS will use English as the base language for home state purposes to minimize translation requirements when distributing cross-border. It is estimated that choice of base language in Luxembourg is currently split 40% French, 20% German and 40% English.

Notion of marketing arrangements – due diligence required ex ante to mitigate sanctions ex-post The UCITS IV proposal, like the previous UCITS directives, foresees that the marketing arrangements in the host country are within the jurisdiction of the host member state. The UCITS IV

proposal will further highlight the demarcation between the UCITS field of influence and the host member state marketing arrangements. The home state regulator will ensure the completeness of the UCITS documents as referred to in the list above. The less obvious host country marketing arrangements which consist of country specific annexes, paying agency arrangements, proof of regulatory payments and similar obligations will not be validated by the home state regulator and will remain the responsibility of the UCITS. The notion of marketing arrangements is open -ended but includes areas such as: (i) the requirement to inform investors of the sub-funds available for sale in the host member state; (ii) the appointment of local paying agents and or representatives; (iii) the availability of fund prices; (iv) the obligation to have a local distributor; (v) the use of nominee structures; (vi) the requirement to have an annex addressed to host member state investors. It is in this area, which is outside the remit of the UCITS Directive and therefore is not coordinated at an EU federal level, that there is a risk that no significant development is made when compared to current practices. This measure will hopefully reduce the ambiguity currently experienced when registering

UCITS cross-border. But, given that the host member state is limited to ex-post controls, this may increase the instances of regulatory penalties.

some cause for celebration In conclusion, the UCITS IV proposal delivers everything the fund industry requested but, due to the remit of the Directive, a number of potential obstacles may remain, notably in the complexity of host member state marketing arrangements. This will depend on the host member states’ willingness to relax rules, such as the need for local paying agents, or maintain their local practices. In order to avoid regulatory sanction, UCITS will need to employ sound due diligence for all cross-border activities. Furthermore, the coordination between European regulators still needs to be determined, including permutations such as how communication will cascade in the event that a UCITS and its management company are domiciled in different member states, and how the transposition of the rules will be handled. Time-to-market will be improved but overall costs are likely to remain substantially unchanged for retail fund promoters. CESR’s advice on the implementing measures is the next step towards reaping the benefits of the UCITS IV Efficiency Package.

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Asia’s Economies

Looking Ahead From Crisis To Recovery Governments across Asia are becoming aware of the benefits that more sustainable development models can offer.

KK Tse (text), Annabel Briens (illustration)

The global recession has left a deep mark on Asia’s economies as it has elsewhere around the world. Not since the region’s currency-driven financial meltdown in 1997 and 1998 has Asia experienced such a marked slowdown. However, while the earlier crisis was largely local, current conditions in Asia have their origins in the severe economic turbulence that has spread outward from the US, triggered by collapsing credit markets there. Since the fortunes of the pan-Asian economies continue to be tethered to offshore developments, recovery across the region will depend heavily on conditions abroad. At the same time, signs are emerging that countries in the region are interested in moving to more sustainable development models that are less reliant on export-led growth.

Falling external demand chills growth across Asia Contracting economic activity in the US, the Eurozone area and Japan has exerted a particularly significant strain on Asia as a whole. The remarkable growth across the region that occurred prior to 2007 has decelerated notably, dropping by about one-third to 6.3 percent in 2008 and estimated to fall further to 3.4 percent in 20091. Yet performance in individual Asian economies has varied. In 2008, for example, as China expanded at a rate of 9 percent, and India by 7.1 percent, growth in Singapore and Thailand fell much more sharply, while Taiwan’s GDP scarcely budged and Japan actually shrank by 0.6 percent. Much of this decline has been caused by a sharp decrease in the manufacturing sector, coupled with a steep drop-off in trade. Highlighting the export dependency that characterizes Asia’s markets, contraction in business and consumer spending in the US and Europe has proved to be a severe drag on the region. Shrinking manufacturing activity and trade have also tended to curb Asia’s domestic markets, as rising unemployment has taken hold. These factors are among the reasons why an upturn in Asia must await improvement globally which is projected to occur in 2010. As the world pulls out of recession, Asia may expect overall growth of 6 percent (with wide fluctuations in individual economies), a relatively

KK Tse, Executive Vice President (State Street Corporation, Hong Kong)

mild rate of expansion compared to the rapid growth that was the norm in the years leading up to the current slowdown. In addition to the cutback in trade and manufacturing, Asia has also experienced a steep curtailment in incoming investment flows and access to financing. These changes are the result of the liquidity crisis that has had such a dramatic effect overseas. As declining investment flows have added to the pressure on Asia’s economies, governments, notably China’s, have sought to fill the gap with homegrown stimulus measures.

Looking ahead For all the turbulence seen in the financial sectors in the US and Eurozone countries, the financial systems in Asia’s economies have remained comparatively healthy. This is largely thanks to the fact that banks in the region have had low exposure to the difficulties that their overseas counterparts have experienced. However, the risk here is that a prolonged global downturn may challenge the ability of Asia’s financial sector to continue to function normally, as borrowers feel

squeezed. Signs of this possibility are already affecting second-tier businesses in Korea, for example. The current downturn underscores the importance of looking to trusted financial institutions, such as State Street, with global scope and deep local experience in the region. External demand in Asia has led to the large account surpluses that have long been a hallmark of its regional economies. As the lessons of the global recession sink in, the dangers of this dependency have not gone unnoticed. Governments across Asia are becoming aware of the benefits that more sustainable development models can offer. Aside from seeking ways to improve the investment climate in their countries, they also understand the value of stimulating their own domestic markets and encouraging greater consumer spending. As more active fiscal policies take root, Asia seems set for a new chapter in its development. Asian development Outlook 2009: Rebalancing Asia’s Growth, Asian Development Bank 1

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Asia

Managing the challenges of the fund distribution process Asian investors are not necessarily traditional “buy and hold” customers and local investors do not accept  being restricted to a limited number of funds… Tilman Fechter (text), Annabel Briens (illustration)

Asia is the engine of expansion for the world. It is the most important growth market for European manufactured and domiciled mutual funds. Over the first seven months of 2008, Asian investors contributed to 90% of the net sales of crossborder UCITS, according to a survey conducted by the European Fund & Asset Management Association (Efama). And the overwhelming majority of funds available in Hong Kong (90%), Singapore (79%) and Taiwan (59%) are offshore funds. These numbers are here to stay given the necessity to finance long-term retirement needs with the lack of any pay-as-you-go-system. And local investors want and need to diversify their investments. According to Cerulli Associates, 11 of the top 15 countries with the highest projected growth rate for assets under management are located in Asia. Additionally, huge markets like China and India are still in their infancy and have the potential to push assets far higher and far quicker when recovery starts. But distributing European funds in Asia poses multiple challenges. To begin with, unlike European investors, Asian investors are not necessarily traditional “buy and hold” customers. They see funds also as a short-term investment and keep them for weeks or months rather than for months or years as in Europe.

Secondly, local investors do not accept being restricted to a limited number of funds. A client wanting to invest HK$ 1 million may want to buy as many as 20 different funds and it is highly probable that those funds are administered by a variety of different funds and transfer agents (TA). This means Asian distributors are required to build multiple individual links with a large number of European TAs. Today, they do so primarily manually – and this is the biggest challenge – with “traditional, fax-based” transaction processing. This involves opening individual accounts and, when transactions go through, wiring money to each funds cash collection account. Geographical and time differences, not to mention language, add to the difficulties. This can be a cumbersome and inefficient process, prone to errors, which slows down the growth of the market for offshore funds and/or results in high operational and reputation risks for the involved banks. Any process which causes exception handling and repair costs a lot of effort and money, be it for just one big ticket which “gets lost” and hurts the P&L, or for smaller tickets with which the end customer expects timely and reliable processing and booking in their account.

Automating order routing is not the real driver for cost saving From my experience, the automation of order routing seems to be the main objective in Asia. In

all countries, banks have a large choice for this part of the value chain – local IT companies, local infrastructure providers or sub-TAs offering dedicated fax solutions. But is order routing really the driver for cost saving, operational efficiency and risk reduction? No. If you look at the end-to-end fund process, the business case often lies with centralised cash management, integrated and reliable position reporting, accurate and timely corporate actions processing, static data maintenance and many other post trade components. Most of these difficulties can be overcome if fund ordering and payments are processed in an integrated step with the exchange of fund shares in a centralised system, which efficiently sorts out all transactions and so ensures that no errors are perpetrated as a result of the highly manual nature of the process. This is precisely what Clearstream Investment Fund Services do, increasing the efficiency in the fund share transfer for all involved parties, i.e. Fund Distributors and Transfer Agents (TAs). The services offered via Vestima+ and the Central Facility for Funds (CFF) cover the entire order lifecycle from order input till its final execution. Vestima+, which has around 60,000 funds available, offers an automated order-routing service that provides a single point of access for not only Asian, but also European order issuers for third party, cross-border and offshore funds. In

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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Tilman Fechter, Head of Sales & Relationship Management, Investment Funds Services (Clearstream)

addition, Clearstream’s Central Facility for Funds (CFF) is a unified platform offering automated and centralised fund settlement. It gives Fund Distributors and TAs efficient electronic reporting services on their holdings, provides data to compute trail fees, and allows centralising corporate action and dividend processing. Furthermore, Clearstream can help banks in Asia and Europe to speak the same language. For instance, while many banks in Europe continue to use the “old” SWIFT ISO 15022 format for fund transactions, parts of the automated Asian providers are already using the new ISO 20022 format. A 20022 format message sent to Luxembourg by a Hong Kong institution via Vestima+ will be converted into 15022 and vice versa when the transaction returns to Hong Kong. Language is a case in point when talking to Asian customers, and local support is key to satisfying local clients as the challenges are different from market to market and bank by bank. The challenges posed by a private bank in Singapore with demanding high net worth individuals are different to those of a Taiwanese retail bank with ten thousand monthly transactions. The time difference makes customer support all the more important. If a problem comes up, Asian customers need help to solve it although the European Fund Industry is still asleep. And they need help for their entire fund universe. This is why European fund managers’ service

centres or representative offices in Asia are a good first step, but not necessarily what banks in Asia want. Such centres help them for the funds which have offices in Asia, but this only represents a part of the requested/already traded fund universe. As a leading provider of fund transaction services, Clearstream has a dedicated focus on Asian markets. It not only has fund expertise available in its Luxembourg headquarters but it can also rely on a network of relationship managers in its Hong Kong, Singapore, Tokyo and Dubai offices to support and manage an increasing part of inflows coming from clients across Hong Kong, Singapore, Taiwan, Korea and, more recently, Japan. So are the challenges of the fund distribution process in Asia really different from those in Europe? It’s a good question, but speaking honestly, I’m not so sure. It is fair to say that Asian banks face the same problems as European banks: to find efficient and reliable solutions for processing and settling their orders, just with an additional time zone problem and a much faster turnover in orders than in Europe. Providers with significant market and technological expertise and highly efficient service propositions are well equipped to manage these challenges. Clearstream is one of them and will continue to develop relationships with Asian banks, pension funds and asset managers. paperjam  | September-October 2009 | Special ALFI & NICSA forum

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2008

Flashback The previous Alfi/Nicsa conference took place on 23 and 24 September 2008.  It was its first edition in the new Centre  de Conférences in Luxembourg-Kirchberg. Etienne Delorme (photos)

Serge De Cillia (ABBL) and Fouad Rathle (Garanti Bank)

Bernard Bronckart (Citibank International plc, Luxembourg)

Jobst Neuss (European Investment Fund)

Siobhan Roche and Camille Thommes (Alfi)

Karine Hirn (East Capital, Stockholm), Kira Lukiyanova (Deputy of the Duma of Russia, Moscow) and Andrey Ganin (Deloitte, Moscow)

James Charrington (BlackRock)

Abdel Maoula Chaar (Islamic Financial Management Institute) Andrea Adelheid Schwaab (DWS Investment)

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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Theresa Hamacher (Nicsa)

David Pember (JP Morgan)

Isabelle Kintz-Blouquy (JPMorgan Bank Luxembourg)

Jon Elliott (JPMorgan Bank Luxembourg)

François Honoré (Dexia BIL) Serge Weyland (Caceis Bank Luxembourg)

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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Nadezsa Kozomara (JPMorgan Bank Luxembourg) Leonid Nitko (Glenic)

John Li (KPMG Luxembourg)

Laurent Laigaisse (Alter Domus FRS)

Taylor Hui (Deacons)

Maria Tomillo Martin (Deloitte Espagne)

Ayyaz Ahmad (Funds Partnership Limited)

Derek Wilson (Igefi Group) Willem van Someren Grève (Robeco) See all the pictures at: www.paperjam.lu

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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Security and precision from source to target for investment funds

Finesti provides innovative solutions and high-quality tools for investment funds that improve information transparency and enhance distribution opportunities. Increasingly European in our outlook, Finesti is involved in two major EFAMA projects: the European Fund Classification initiative and the rollout of Fund Processing Passports. Finesti offers a large range of products and services that cover the full cycle: from data collection and management to bulk dissemination and end-user consultation.

T (+352) 47 79 36-330 | info@finesti.com | www.finesti.com

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Finesti is a subsidiary of the Luxembourg Stock Exchange

f inesti

Intelligence for investment funds

8/09/09 14:23:56


50

inside Cover Annabel Briens This publication is a special supplement to the September-October 2009 edition of paperJam

September-October 2009 | Special alFi & NicSa Forum

A & N iC S N t th lf i 1 8 A l iN v e S t m e G lo b A f o r u m f u N d S

director of publication Mike Koedinger

Organisations cited A ALFI Alter Domus FRS

6, 46, 21 48

B BlackRock BNP Paribas Brown Brothers Harriman, London

46 19 38

editorial staff editor in chief Jean-Michel Gaudron coordination Jean-Michel Gaudron copy editor Cynthia Schreiber,  Brian Power and Docs illustrations Annabel Briens Layout INgrid.eu

advertising phone (+352) 27 17 27 27 Fax (+352) 26 29 66 20 E-mail web@tempo.lu WEB www.tempo.lu associate manager Aurélio Angius associate sales manager Francis Gasparotto advertising account manager Simon Beot

Caceis 11 Caceis Bank Luxembourg 47 Cerulli Associates 44 CESR 32, 40 Cetrel 43 China Investment Corporation 38 Citibank International plc, Luxembourg 46 Clearstream 44 Clearstream Investment Fund Services 44 Council of the European Union 32 CSSF 6

D Deacons Deloitte Deloitte Espagne Deloitte Moscow Dexia BI DWS Investment

L

East Capital, Stockholm 46 Efama 6, 44 Ernst & Young 2, 28 European Commission 6, 28, 32, 40 European Investment Fund 46 European Union 40

Lipper FMI LSF

F

C

www.paperjam.lu

E

48 40 48 46 47 46

Financial Services Authority Finesti Fund -X Funds Partnership Limited

28 49 39 48

n National Social Security Fund 38 NGR 51 Nicsa 6, 24, 47 Northern Trust Global 4

P PricewaterhouseCoopers 9, 48

R Robeco

48

S

G Garanti Bank Glenic

34 13

46 48

I IFBL 23 Igefi Group 48 Ineum Consulting 35 International Monetary Fund 28 IQ Solutions 31 Islamic Financial Management Institute 46

J JP Morgan 47 JPMorgan Bank Luxembourg 47, 48

SII 15 State Administration of Foreign Exchange 38 State Street Corporation, Hong Kong 42

T T. Rowe Price Global Investment Services Limited 30 TCS 26, 27

u UK Government UK Government Treasury Office US Congress

28 28 24

K Kneip Communication 25 KPMG 36, 48, 52

publisher phone (+352) 29 66 18 Fax (+352) 29 66 19 E-mail office@mikekoedinger.com Web www.mikekoedinger.com Postal address P.O. Box 728, L-2017 Luxembourg office 10 rue des Gaulois,  Luxembourg-Bonnevoie

© Editions Mike Koedinger S.A. (Luxembourg) All rights reserved. Any reproduction or ­translation, in whole or in part, without prior written permission by the editor is strictly prohibited.

personalities cited A

H

Adair Turner 28 Adelheid Schwaab Andrea 46 Ahmad Ayyaz 48

Hamacher Theresa Hirn Karine Honoré François Hui Taylor

B Blondeau Thierry Bronckart Bernard Brown Dean

32 46 28

C Annabel Briens is one of the rising young stars of illustration. She trained at the Ecole Professionnelle Supérieure d’Art et d’Architecture, aux Beaux-Arts de Nantes, and then at the Intuit/lab (Ecole de Communication Visuelle). Her interest is in reworking frozen artifice to allow her to develop a personal language that shows off her spontaneity and energy. Fashion magazines are an inexhaustible source of inspiration, and she traces the outlines of the icons of those glossy pages on paper and then reworks the refined silhouettes with wash drawing or spray paint. The results are reborn characters with the allure of puppets that perfectly illustrate the mixed media she uses.

Charrington James

46

46 36

e Elliott Jon

47

f Fechter Tilman Ferguson Michael

44 28

G Ganin Andrey

Kiesch Lou Kintz-Blouquy Isabelle Kozomara Nadezsa Kremer Claude

46

Laigaisse Laurent Li John Lukiyanova Kira

40 47 48 6

48 48 46

m Mackay Diana Mandelson Peter Maoula Chaar Abdel Muller Charles Myners Paul

34 28 46 6 28

n Neuss Jobst Nitko Leonid

Obama Barack

24

p Pember David

47

r

K

l

d De Cillia Serge Dogniez Nathalie

o 24, 47 46 47 48

46 48

Rathle Fouad Roche Siobhan Ruppert Todd

46 46 30

s Sants Hector Schulz Nicolas

28 32

t Thommes Camille Tomillo Martin Maria Tse KK

6 48 42

V van Someren Grève Willem 48

w Weyland Serge Wilson Derek

47 48

paperjam  | September-October 2009 | Special ALFI & NICSA forum

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Annoncesimple_NGRstar_PPJ:Mise en page 2

13/01/09

9:24

Page 1

Use the stars to find your way

Independent and specialized in the financial sector, NGR Consulting provides consulting services to leading financial institutions helping them to improve their business performance. Combining business expertise in Fund Services, Private Banking & Asset Management with deep understanding of market trends, we work closely with our clients to design innovative business strategies and solutions which deliver quick added-value results. Need to experience a new idea of consulting? Contact us at info@ngrconsulting.com

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BUSINESS CONSULTING • TECHNOLOGY CONSULTING • PROFESSIONAL RESEARCH

www.ngrconsulting.com


Š 2009 KPMG, the Luxembourg member firm of KPMG International, a Swiss cooperative. All rights reserved.

Who else ?

KPMG

Are you familiar with fund governance topics applicable to a Luxembourg UCITS? Our KPMG Executive Briefing provides an overview of a number of UCITS fund governance topics. For example, it describes valuation process fundamentals, and shows the basics of how ongoing oversight over this process could be carried out by the Board of Directors and Conducting Officers. Request the report from info@kpmg.lu


Alfi 2009  

Supplement paperJam septembre octobre 2009

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