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SEPTEMBER-OCTOBER 2014

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SUPPLEMENT

ALFI Global Distribution Conference 2014 in association with NICSA & HKIFA

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Editorial Sustainable growth

Pierre Gramegna Minister of finance, Grand Duchy of Luxembourg

O

“Reactivity and speed”

ver the years, the ALFI Global Distribution Conference has become a reference point for the investment fund community, illustrating Luxembourg’s long standing leadership as an innovative and reliable jurisdiction for all types of funds. This unique position is the fruit of decades of common efforts and a continued dialogue between the authorities and the industry.

Success is always a work in progress. I am well aware of the challenges ahead. I see them as opportunities and will confront them with confidence. For instance, I strongly believe that the current global shift towards a higher degree of transparency in fiscal matters will be beneficial to the Luxembourg financial sector.

The government is committed to work towards full compliance with OECD and G20 standards, as this will put the focus on Luxembourg’s true strengths: a long standing experience and unmatched expertise in cross-border financial services.

Since I took office as finance minister [editor’s note: in December 2013], I have taken a series of measures designed to strengthen Luxembourg’s position as the world’s leading fund distribution and servicing platform. Among others, I have supported the launch of the LuxFLAG ESG Label, and I have signed with the government of the United States the intergovernmental agreement to implement the Foreign Account Tax Compliance Act. Meanwhile, the Commission de Surveillance du Secteur Financier has recognised the classification of the China interbank bond market as a possible regulated market for the purpose of the UCITS regulations.

With regard to the implementation of the Alternative Investment Fund Managers Directive, I notice with satisfaction that more than 200 authorisation requests have already been received by the CSSF, of which over 150 have so far been approved. These figures underText Pierre Gramegna ― Illustration Stina Fisch

line that reactivity and speed are among our key virtues.

The Luxembourg government is actively working on the further internationalisation of the financial centre. My recent visit to Beijing and Shanghai has contributed to strengthening the economic relations with China and to consolidating the Luxembourg position as Europe’s leading renminbi hub. The issuance of the first-ever sovereign sukuk denominated in euro is an illustration of Luxembourg’s expertise with regard to Islamic finance. Later this year, I will lead a mission to Brazil and Mexico, two countries identified as future growth markets for the fund industry.

The ALFI Global Distribution Conference, in association with NICSA and HKIFA, represents a privileged opportunity for the investment fund community to exchange best practices, debate the challenges ahead and carve out strategies for further sustainable growth. I will follow these discussions with great interest and stay committed to work with all of you to keep Luxembourg’s fund industry on the path of success. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 03

Inside A quick glance at this special edition

Contents

ALFI Global Distribution Conference 2014

Editorial

03

PIERRE GRAMEGNA

“Reactivity and speed”

Luxembourg’s finance minister on facing the challenges ahead.

Leaders

06

36

Contributors

22

MARTIN DOBBINS

Adapting to new distribution demands

THOMAS SEALE

The new ESG label

The chairman of Luxembourg’s responsible investment labelling agency introduces its latest certification scheme and explains how any fund, regardless of domicile, can earn its stamp of approval.

24

CHRISTOPHER STUART-SINCLAIR

CHARLES MULLER

Tacitus said: “Rome created a desert and called it peace.” Could Europe be doing the same in the name of investor protection?

The “regulatory put” option

Why non-European managers should heed the spirit of the EU’s alternative fund rules.

The Grand Duchy’s fund centre has plenty of opportunities to grow, but at the same time needs to expand its global footprint.

26

08

Open architecture for dynamic times

THERESA HAMACHER

Lehman still in the picture

The American market is seeing debates over systemic, retail alternative fund, and cybersecurity risks.

10 LIEVEN DEBRUYNE

Mainland connections

Hong Kong as a leading asset management hub in Asia.

Exhibitors plan

12

Who? Where? Here’s a practical guide.

Conference agenda

14

38 Ensuring enlightened choices

MARC SALUZZI

“We must maintain our ability to adapt quickly to new trends”

Why asset managers must reassess their distribution strategies to meet shifting investor needs in both new and existing markets.

40 CHRISTIAN BEHRING

BERNARD PONS

Never before have institutional and private investors had so much recourse to the services of flexible strategy funds.

What changed post-crisis?

What are institutional investors looking for when they make indirect investments through funds or securitisation vehicles?

42

30

MICHAEL FERGUSON

Asia’s evolving investment fund environment

HERMANN BEYTHAN

Cross-border challenges in Europe’s new fund landscape

Fund managers and management companies face evolving rules on passporting, private placements and inducements.

32

Several Asian cross-border passports are under development.

44 NICK SHERRY

Lessons from Down Under

JOSÉ-BENJAMIN LONGRÉE

Compulsory defined contribution schemes, like Australia’s, are increasingly popular.

New frontiers in cross-border fund distribution Regional and global passports will only grow in importance.

Picture report

34

46

GUDRUN GÖBEL

The best parameters

How the EU’s draft Central Securities Depositories Regulation will potentially impact Luxembourg’s fund industry.

FLASHBACK

Spring Conference

Highlights from ALFI’s other big annual international conference, held last March.

The whole programme at a glance.

― Supplement ― ALFI Global Distribution Conference 2014 ― 05

Chairman’s comment Luxembourg’s status as a fund center

“We must maintain our ability to adapt quickly to new trends” ► The Grand Duchy’s fund centre has plenty of opportunities to grow, but at the same time needs to expand its global footprint.

— Text Marc Saluzzi — Illustration Stina Fisch

06 ―

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T

here is no doubt that 2013 was a vintage year for Luxembourg’s investment fund industry.

The European asset management industry posted record net sales of €410 billion in units and shares in undertakings for collective investment (UCI), and owes a large part of this success to Luxembourg. In fact, funds domiciled in Luxembourg succeeded in attracting €193 billion of new investment, equating to 47% of total European sales.

By the end of December 2013, net assets held in investment funds governed by Luxembourg law had reached the unprecedented level of €2,615 billion.

This positive trend continued in 2014, with net assets under management rising by 7.6% over the first five months of the year to reach €2,815.8 billion by the end of May. While the number of investment funds established in Luxembourg underwent only a moderate increase, it is nevertheless satisfying to note that 129 new fund promoters – nearly one third of which originate from nonmember states of the EU – have opted for Luxembourg as the financial location in which to base their products.

ALTERNATIVE FUNDS The European asset management sector will remember 2013 as the year in which the EU’s Alternative Investment Fund Managers Directive (AIFMD) was transposed into Luxembourg law with the introduction of the law of 12 July 2013.

The subject of long and heated debate, this new regulatory framework for managers of hedge funds, real estate funds and private equity funds ultimately attracted the attention of those operating in this sector. Since the directive entered into force, Luxembourg’s supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF), has received more than 200 applications for approval from alternative investment fund managers wishing to develop their activity from a base in Luxembourg.

The legislator has also taken advantage of the AIFMD and introduced a new company form to Luxembourg law, namely the “Société en commandite spéciale (SCSp)”, which is likely to appeal to those already familiar with the Anglo-Saxon limited partnership model. There has similarly been a high level of interest in the SCSp, with 200 such companies having been established.

Will this level of growth be maintained?

We have reason to be optimistic but such a level of growth will certainly not be automatic. If anything, the opposite is true. Our industry currently faces two major challenges.

It is important, first of all, to recognise that the positive development in European investment funds over recent times has been stimulated by the exceptionally low level of interest rates, an environment that is generally conducive to the stock market. In turn, a favourable stock market environment tends to also benefit investment funds.

It remains to be seen how long interest rates will remain at their historically low levels.

Furthermore, there are several factors currently generating a mood of uncertainty that is far from ideal for those involved in the sector or for their investors. These include the project being pursued by several European countries to introduce a financial transaction tax, discussions surrounding regulatory initiatives such as the UCITS V Directive, the money market fund regulation project, and the extension of the second version of the Markets in Financial Instruments Directive (MiFID), which will impact on one of the areas of specialisation of our financial centre,

“We have reason to be optimistic.”

Marc Saluzzi Chairman, ALFI

namely the cross-border distribution of investment funds.

In addition, we are seeing an increasing number of foreign financial centres attempting to replicate the Luxembourg model, dedicating major resources to establishing themselves as investment fund centres. The result is that, more than ever, Luxembourg finds itself facing the challenge of maintaining the attractiveness of its financial centre for investment fund promoters and also ensuring that its own funds continue to attract investors.

In order to be able to continue to attract new players and to enable Luxembourg to defend its position as the leading European centre for collective saving, our financial centre must remain competitive compared with emerging investment fund bases in other regions of Europe, in the Middle East, and in Asia. Administrative costs and the costs associated with many new regulations adopted in the wake of the financial crisis or that are still being developed risk pushing up operating costs to such an extent that asset managers will be forced to rethink their business models, including consideration of the base from which they choose to operate that business.

Admittedly, as things stand, Luxembourg’s status as an investment fund centre is not being called into question.

All of the fund promoters and service-providers that we have questioned as part of a survey that we are currently conducting on their future strategies have confirmed that Luxembourg will remain the cornerstone of their global strategy.

It is becoming increasingly clear that Luxembourg service providers will have to extend their services to non-Luxembourg providers or funds.

They may also, by offering their specialist services to funds governed by foreign law, be able to benefit from many promoters’ wish to avoid having all of their products and resources concentrated in one single base. By developing experience and local expertise along the entire value-added chain of a UCI within their respective groups, or even vis-à-vis third parties that promote funds, the investment fund industry could thus help to make Luxembourg a genuine centre of excellence for the provision of services to UCIs.

PUBLIC-PRIVATE COOPERATION Defending Luxembourg’s leading position requires collective efforts from the industry, the regulatory authority and the government. We must not only protect our competitiveness, we must equally work to uphold our regulatory effectiveness and pragmatism, enabling the industry to develop new products and services whilst likewise guaranteeing an appropriate level of investor protection.

Responsible investment appears to be a promising niche for further development. Similarly, we must maintain our ability to adapt quickly to new trends and to a changing international regulatory environment.

In order to respond to growing competition from emerging financial centres, we need to step up our promotion of the very concept of regulated investment funds and of our investment fund centre on our key distribution markets.

There is clear interest in Luxembourg products and services in other parts of the world, as evidenced by the resounding success of the roadshows organised by the ALFI across the globe.

At the same time, given the rapid development in the sector’s environment, it is now no longer enough to make do with one or two visits per year to our key target markets.

Ideally, permanent representative offices are required.

In order to achieve this, however, substantial financial support from the government will be vital, with ALFI having reached its financial limits. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 07

View from Washington Five topics to watch

“There’s no consensus on which approach is better.”

Theresa Hamacher President, NICSA

Lehman still in the picture ► The American market is seeing debates over systemic, retail alternative fund, and cybersecurity risks.

S

Text Theresa Hamacher ― Illustration Stina Fisch

ix years after the event, the collapse of Lehman Brothers is still driving change in the US fund industry. While the economic growth is back on track driving fund assets to new highs, regulators, the industry and the public are still debating what caused the Lehman bankruptcy – and the broader financial crisis of which it was a part – and what needs to be done to prevent a recurrence of the turmoil.

The passage of the Dodd-Frank Act in 2010 should have brought closure, but instead opened up a new conversation about what constitutes risk in the asset management industry. Here are the five topics dominating the risk discussion in the United States today: Money market funds. Yes, this is still on the list – as it has been every year since the credit crisis. The Securities and Exchange Commis-

08 ―

sion has made two proposals for changes in money market regulation. The first proposal calls for a floating net asset value for funds sold to institutions, using market prices for securities, rather than a constant $1 per share. The second proposal would impose exit fees and redemption gates limiting withdrawals during periods of market stress.

There’s no consensus on which approach is better, with banking regulators favouring the first proposal and the industry favouring the second – while continuing to advocate for no change at all. The debate has become so heated that even members of the US congress have been drawn into this technical conversation, and the arguing is likely to continue even after the SEC issues its decision.

Systemically important financial institution (SIFI) designation. While the money market debate is longstanding, the SIFI con-

― Supplement ― ALFI Global Distribution Conference 2014

versation has risen to the top of the agenda only within the past year. Asset managers never imagined that they’d be on the list of candidates for designation as systemically important financial institutions by the Financial Stability Oversight Council – but now they are. So far, the focus has been on the very largest fund managers, though there are voices suggesting that involvement in certain activities, and not sheer size, should be the basis for SIFI status.

Needless to say, the industry is strongly opposing a designation that would add significantly to its regulatory burden – though some suggest that the entire issue may be moot if money market reform is adopted.

Liquid alternatives. But it’s not just money market funds that raise risk concerns. Regulators are also taking a close look at what have become known as liquid, or retail, alternatives funds; these are registered funds sold to the general public which use more aggressive investment strategies, such as short selling and leverage. US regulation imposes no clearcut limits on the use of the derivatives used to implement these strategies, which worries some observers. The SEC has recently conducted a sweep exam of these funds, so it wouldn’t be surprising to see additional regulatory guidance soon.

Suitable distribution. The SEC – like many other regulators around the world – has realised that imposing tighter controls on investment products by itself can’t provide complete investor protection, since many of the problems arise at the point of sale. As a result, distribution of fund shares has become an area that the SEC is paying closer attention to.

While proposals to establish a fiduciary standard for brokers and retirement plan advisers have been hotly contested – and may never be adopted – increasing scrutiny of the sales process and tighter standards regarding suitability seem likely.

Cybersecurity. And then there’s the risk that could well dwarf all the others. While perhaps not technically in its purview, the SEC is taking a leadership position here, emphasising that firms need to understand their data security risks and be prepared to protect their customers’ information.

Expect to hear more on all these topics. ◄

A straightforward solution to AIFMD cross-border distribution Although the worlds of UCITS and AIFMD are converging, major challenges lie ahead to ensure compliance with distribution and marketing of AIFs on a local level.

Deloitte can help guide you through the maze of regulatory and practical requirements to ensure a seamless integration of AIFM passporting into your cross-border distribution strategy.

Contact us to achieve your desire to reach out to investors and gain market access:

Benjamin Collette Partner Strategy and Corporate Finance Leader +352 451 452 809 bcollette@deloitte.lu

Vincent Gouverneur Partner EMEA Investment Management Leader +352 451 452 45 vgouverneur@deloitte.lu

Š 2014. For information, contact Deloitte Touche Tohmatsu Limited.

Lou Kiesch Partner Regulatory Strategy +352 451 452 456 lkiesch@deloitte.lu

Xavier Zaegel Partner Capital Markets/ Financial Risk +352 451 452 748 xzaegel@deloitte.lu

Paola Liszka Draper Senior Manager Regulatory Strategy +352 451 452 803 pliszkadraper@deloitte.lu

Greater China Looking ahead

Mainland connections ► Hong Kong as a leading asset management hub in Asia.

T

Text Lieven Debruyne ― Illustration Stina Fisch

he Hong Kong fund management industry has enjoyed tremendous growth in recent years. According to the latest Fund Management Activities Survey conducted by the Hong Kong Securities and Futures Commission, the combined fund management business in Hong Kong hit another record high of US$2,052 billion as of the end of 2013. This ranks Hong Kong amongst the top asset management hubs in Asia excluding Japan.

Hong Kong has built its reputation on having an open and efficient market, which makes it a preferred platform for international investors. According to the FMAS, contributions from overseas investors went from strength to strength and reached a record high of US$1,459 billion, accounting for 72% of the total fund management business in 2013.

Amongst non-Hong Kong investors who have been using Hong Kong as an investment platform, an increasingly important group is from the mainland. According to a survey sponsored by the Hong Kong Investment Funds Association, about 2.4 million mainland travelers from the four key mainland cities (Beijing, Shanghai, Guangzhou and Shenzhen) visited Hong Kong in 2013, up by 21% over 2012. Sixteen percent of them currently invest in funds in Hong Kong, up from 13% in 2012. Out of all the respondents, 62% said they would invest in funds in the next 12 months. This translates to around 1.5 million potential fund investors.

With the increasing affluence of the mainland population, there is an increasing need to look for alternative channels of investment to effectively deploy their financial assets. Hong Kong is well positioned to cater for these burgeoning needs.

The mainland Chinese central government, in its 12th five-year plan, has accorded Hong Kong a key position in its overall national development, in particular for Hong Kong to be developed as the key offshore renminbi business centre and as an international asset management hub. The expansion of Renminbi Qualified Foreign Institutional Investor pilot schemes, as well as the impending initiative of mutual recognition of fund products between Hong Kong and the mainland are testament to these strategies.

In 2013, the SFC announced that it was studying with mainland authorities an arrangement for mutual recognition of funds. We are in full support of this initiative and believe that this will become a major milestone for both the Hong Kong and the mainland fund industries, especially as it has the potential to create substantial benefits for investors and the investment industry alike. Hong Kong and mainland regulators have agreed on the regu-

10 ―

“We are in full support of this initiative.”

Lieven Debruyne Chairman, Hong Kong Investment Funds Association

latory framework and we are now waiting for the green light from the State Council of the PRC government.

NEW PROGRAMMES These initiatives have bolstered the development of the Hong Kong industry, in particular encouraging more managers to set up locally domiciled funds. According to the latest data from the SFC, the number of Hong Kong-domiciled funds has surged, from 305 (March 2013) to 469 (March 2014) and the NAV has increased from US$56,026 million (December 2012) to US$97,565 million (December 2013). To complement this, the Hong Kong Special Administrative Region government is now undertaking an initiative to introduce the

― Supplement ― ALFI Global Distribution Conference 2014

open-ended fund company structure to encourage more funds to be domiciled and set up in Hong Kong. The consultation exercise has just been completed in June and it is expected that the government will come up with a finalised framework soon.

In addition, Hong Kong and mainland regulators jointly announced in April this year “Hong Kong/Shanghai Stock Connect”, a pilot programme to establish mutual stock market access between Hong Kong and the mainland.

The HKIFA welcomes this initiative and believes that this will be complementary to RQFII and QFII by offering more channels for international investors to gain exposure to the Chinese market to capitalise on its long term growth opportunities.

Clearly the Hong Kong fund management industry is at a very important juncture given these developments. The HKIFA will continue to play a pivotal role in providing thought leadership in all the discussions so as to help investors and the industry to fully leverage on the emerging opportunities, with the ultimate objective of entrenching Hong Kong’s position as an asset management centre. ◄

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Practical guide Who? Where? Look here:

Exhibitors plan ► Here is a quick overview of the expositions at the New Conference Centre Kirchberg.

an or have ponsor s a e b uld you xt Why sho booth at the ne ? The forum n 0 io 2 ber 15 nity exhibit Septem 16 15 t, opportu n eve a unique y as a major u o y r e will off compan a, ion your tment fund are of to posit es er v b in m e u n th e player in h an impressiv gle s a wit ls in in to meet try professiona and, last but us od fund ind a two-day peri ibility r is e v o d bran v place increase n makers. t, s a le t no cisio t key-de amongs on rmation More info .lu www.alfi

How to find us?

By bus: With most bus lines to Kirchberg – stop at “Philharmonie/Mudam” – transit via Centre Aldringen, central train station and boulevard Royal.

Further information can be obtained from the “Mobilitéitszentral” hotline (+352) 24 65 24 65 or www.mobiliteit.lu.

By car: Direct and covered access from the “place de l’Europe” car park; entry on avenue John F. Kennedy.

From the “Trois Glands” car park; via avenue John F. Kennedy and the place de l’Europe tunnel; or via rue du Fort Thüngen.

12 ―

― Supplement ― ALFI Global Distribution Conference 2014

Company

Booth booth number

Company

Booth booth number

Company

Booth booth number

5

Luxair

22

Diamos

26

MDO

4

20

EY

34

Metrosoft

19

Axiom SL

41

Funds Europe

24

Milestone Group

21

BNP Paribas Securities Services

36

Fundsquare

7

Northern Trust

13

BNY Mellon

38

HSBC

6

Phoenix Systems

40

3

IFBL

23

PwC Luxembourg

1

Acarda

42

Deloitte Luxembourg

Arendt Regulatory Solutions

33

Atlantic Fund Services

Bonn & Schmitt Caceis

32

IPE International Publishers

Cerulli Associates

25

J.P. Morgan

8

Confluence

31

Kneip

2

Credit Suisse

35

KPMG Luxembourg

22a

30

RBC Investor & Treasury Services

27

Societe Generale Securities Services

37

Swiss & Global Asset Management

29

UBS

12

― Supplement ― ALFI Global Distribution Conference 2014 ― 13

Conference Agenda

Programme day 1 – Tuesday 23th September 2014 Registration & breakfast 08.00 – 08.45

Refreshment break and visit of the exhibition area 10.20 – 10.50

Welcome & introduction 08.45 – 09.00 Theresa Hamacher, CFA, President, NICSA, Boston

Lieven Debruyne, Chairman, Hong Kong Investment Funds Association (HKIFA), Hong Kong Marc Saluzzi, Chairman, Association of the Luxembourg Fund Industry (ALFI), Luxembourg

Chairperson’s introduction 09.00 – 09.15 Charles Muller, Partner, KPMG, Luxembourg 09.15 – 09.40 H.E. Pierre Gramegna, Minister of Finance, Grand Duchy of Luxembourg

The institutional investors’ view – Direct vs indirect investments.

What changed post-crisis?

09.40 – 10.20

Moderator: Christian Behring, Partner, Behring, Khan & Co., Atlantic Highlands Panelists: Michael Pilz, Head of Fixed Income, Versicherungskammer Bayern, Munich Raimund Seeholzer, Partner, LGT Capital Partners, Pfäffikon Philip Vlieghe, Managing Director, Pramerica Fixed Income, London

14 ―

― Supplement ― ALFI Global Distribution Conference 2014

The Australian pension fund scheme a blueprint for Europe?

10.50 – 11.10 Nick Sherry, Senior Adviser, Citigroup, Sydney

Pension reform – Implications for funds growth, mix and flows 11.10 – 11.50 Moderator: Nick Sherry, Senior Adviser, Citigroup, Sydney

Panelists: David Harris, Managing Director, TOR Financial Consulting, London Robert Kieffer, Chairman, Fonds de Compensation, Luxembourg Alwin Oerlemans, Director Institutional Business Development, APG, Amsterdam

Key trends in US investment fund industry and the potential impact on Europe and beyond 11.50 – 12.15 Speaker to be confirmed

Lunch 12.50 – 14.00 Hosted by Crédit Suisse, EY

The Private, Private Bank

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Conference Agenda

Programme day 1 – Tuesday 23th September 2014 Chairperson’s introduction 14.00 – 14.15 Pervaiz Panjwani, Country Officer, Citibank International, Luxembourg

CEO interview 14.15 – 14.45 Naim Abou-Jaoude, CEO, CANDRIAM, Paris

Interviewed by: Sébastien Danloy, Managing Director, Continental Europe & Offshore Investor & Treasury Services, CEO, RBC Investor Services Bank, Luxembourg

Post RDR distribution landscape in Europe 14.45 – 15.15 Bella Caridade-Ferreira, CEO, Fundscape, London

Refreshment break and visit of the exhibition area 15.15 – 15.45

The evolving role of management companies in supporting distribution 15.45 – 16.25 Moderator: Hermann Beythan, Partner, Linklaters, Luxembourg

Panelists: Albin Rosengren, Partner, CEO, East Capital, Stockholm Jason Trepanier, COO, NATIXIS Global Asset Management, Paris Revel Wood, CEO, RBS Luxembourg

16 ―

― Supplement ― ALFI Global Distribution Conference 2014

Mutual recognition and Asian passports – What are the opportunities and challenges?

16.25 – 17.10 Moderator: Michael Ferguson, Partner, Asset Management Leader, EY, Luxembourg

Panelists: Christian Dargnat, President, EFAMA, Brussels Lieven Debruyne, Chairman, Hong Kong Investment Funds Association, Hong Kong Stéphane Karolczuk, Head of Representative Office, Arendt & Medernach, Hong Kong West Lockhart, Managing Director, BlackRock Investment Management, London

The Luxembourg Fund Data Repository – An idea whose time has come 17.10 – 17.55 Dave Barclay, COO, Center for Research in Security Prices, Chicago

Julian Presber, Coordinator Relations with the Financial Centre, Luxembourg School of Finance, Luxembourg

Chairperson’s wrap up 17.55 – 18.00

Cocktail 18.00 Sponsored by KPMG

Conference Agenda

Programme day 2 – Wednesday 24th September 2014 Registration & breakfast

Refreshment break

08.00 – 08.45

and visit of the exhibition area 10.30 – 11.00

Chairperson’s introduction 08.45 – 08.55 Noel Fessey, Managing Director, Schroder Investment Management, Luxembourg

Shaping up tomorrow’s world – what to expect from PRIPS and MiFID II 08.55 – 09.45 Moderator: Christopher Stuart-Sinclair, Director Enterprise Risk Services, Deloitte, Luxembourg

Panelists: Valérie-Mariatte Wood, Associate Director, Head of Regulatory Proposition, Lombard International Assurance, Luxembourg Christian Dargnat, President, EFAMA, Brussels Chris Edge, CEO Allfunds Bank International, Luxembourg Philip Warland, Head of Public Policy, Fidelity Investment Managers, London

Through the looking glass: industry issues from the regulator’s perspective 09:45 – 10.30

Moderator: Noel Fessey, Managing Director, Schroder Investment Management, Luxembourg Panelists: Gráinne McEvoy, Head of Securities and Markets Supervision Division, Central Bank of Ireland, Dublin Esther Wandel, Manager, Investment Funds Team, Financial Conduct Authority, London Jean-Marc Goy, Counsel for International Affairs, Commission de Surveillance du Secteur Financier, Luxembourg

18 ―

― Supplement ― ALFI Global Distribution Conference 2014

New players, new channels and new products in the world of cross-border distribution 11.00 – 11.40 Moderator: José-Benjamin Longrée, Partner, PwC, Luxembourg

Panelists: Alexandre Meyer, General Counsel, Lombard Odier Asset Management, Geneva Rob Swan, Vice President, Distribution Strategy Consultant, BNY Mellon Asset Servicing, London

Responsible investing – is it a critical component for fund selection and distribution?

11.40 – 12.20 Moderator: Thomas Seale, CEO, European Fund Administration, Luxembourg

Panelists: Ulrika Hasselgren, CEO, Founding Partner, Ethix SRI Advisors, Stockholm Jacob Nordby Christensen, RI Director, Sparinvest, Copenhagen Adrie Heinsbroek, Senior Sustainability Advisor, ING, Amsterdam Erik Breen, Manager SRI, Triodos Investment Management, Zeist, The Netherlands

alfi european alternative investment funds conference

THE FUTURE IS

www.alfi.lu

centre de confĂŠrences kirchberg, luxembourg november 25th & 26th, 2014

Conference Agenda

Programme day 2 – Wednesday 24th September 2014 Chairperson’s wrap up

Refreshment break

12.20 – 12.30

and visit of the exhibition area 15.45 – 16.15

Lunch 12.30 – 14.30 Hosted by BNP Paribas, Deloitte

Chairperson’s introduction 14.30 – 14.35 Martin Dobbins, Senior Vice President, Managing Director, State Street Bank Luxembourg

Oversight of the distribution function: principles and challenges

to investment funds 16.15 – 16.55 Moderator: Gudrun Göbel, COO, RBS, Luxembourg

Panelists: Vanessa Grüneklee, Head of European Client Operations, AXA Investment Managers Deutschland, Frankfurt am Main

14.35 – 15.05 Jacques Elvinger, Partner, Elvinger, Hoss & Prussen, Luxembourg

Patrick Georg, General Manager, LuxCSD, Luxembourg

Henry Kelly, Independent Director, KellyConsult, Luxembourg

Michael Weber, Head of Mutual Fund Distribution Operations, Allianz Global Investors Europe, Frankfurt

Reconciling the competing interests of the fund manufacturers and distributors 15.05 – 15.45 Moderator: Mario Mantrisi, Chief Strategy and Research Officer, Kneip, Luxembourg

Panelists: Iain Evans, Global Head of Distributions, Polar Capital, London Richard Lepere, Managing Director, Fund Channel, Luxembourg Stephen Mohan, Head of UK and Ireland, Allfunds Bank, London

20 ―

CSD – Regulation and its impacts

― Supplement ― ALFI Global Distribution Conference 2014

Jan Vandendriessche, Head of Fund Platforms, VP LUX, Luxembourg

Chairperson’s closing remarks 16.55 – 17.05

Responsible investing Fund certifications

The new ESG Label ► The chairman of Luxembourg’s responsible investment labelling agency introduces its latest certification scheme and explains how any fund, regardless of domicile, can earn its stamp of approval.

Text Thomas Seale ― Illustration Stina Fisch

R

esponsible investing is an exciting area and is steadily gaining momentum with investors showing a growing interest in investment strategies that integrate environmental, social and governance (ESG) criteria into the investment process.

According to the ALFI-KPMG Responsible Investing Fund Survey 2013, approximately 1,800 funds are active in responsible investing with total assets under management of €238 billion.

In terms of creation of new funds, the sector demonstrated a steady increase. The assets under management grew by 19% between 2010 and 2012.

As the market continues to grow the demand for more transparency and reporting on investment impact has also grown. In Europe, this market demand is served by the Luxembourg Fund Labelling Agency, LuxFLAG. It is an independent international labelling agency, based in Luxembourg, specially focused on the responsible investing sector. The agency aims to promote the raising of capital for responsible investing sectors by awarding a recognised label to eligible investment vehicles. Its objective is to assure investors that the labelled investment fund invests most of its assets in the respective sector, in a responsible manner.

As of May 2014, 37 investment funds were granted the use of LuxFLAG Microfinance and Environment labels, representing approximately US$4 billion in assets under management.

The agency recently launched a new ESG Label. The ESG Label is available for investment funds which meet specific criteria related to their respect of environment, social and governance objectives.

The Luxembourg government is a founding member of LuxFLAG. Pierre Gramegna, minister of finance, commented: “Over the past 10 years, the responsible investment sector has grown at a rate that has outstripped growth in most other investment strategies. The LuxFLAG

22 ―

“The new ESG Label is appropriate for investment funds which truly incorporate disciplined ESG criteria in their investment process.”

Thomas Seale Chairman, LuxFLAG, and CEO, European Fund Administration, Luxembourg

― Supplement ― ALFI Global Distribution Conference 2014

ESG Label is a new tool in the broad range of initiatives that encourage fund stakeholders to act responsibly and aim for the achievement of a better and sustainable future. We in Luxembourg strongly support this goal.”

The ESG Label is available to UCITS and AIFMD funds domiciled throughout Europe or in equivalent jurisdictions. The new ESG Label is appropriate for investment funds which truly incorporate disciplined ESG criteria in their investment process. It will help these funds differentiate themselves from other offerings in the market place and it will help investors make informed decisions through the enhanced transparency and visibility the label provides. As there is no existing product based label covering ESG, the new ESG Label

by LuxFLAG fills a gap in the European investment fund market.

WHAT LUXFLAG OFFERS For investors, LuxFLAG labels help identify investment funds that are active in responsible investment. LuxFLAG seeks to encourage transparency by investment funds ESG performance. And LuxFLAG regularly shares with investors relevant information on investment funds active in responsible investment.

For asset managers, LuxFLAG labels enhance the visibility of investment funds and reflect the asset managers commitment to responsible investment. The LuxFLAG label helps managers to demonstrate that they are committed to investing in responsible investment. And LuxFLAG labels help managers to attract investors interested in responsible investment.

APPLICATION PROCEDURES All LuxFLAG labels are granted by LuxFLAG’s board of directors, based upon an application by the investment fund including information reviewed by an auditor, and a recommendation by LuxFLAG’s eligibility committee which are specialists in responsible investing sector.

The applicant investment funds wishing to

LuxFLAG’s ESG Label criteria include: l The applicant fund must be regulated l The application must explain clearly

how ESG criteria are integrated into the investment process

l The applicant fund must have

an exclusion policy

l 100% of assets must be scrutinised

against the ESG criteria

l The fund must publish its entire

portfolio at least once per year

l The fund must mandate an outside

auditor to demonstrate compliance to the LuxFLAG criteria

apply for the LuxFLAG Label must complete and sign an application form and return it to LuxFLAG together with a series of documents in hard copy or electronic format.

These documents are: the prospectus of the investment vehicle; the statutes or articles of incorporation of the investment vehicle; the latest audited financial statements (including the report of the auditor); the un-audited semi-annual financial statements (if more recent than the audited financial statements); a full list of assets of the applicant investment fund;

the offering and marketing documents that describe if and how non-financial performance is managed by the applicant investment fund; and, in case of ESG and Environment labels, the agreed upon procedures.

If the application is complete and accurate, the process should take no longer than one month.

A written notification of the decision will then be sent to the applicant investment fund.

Further information on the label’s eligibility criteria and application process is available on www.luxflag.org. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 23

Marketing A word for non-EU alternative fund managers

“The biggest risk… is getting into trouble with the investor himself.”

Charles Muller Partner, KPMG Luxembourg

The biggest risk, however, in my view, is getting into trouble with the investor himself: if he is unhappy with your fund performance, he might very well turn against you and threaten legal proceedings, claiming that the fund has been marketed to him while the manager was not allowed to do so. This is what has come to be called the “regulatory put” option.

Asset managers who want to have access to EU money should therefore not test the limits of “reverse solicitation” or “passive” marketing.

They should play by the rules set in individual member states for private placement. And they should keep a close eye on the next steps of the AIFMD implementation.

The “regulatory put” option ► Why non-European managers should heed the spirit of the EU’s alternative fund rules.

Text Charles Muller — Illustration Stina Fisch

T

he implementation of the Alternative Investment Fund Managers Directive (AIFMD) has significantly altered the rules for distribution of non-retail funds in Europe. Since the last edition of the ALFI Global Distribution conference in September 2013, fund managers worldwide have increasingly become aware that AIFMD is not just for European managers but affects the industry globally.

Next to the question of reporting, managers are wondering how they can still get access to European investors without being caught by the new rules. And as the AIFMD is built around the notion of “marketing” funds in the EU, they wonder how far they can go without being seen as actively marketing. Is having a

24 ―

website with product information accessible to EU investors already marketing? Or talking at a conference such as this one, even if individual products are not being promoted?

LACK OF CLARITY There is unfortunately no easy response to this question, as rules are different from country to country and lack clarity at this stage. Interpretations vary and some EU jurisdictions appear to be more liberal than others. What is clear is that you might not want to be caught on the wrong side of the fence. Although it might not be easy to catch you if you sit on the other side of the world, you nevertheless run the risk of (criminal) sanctions, including heavy fines and even imprisonment.

― Supplement ― ALFI Global Distribution Conference 2014

NON-EU MANAGER RULES IN PROGRESS Indeed the directive foresees the possibility of a marketing passport for non-EU managers as of next year. For this to happen, the European Securities and Markets Authority will first need to give its opinion and advice to the European Commission and preparatory work to that effect has already started.

This is a highly political topic as the US has in the past accused Europe of protectionism and it should therefore be expected that the new commission will treat this as a priority.

With the regulatory landscape still in a state of flux, asset managers should not forget the most important question when it comes to distribution: “What are investors looking for?” If institutional investors increasingly start refraining from investing into funds that do not carry the AIFMD “quality label”, this will be a powerful incentive for asset managers to build a product range that complies with the requirements.

We should not forget that the main aim of the AIFMD was not to tackle systemic risk but to protect investors, and it is investors who will ultimately decide if they want this level of protection or not. If they do, AIFMD will follow UCITS to become a globally accepted standard, if they do not, they will turn towards less regulated (and therefore less costly) products that will not necessarily be domiciled in the EU. Affaire à suivre, so stay tuned. ◄

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Flexible funds The best of both portfolios

Open architecture for dynamic times ► Never before have institutional and private investors had so much recourse to the services of flexible strategy funds.

I

Text Bernard Pons ― Illustration Stina Fisch

n a context of financial markets without clear trends, led more by politicians’ speeches than by fundamental analysis, many financial advisors have turned to investment funds that provide, or are supposed to provide, know-how to protect portfolios in any climate and offer good returns in the right markets. More and more financial advisors are coming into the market with one single solution for their private clients: portfolios built as a mix of flexible funds.

The interpretation of this development could be twofold: First, some see it as a clear admission of the weaknesses of many financial institutions and intermediaries who prefer to outsource the asset allocation of their client’s portfolios to specialised flexible investment managers.

Second, others see that the financial industry is pushing, for better or worse, the concept of “open architecture” to its broader definition, including asset allocation itself.

Whatever the case may be, this obvious (and maybe easy) solution is attractive for these institutions and explains the commercial success and fame of some of these flexible funds, mainly since 2008.

The industry of flexible funds is therefore surging, attracting an increasing number of investment managers as they realise that there is more market share to capture than there is by managing specialised investment funds (such as thematic, geographic, industry focused funds or single security types investment funds). Originally created mainly by “boutique asset managers”, this segment of the fund industry is spreading to all types of investment firms.

In terms of asset collection, the situation is quite clear: the brand recognition and the existence of large distribution networks do matter!

These two factors give an advantage to larger firms, leaving, in many cases, some hidden gems undiscovered.

A TRUE FLEXIBLE FUND Another point is that many of these funds define themselves as flexible. However, in reality, many of those would be more accurately defined as equity funds that give themselves more leeway to vary their level of exposition to equity than others. A true flexible fund should be able (on top of the broad asset allocation) to find value in any asset class at any given time.

But to do so, the expertise to succeed in today’s

26 ―

“There is more market share to capture.”

Bernard Pons Managing partner, Pure Capital

complex markets is key. The next generation of flexible funds should, in our view, be the ones that will have as their main objective replacing the traditional fixed and floating income allocation of these institutions.

Indeed, in a current context of “near the ground” interest rates, the yields across the range of main fixed or floating rate instruments are increasingly low and become, for many of them, even unattractive. The reasons are widely known: expected long term low inter-

― Supplement ― ALFI Global Distribution Conference 2014

est rates environment in many geographical zones; low and, in some cases, totally inexistent inflation rates; historically low recorded default rates.

The risks of managing fixed income portfolios are very high, leaving room for new “flexible fixed income” managers to enter the market scene.

As an illustration, European high yield spreads measured by the five year Itraxx Crossover Index are now close to 240 basis points (bps). In early 2007, this index broke the 200 bps level to overpass the 1,000 bps one year and a half later, damaging the portfolios of “long only” European high yield investors.

Many of these financial advisors remember this situation very well and are not ready to try to manage it on their own, whatever the economic backdrop will be. They will therefore consider alternatives to benchmark-oriented bond portfolios, and instead look to adopt a more dynamic, unconstrained – and ultimately much more flexible – investment approach. ◄

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Paperjam Advertorial Interview: M&A Capital Fund - smart private equity real estate

Targeting lucrative real estate investment niches

► Offering investment exposure to highly profitable niche opportunities. ► Providing capital to projects ignored by larger players. ► This “smart” strategy involves making many investments and spreading risk. ► M&A Capital Fund Board Members also invest. ― Interview Stephan Evans ― Photograph Sven Becker ▲ Marc E. Cottino, Founder and chairman and Serge Ejzenberg, Director of M&A Capital Fund detail their business strategies.

You bridge the funding gap for real estate projects. Please explain. MC: Banks are still not lending as they did pre-crisis and this offers us huge opportunities. We are specialists in supporting reliable, value-adding real estate developments and we target projects that are prized by wealthy buyers.

We are part of the whole development process, supporting worthy promoters with proven track records. Generally, banks provide 50-60% loan financing of the global project cost with the promoter providing the balance. They may be unable or unwilling to take all this risk, so will then look to a third party such as M&A Capital to lend or become an equity partner. We then step in to help the promoters complete the deal.

My 15 years experience in this business has shown me how many good deals arise as these deals are hammered out. We achieve profitable returns due a high leverage effect. Because we trust our specialist, long-standing partners, we have no need interfere with their plans.

How do you achieve investment flexibility? SE: M&A Capital Fund’s core business is equity-partner investment banking.

We take an opportunistic approach, investing in new and existing developments with a planned exit-strategy within 36 months.

This is much less time than is standard for industrial private equity, for example. So if

28 ―

― Supplement ― ALFI Global Distribution Conference 2014

Paperjam Advertorial Interview: M&A Capital Fund - smart private equity real estate

there is a liquidity event the fund may make a distribution or a cash-dividend. We do no act as promoters or constructors, we do not buy-tolet, we do not seek bank financing nor do we leverage our own equity. We care deeply about each project, but it is central to our strategy to maintain a degree of independence.

What property do you invest in? SE: We focus on luxury residential, mixed use residential/commercial developments and any kind of high quality, high demand assets, whether new or needing refurbishment. Initially, we focused on the luxury Swiss second home market and now we are expanding into Germany, the Benelux, the UK and the Czech Republic. We avoid projects targeted by large private promoters and we steer clear of “trophy” projects. Our analysts understand each market so can differentiate between projects with high investment potential and those which just appear to be impressive.

How is selection made? MC: M&A Capital always leads or co-leads the sourcing, and execution of each business plan and capital deployment. We have an extensive network of over 100 trusted partners including developers, business lawyers, architects and engineers.

At the heart of these are our M&A Partners with strong local knowledge who identify opportunities and monitor investments.

SE: Our team is closely involved with this analysis to rate each risk and address potential problems before they occur. Bringing all this expertise together is the key to maximising returns. We maintain low risk and volatility though a perfectly balanced portfolio with clear medium term exit routes. This gives us a clear picture of the value of each asset and the appropriate financing plan.

What returns do you target? MC: Our 12-year track-record enables us to commit to returns in excess of 20% per annum calculated on exit. This includes a 6% net annual dividend over the fund’s planned five-year life. We also focus on capital preservation and risk mitigation by maintaining a diverse portfolio of borrowers, financing, market sector, strategy and property types.

What are the options for investors into M&A? MC: There are two main options. Either investors have access the M&A Capital Fund’s portfolio of selected investments or they can participate in particular projects on a “Club deal” basis. Minimum investment is around €500,000, hence we are targeting professional investors such as HNWI, family offices, institutions and wealth managers. The fund’s target size is €100 million by the end of 2015.

In both cases, M&A’s General Partners co-invest in all projects.

How are your investments structured?

MC: We consider supporting individual investments of up to €70 million total cost. Of this we provide maximum financing of 40% of required equity. Central to our success are the “Capital Stack” hybrid equity/mezzanine financing structures we use. As well, we consider commitments as low as €1 million to support small and quick deals such as land trading to resale, distressed debt restructuring, mezzanine solutions or bespoke financial transactions. Such deals are often much more lucrative because they are short-term and are under the big players’ radar screens. They also help us maintain a diversified portfolio exposure.

SE: We take a very pragmatic approach to offer our investors a range of strategies. Each investment has its own Special Purpose Vehicle to guarantee transparency for accounting and taxation. We use the most appropriate financial tools to achieve our aims without sacrificing clarity for the investor.

“Our ‘smart’ business model enables M&A Capital Fund to achieve premium returns in the medium term with the flexibility to react to the economic environment.”

Please talk about your experience.

MC: I have 35 years of wide-ranging experience in the international financial industry, with expertise including real estate, capital markets, portfolio management, and corporate and project financing throughout Europe.

This has included managing the Madrid branch of Goldschmit Financial Services, co-managing my own wealth management firm in Lugano, co-founding in 1999 Millennium Capital Partners a Luxembourg-based equity real estate investment firm, and having sourced, financed and managed 22 developments across Europe providing €500 million equity financing. I sold my stake in this firm in 2007 to set-up M&A Property Investors in 2009.

SE: I have more than two decades experience offering management services to European private equity firms. After starting with high-tech businesses I moved to found Euro Setup a sales and marketing firm which also advised on venture capital. From 2003-2006 I was vice president of the Luxembourg-based venture capital firm Mangrove Capital Partners, responsible for developing new funds.

I then moved into consultancy to the private equity industry before joining M&A Capital.

How do you see M&A Capital growing?

MC: Although headquartered in Luxembourg since 2001, our operational platform has been Switzerland over the last six years. However, that market has become less attractive and we felt the time was right to use our knowledge of the European market to invest more widely. We are focusing on northern Europe while being open for opportunities in growing central European countries. Our target is that our private equity investment will help support final capital expenditure of €1 billion by mid-2015. ◄

Unique investment high-end property M&A Capital Fund provides capital solutions in high-end residential and mixed residential/retail properties in growing European markets. They have over 100 trusted partners across Europe to advise and supervise. They identify high quality, high profitable, medium term investment possibilities to maximise returns and minimize risk.

Investments are highly transparent and guaranteed.

€5-10m The typical investment size is €5-10 million each, with the fund making many, relatively small bridging investments that are off the big players’ radars.

― Supplement ― ALFI Global Distribution Conference 2014 ― 29

Distribution Differing models, differing questions

Cross-border challenges in Europe’s new fund landscape ► Fund managers and management companies face evolving rules on passporting, private placements and inducements.

Text Hermann Beythan — Illustration Stina Fisch

T

he full implementation last July of the EU’s Alternative Investment Fund Managers Directive, the impending entry into force of Markets in Financial Instruments Directive II and Undertakings for the Collective Investment in Transferable Securities V Directive, and further regulatory changes further down the road leave the landscape for the fund industry in Europe in a state of permanent upheaval – with broad implications for the fund distribution process and for Luxembourg as its epicentre.

Currently a variety of distribution models exist: it can be carried out directly by a UCITS management company, by an AIFMD-authorised alternative fund manager (AIFM) or by a “super manco”, a management company authorised to manage both UCITS and alternative investment funds (AIF). Alternatively distributors or placement agents, or a global distributor with its own network may be used. It may, as well, be a combination of direct distribution and use of distributors.

The challenges differ from model to model.

PASSPORTING Typically, where marketing is within the EU or the European Economic Area, the UCITS or the AIFMD marketing passport would be used. Under the UCITS model, the marketing passport is applied for and obtained by the relevant UCITS and not the UCITS management company, and its benefits apply to distributors.

Under AIFMD it is not the AIF but the AIFM who obtains the marketing passport, even though such passport is granted in relation to one or several specific AIFs. There are good arguments that third-party distributors should benefit from the AIFM’s passporting, too.

SOURCE OF CONFUSION A source of confusion is the difference between regulatory requirements in relation to the product, i.e., the shares or units of the UCITS or the AIF, and the regulatory requirements relating to the service of marketing such product, e.g., in MiFID terms, the reception and transmission of orders for a financial instrument. While a distributor should be covered in relation to the product by the marketing pass-

30 ―

― Supplement ― ALFI Global Distribution Conference 2014

port obtained by the UCITS or the AIFM, this is not the case for services.

A distributor will need its own MiFID passport or to be established in the market in question to carry out services such as receiving and transmitting orders, or providing investment advice.

The difference between product and service passports gives rise to a great deal of confusion among managers, especially those based outside the EU.

GOLD-PLATING Already the apparent simplicity of the AIFMD passporting system is being somewhat undermined by EU member states “gold-plating” the rules. France requires the appointment of a centralising agent, a condition not mentioned in AIFMD. Germany requires additional paperwork and conducts closer scrutiny of a fund’s prospectus and marketing materials, and both countries, as well as Austria, require payment of a processing fee to the host country regulator. The same is true for Malta.

This means that fund promoters need to pay attention to any additional requirements in the markets they are targeting. In time the European Commission or European Securities and Markets Authority may get some of these measures struck down, but until then AIFMs who want to use passporting opportunities will have no choice but to comply.

CHANGE OF UCITS MANAGEMENT COMPANY, CHANGE OF AIFM One question that does not appear to have been addressed yet is what happens to the passporting of an AIF if its AIFM changes. Does the passport have to be renewed, or does it remain valid? Does the fund’s former AIFM have to relinquish its passport? And where does this leave distributors? AIFMD and the implementing measures are silent on his question.

For UCITS the situation is clear. The UCITS passport has been obtained by the UCITS itself and remains – subject to a change notification – valid if the UCITS management company is replaced.

ANCILLARY SERVICES Initially it appeared that ancillary services that UCITS management companies and AIFMs may perform, such as discretionary portfolio man-

“The AIFMD passporting system is being somewhat undermined

by EU member states ‘gold-plating’ the rules.”

Hermann Beythan Partner, Linklaters LLP Luxembourg

agement for individuals or institutions, could in the case of an AIFM not be passported, but an about-turn now seems to be underway. In the meantime managers can be caught between rules in different jurisdictions: for instance, the UK regulator believes ancillary services can be passported out of the jurisdiction, but you still need the target market to accept that they can be passported in.

BRANCHING OUT UCITS management companies that have established EU/EEA branches may wish to use such branches as well for AIFM core activities when they upgrade to super manco status. This will not be an automatic process, but will require the relevant notifications under the AIFMD regime.

PRIVATE PLACEMENT ISSUES Private placement distribution remains a thorny question. The basic principle of the AIFMD is that once AIFMs have access to the passport, they may no longer use distribution via national private placement regimes.

This already applies to EU AIFMs and the legislation stipulates that the private placement route will be closed off for foreign managers too in 2018, assuming that the passport is extended to them some time after July 2015.

Private placement regimes vary considerably from country to country. In France, for instance, foreign funds may not be distributed at all through private placements. For UCITS funds, private placement may be more attractive than one might imagine, since complying with all the UCITS rules (and there is gold-plating here,

too) can be burdensome and expensive, especially just for one or two institutional investors. There is, however, no uniform view or practice in the various EU/EEA jurisdictions in this respect.

A popular route to have investors subscribe to the shares or units of a given fund has been to rely on reverse solicitation. There is no doubt, however, that regulators are becoming increasingly restrictive on what they will allow under reverse solicitation rules and will be keeping a close watch on any attempts to circumvent the regulations.

However, it’s important that regulators continue to allow sensible pre-marketing, which is an essential part of the product development process. Fund promoters need to have the ability to test the market to see if there’s any interest before incurring the time and expense of creating a product and preparing to market it.

RESTRICTIONS ON INDUCEMENTS The final point managers need to consider is inducements, especially with MiFID II – and this applies to UCITS as well as AIFs. The stringent rules to come will require traditional players to review and re-assess the way they have operated in the past and it will require considerable adaptation from the alternative players that until recently may have operated in a virtually unregulated environment, and for which relationships with investors were a private matter. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 31

Distribution Regulatory passports are ever-more mainstream

“Europe will have to foster reciprocity.”

José-Benjamin Longrée Global Fund Distribution leader, PwC Luxembourg

building their cross-border capacities. Moreover, SAAAME players like China AMC, Bradesco (Brazil) and Old Mutual (South Africa) have set up funds in Luxembourg to benefit from the UCITS brand.

NEW FUND DISTRIBUTION BLOCKS WILL FORM

New frontiers in cross-border fund distribution ► Regional and global passports will only grow in importance.

Text José-Benjamin Longrée ― Illustration Stina Fisch

C

ross-border fund distribution is one of the fastest growing business models and has been a strong driver of growth in the asset management industry. Since 2001, the number of true cross-border funds has tripled reaching nearly 9,900 funds at year-end 2013 and accounting for over 75,000 product registrations globally, according to a PwC, LIM and Lipper analysis.

CROSS-BORDER BUSINESS HAS GONE MAINSTREAM Initially, cross-border fund distribution was limited to UCITS funds and Europe, but today alternative funds are becoming suitable for cross-border distribution and players from South America, Asia, Africa and the Middle East (SAAAME)

32 ―

countries are getting into the game. Cross-border distribution mainly stems from the UCITS Directive, which allows asset managers to sell their funds throughout Europe and beyond. In Hong Kong, for example, European UCITS account for 88% of funds authorised for distribution (67% are domiciled in Luxembourg), in terms of assets under management, reports the Securities and Futures Commission. UCITS structures are also widely accepted in Latin America. Local regulators in Chile, Peru and Colombia now permit pension funds to buy UCITS because they are deemed a safe investment.

While US promoters were the first ones to seize this opportunity, the creation of regional or global distribution platforms has become a standard in the industry. Franklin Templeton currently distributes cross-border funds in 50 different countries and fast-growing players like Carmignac Gestion and East Capital are also

― Supplement ― ALFI Global Distribution Conference 2014

Going forward, cross-border distribution will be fuelled by the development of regional fund distribution blocks. By 2020, there will be deeper regulatory integration within Greater China, including Hong Kong and Taiwan. ASEAN countries have taken great strides to create a structure that allows recognition of mutual funds in all countries of the region.

Moreover, in 2016, the APEC Asia Funds Passport initiative is set to launch its first fund, established by founding members Australia, New Zealand, Singapore and Korea.

Other countries, like Japan, will also come into the fold. We believe that such regional cross-border fund passporting regimes will then initiate interregional bilateral agreements, paving the way for an integrated passport at a quasi-global level and allowing asset managers to distribute products across Asia.

ALTERNATIVES ARE BECOMING SUITABLE FOR CROSS-BORDER DISTRIBUTION While mutual funds will remain the primary product for cross-border fund distribution, we expect alternative funds to join them. Building on the Alternative Investment Fund Managers Directive model, which allows non-EU alternative funds to be distributed in Europe, alternatives are establishing reciprocity standards between Europe and the rest of the world.

Consequently, they are now being regulated as cross-border distribution products, making them more suitable for broader distribution and changing the way investors view them.

As a distribution product, post-AIFMD alternative funds have become structures that fit more than ever in the Luxembourg jurisdiction and international gateway.

To remain competitive in the cross-border distribution business, Europe will have to foster reciprocity and mutual recognition with other regional blocks. The memorandum of understanding between the Association of the Luxembourg Fund Industry and the Asset Management Association of China, signed on 30 June 2014, is evidence that the Grand Duchy is deepening its collaboration with growing asset management markets to create mutually beneficial opportunities. ◄

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European regulations Target2 Securities

The best parameters ► How the EU’s draft Central Securities Depositories Regulation will potentially impact Luxembourg’s fund industry.

Text Gudrun Göbel ― Illustration Stina Fisch

T

he Central Securities Depositories (CSD) Regulation aims to address concerns about the systemic risks of a highly fragmented market. But it may have an unintended impact on the Luxembourg fund industry.

Although the EU believes domestic settlement is broadly safe, cross-border transactions are considered riskier, costlier and less efficient because settlement is currently regulated only at a national level – and that means there are significant differences between countries. There is no open market across Europe at the moment.

With the introduction of Target2 Securities (T2S), accelerating the trend towards cross-border interconnection of CSDs, the EU wants to harmonise the timing and conduct of securities settlement across national boundaries within the region.

The CSD Regulation is designed to make settlement across borders within the EU as easy, safe, efficient and cheap as it is in within individual countries. The main objectives are to ensure buyers and sellers receive their money on time, ensure a true internal market within the EU for the operation of CSDs, and to ensure the standards governing them are high.

Measures include making issuers and investors keep electronic records of all securities on CSDs and requiring CSDs to meet strict organisational and prudential standards, while paving the way for them to operate seamlessly across Europe.

To harmonise the timing and conduct of securities settlement, the proposed regulation requests that transactions should be settled within two days of a trade being agreed, or T+2. At the moment, most national regulations call for trades to be settled within two to three days, or T+3. Those failing to meet the deadline will suffer stiff penalties.

The background of bringing down settlement deadlines from T+3 to T+2 cuts risk by reducing the period of uncertainty over whether a

34 ―

counterparty will default or not. T+2 will also improve market efficiency and cut the risks of cross-border transactions and funding costs for investors.

This needs to be reviewed in the context of Luxembourg as the largest cross-border fund centre in the world with €2.7 trillion of assets under management.

First, it is important to state that the Association of the Luxembourg Fund Industry fully recognises the benefits which T+2 brings for any exchange traded financial instrument – including those held by the portfolios of investment funds.

Harmonised reduced settlement cycles and improved settlement discipline will be a substantial component of the risk management framework for investment managers and depositary banks: they will increase standardisation of settlement cycles, increasing market liquidity and investor protection. They will reduce market and settlement risk.

At the same time, one has to consider the limitations when the CSD Regulation is applied to non-exchange traded instruments held by investment funds, and to investor transactions in investment funds which are not traded on exchanges. Although T+2 will apply to most financial instruments and assets within the investment portfolios of Luxembourg UCITS and alternative investment funds, it might not be equally applicable to shares or units issued by the same UCITS and AIFs. There are a number of issues to consider.

monitored by the fund’s management company, the depositary bank or its transfer agent.

The shares or units are created or liquidated based on the order receipt and then cash is paid to or from the investor within the settlement period published in the prospectus.

For UCITS, this is often three or four days and in the case of AIFs with illiquid assets, settlement can be delayed several weeks or months.

T+2 is more difficult to apply for primary trading of Luxembourg UCITS and AIF shares than to standard exchange trades of financial instruments in the secondary markets. These standard exchange trades are entered into with a counterparty that holds the securities, which means that the market risk exists and vests with the holder.

Trading method and settlement risk: in Luxembourg, most trades in UCITS and AIFs are executed directly with the promoter or agents acting for funds as primary market trades – a major difference to many other European security classes. Many shares are created on demand by or through the fund’s agents. A trade submitted before the fund’s cut-off generates a trade using the next applicable NAV. The settlement risk in relation to this trade is

Valuation models: dealing cut-off and valuation models are crucial when determining the settlement period of the fund. For example, a fund with a cut-off around 18:00 CET on T, a valuation point at 22:00 CET on T and the NAV calculation performed by 10:00 CET on T+1 will only issue trade confirmations around midday on T+1, leaving limited time for investors to process payments by T+2 – even more so depending on the currencies used and the investors’ location.

― Supplement ― ALFI Global Distribution Conference 2014

Time zones: investors in Luxembourg-domiciled European investment funds reside within various time zones. They are able to accommodate T+3 in a timely manner. Amending the settlement cycles for these funds to T+2 poses a risk because transaction confirmations are often not produced before T+1, where investors handle their internal reconciliation before instructing payments.

A move to T+2 could therefore damage the attractiveness of European funds to Central and Eastern European and Asian investors who might struggle to meet the new deadline. This could be fatal especially during a time when Asian countries consider local fund passporting regimes of their own.

“This could be fatal especially during a time when Asian countries consider local fund passporting regimes of their own.”

Gudrun Göbel Chief operating officer, RBS Luxembourg

currencies different to the fund’s denomination. There are currencies which have to be instructed before value date – adding an extra day to transaction settlement.

This combined with an investor based in eastern time zones can mean more than two days are required after trade confirmations have been received. To determine which settlement is most appropriate and risk sensitive requires more than a blanket approach in some cases.

CONCLUSION

Underlying portfolio and liquidity: investment funds with globally diversified investment policy offer a wide range of contractual settlement periods, varying from T+0 to T+4 or more.

The movement to T+2 might help investment managers handle liquidity of the fund overall because they receive payments earlier from investors. But at the same time they will face pressure on liquidity because they have to pay shareholders earlier for redemptions. AIFs

often have customised models to accommodate the liquidity of the underlying securities.

This can require subscriptions to be paid on or before trade date. However, the settlement of redemption orders can be delayed by several weeks or months – so T+2 would not work for most of these funds.

Currencies: Luxembourg-domiciled funds are denominated in many different currencies. They also offer hedged share classes in

One must take into account all the parameters facing an investment fund to determine the most appropriate and risk-sensitive settlement period: trading method, settlement risk, valuation model, underlying portfolio, liquidity, currencies and the location of the investors. ALFI submitted a response to the European Securities and Markets Authority consultation on CSD regulation to raise awareness and to ensure investment managers will continue to be able to choose the parameters of their funds to suit investors’ best interests. This should help limit the systemic risk where it exists and continue to foster global distribution growing the Luxembourg UCITS and AIF brands. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 35

Global trends Keeping pace with evolving client demands

Adapting to new distribution demands ► Why asset managers must reassess their distribution strategies to meet shifting investor needs in both new and existing markets.

Text Martin Dobbins ― Illustration Stina Fisch

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sset managers are feeling positive about the future.

State Street research, based on a global survey of 300 senior executives at asset management firms, reveals that 79% are optimistic about the opportunities for growth over the next 12 months (that is according to the State Street 2014 Asset Manager Survey, conducted by FT Remark, in April and May 2014).

That optimism chimes with predictions on how the size of the industry will change over the coming years. PwC, for example, forecasts that worldwide assets under management will rise to $101.7 trillion by 2020, up from $63.9 trillion today in its Asset Management 2020: A Brave New World report.

However, this optimism also comes with a caveat. Client needs are evolving, and asset managers need to keep pace by developing innovative and relevant new products.

Investors increasingly want to achieve a specific outcome. Very often, this will require asset managers to develop multi-asset investment solutions that are focused on absolute rather than relative returns. This blend of different asset types can also help mitigate risk.

State Street’s research shows that 67% of asset managers believe multi-asset solutions will be the investment strategy most likely to drive their growth over the next three years.

As they focus on creating these products, asset managers must simultaneously build effective distribution networks to take them to clients.

This challenge has two dimensions: they need to reach both new markets and untapped segments in markets where they already operate.

Fifty-seven percent of asset managers cite distribution as one of the biggest challenges when launching new products in existing markets. And 55% report that distribution challenges are deterring investment in otherwise highly attractive new markets.

NAVIGATING NEW MARKETS These new markets continue to be a central plank of many asset managers’ growth strategies. Forty-seven percent plan to enter new countries or regions over the next three years.

To do so, they will need to acquire specialist expertise in local regulatory complexities and

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― Supplement ― ALFI Global Distribution Conference 2014

the differing nuances of culture and customer demand. One way to do this is to partner with local firms that can provide this knowledge and experience.

This partnership approach will be the preferred option for many asset managers. Almost a third (32%) of respondents plan to expand their number of distribution channels. The figure rises to 47% for Asia Pacific respondents, which is not surprising given the diversity of its individual country markets. Choosing the right domicile for investment products will be an important part of the equation. This is one explanation for the continuing growth of international hubs, such as Luxembourg and Dublin, for the distribution of cross-border funds. Funds benefit from the credibility that these centres have with clients and intermediaries all around the world.

As asset managers develop new investment solutions – or the building blocks with which intermediaries will construct such solutions – finding the right domicile will maximise the opportunity to manufacture centrally, and minimise the need to create specific product offerings for each new market.

For many asset managers, this model of central manufacturing and local distribution represents the best route to international growth.

But strong relationships with key intermediaries will be vital; particularly the large global banks that are increasingly moving to global lists of recommended funds.

SERVING BOTH ENDS OF THE AGE SPECTRUM Asset managers will not only compete for new geographies, but also for new customer segments in their existing markets. Seventy-two percent see these markets as the biggest driver of growth over the coming three years.

The next big opportunity for asset managers comes from changes in the retirement space, as the shift to defined contribution compels people to take more control over their pension investments. Firms must work with their intermediaries to make their products accessible for those approaching and in retirement, and provide the information and guidance to help them make the right investment decisions. The so-called decumulation phase is also a focus for product innovation.

“Asset managers face a very different challenge when it comes to younger investors.”

Martin Dobbins Managing director and country head, State Street Luxembourg

Asset managers face a very different challenge when it comes to younger investors.

This includes the “millennials” who will come to represent the largest chunk of the market.

Targeting these investors will require a new approach that recognises the expectation of a sophisticated service delivered via digital channels. Digital tools will enable asset managers to connect directly with this younger demographic. Such tools can offer greater transparency and control, as well as potential cost efficiencies.

Asset managers must also recognise that these tools serve a dual purpose: as an opportunity to attract new customers and as a response to the potential competitive threat of major tech brands entering the sector. Google, Facebook and others have all been tipped to follow in the footsteps of leading Chinese social media and technology firms, such as Tencent, and enter the financial services sector, as the

Financial Times reported in its April 2014 article, “Fund managers fret as Facebook pushes into financial services”.

Building a strong brand will become increasingly important as well, as firms target a new generation of customers with no loyalty to – or even knowledge of – traditional financial services leaders.

However, whether asset managers are targeting young customers or a more mature audience, addressing the evolving distribution challenge will remain paramount, with new products requiring local support and intermediary buy-in.

RISING TO THE CHALLENGE Successfully tackling these distribution challenges is the key to unlocking global growth.

Clients across the world are making similar demands of the sector – in particular for multi-

asset investment solutions – but the intricacies of local regulatory requirements, market structures and distribution platforms present a complex challenge.

Asset managers must also be able to clearly and simply articulate how a solution will help a client meet their specific objectives, however complex that solution might be to deliver internally.

Our survey respondents identified a capability gap within the industry here, with 74% agreeing that few asset managers are currently equipped to thrive when offering multi-asset solutions. The majority say some level of investment is needed in both skills training (65%) and new talent (54%) to close this gap.

They also recognise a need for new tools to deliver the transparency clients increasingly demand.

The fundamental requirement, however, is a renewed focus on distribution. Asset managers must determine how new distribution platforms and technologies can better serve a broader range of customers in existing markets. At the same time, they must be able to roll out the products they develop across multiple markets while meeting localised investor needs.

The all-important decision is whether to build a global footprint consisting of a presence in every new market, or a series of strategic partnerships with trusted local operators. These distribution demands promise to be testing, but those asset managers able to adapt to this new environment will reap the rewards. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 37

Investor protection Are new rules putting affordable advice out of reach?

“Where the investor will be left to fend for himself.”

Christopher Stuart-Sinclair Director, Deloitte, Luxembourg

Ensuring enlightened choices ► Tacitus said: “Rome created a desert and called it peace.”

Could Europe be doing the same in the name of investor protection?

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Text Christopher Stuart-Sinclair ― Illustration Stina Fisch

ontrary to some expectations, keys parts of Europe’s legislative programme in the realms of investor protection and transparency were agreed before the end of the previous European Parliament. These included the second Markets in Financial Instruments Directive (MiFID II) and Packaged Retail Investment and Insurance-based Investment Products (PRIIPs) regulations.

For those parts of MiFID II that deal with what might be called the “client interface” – i.e., the interaction between financial sector companies and the end retail investor – are certainly the fruit of genuine and sincere concern for client wellbeing. They may be broadly divided into two generic categories: those aimed at protect-

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ing the investor; and those aimed at promoting investor choice with a “level playing field” that puts competing financial products on an even footing that allows meaningful comparison.

MiFID II introduces the notion that to enable distribution, it is no longer acceptable to pay retrocessions – or as some would say, inducements – to an advisor who claims independence in the provision of his services. Going forward, that “advice” should be remunerated directly by the recipient. The idea is coherent, and the potential conflict of interest it seeks to address evident. What it fails to tackle is the vexed question as to how the supply chain, essential in the provision of adequate choice, is to be financed, and how to avoid effectively cutting off from all forms of guidance and advice a whole raft of the investing population that falls below a

― Supplement ― ALFI Global Distribution Conference 2014

certain threshold of total net worth. In addition, the whole question of inducements is an emotive one, and there are already concerns being expressed that in formulating “level II” guidance there is a danger of eventually “goldplating” the directive.

MiFID II also seeks to protect the investor from the purchase of inappropriate products by restricting access to “complex” UCITS – and introducing an appropriateness test for them – thereby at a stroke breaking the unique quality of the UCITS and introducing an element of “the legislator knows best” as to investment choice. The terms under which a UCITS is deemed to be complex are also controversial, with some of the products likely to be included in the category in fact less liable to unpredictable fluctuation than others not so classified.

To assist the investor in making decisions PRIIPs introduces a “key investor information” type document across a broader spectrum of products, including life insurance “with benefits”, certain banking products, and alternative investment funds distributed to retail investors.

The object of this document is to achieve transparency essentially around questions of risk and cost. The ambition is that with this document an investor can make an informed choice across multiple investment opportunities.

The question now remains what the overall effect of these measures will be. Will the increased transparency lead to meaningful comparison, the ban on inducements lead to better advice, and the effective banning of investors from certain products “unassisted” increase investor protection?

Or will available choice diminish, investors cut off from guidance make inappropriate decisions for themselves, and in front of the plethora of poorly understood detail merely fall back on the “simple option” and leave investible savings languishing in unproductive savings accounts, where as much as 43% of European personal savings are estimated to be?

Certainly these measures will have an impact.

By definition, since it stretches across Europe that impact will be towards a level playing field.

But will it be a level playing field of rich investment opportunity, or will it be a desert, sparse in choice where the investor will be left to fend for himself? More work may yet be required before we can safely say that we have found the right formula to ensure enlightened choice as well as protection. ◄

E R O L G P R X U E O B M E X U L

Training in Investment Funds IFBL / ALFI TRAINING – NEW MODULES THIS SEMESTER !

9th October: M2 Insights into IFRS - IFRS and their use in Investment funds, Luxembourg GAAP Vs. IFRS, applying IFRS standards and disclosures, hot issues, classification and measurement issues for IFRS. 15th October: M2 Depositary Bank in Practice - Roles, responsibilities, interactions, oversight of fund and counterparts, collateral management, crisis management and specifics of master feeder structures.

24th October: M1 UCITS and Non-UCITS ManCos Explanation of the role, responsibilities, authorization, passport and programme of activities for UCITS and AIF management companies incl. concrete examples.

10th (am) & 18th (am) November: M2 AML for Funds Applied understanding of AML and industry Guidelines, roles and responsibilities, the risk based approach, due diligence, vigilance and the application of AML to third and outsourced partners.

3rd December: NAV Errors & Breaches-Circular 02/77 NAV errors and investment rule breaches are explained before describing the steps required to correct them.

8th December: M1 Intro to Fund Compliance – Professional ethics, governance and rules of conduct in funds and ManCos. Market abuse, insider trading, customer complaints handling, conflict of interest, data and confidentiality rules.

Also coming soon: 14th November: Understanding AIFMD - The directive and its environment, objective, impact and scope. Passports, conduct of business, delegation, transparency provisions and implementation.

Programmes: Private Equity and Real Estate Investment Funds Professional – Both programmes will be delivered in full during the second semester.

Full information is available on the IFBL website and from the IFBL Customer Service team (Tel: 46 50 16-1 / e-mail customer@ifbl.lu).

Available in bookshops, newsagents and online at www.maisonmoderne.lu

Indirect investments How institutional investors increasingly look at external vehicles

What changed post-crisis? ► What are institutional investors looking for when they make indirect investments through funds or securitisation vehicles?

Text Christian Behring — Illustration Stina Fisch

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n its early days the fund industry catered almost exclusively to retail investors. These were predominantly individuals looking for higher yielding alternatives to the traditional savings products offered by their banks.

Expectations towards product development were relatively low and the challenges of a successful distribution effort were well understood.

During the last 20 to 25 years the industry saw institutional investors, such as insurance companies, public and private pension funds and even banks, emerge as a new and rapidly growing client group. This group, however, is not homogenous and their driving motivation to invest indirectly (through funds or securitisation vehicles) rather than directly has shifted over time and become ever more complex.

INVESTOR CONSIDERATIONS Operational aspects are important, besides tax (e.g., the treatment of interest vs. capital gains) and accounting considerations (e.g., consolidation rules and different jurisdictional GAAP standards). The investor needs to assess whether there is a capacity to service and monitor the investments in-house or if it is more efficient to outsource these, especially in the case of more complex and illiquid assets; he would then need to compare the costs of the different solutions.

Meanwhile, an external solution will have to ensure that the same reporting standards the investor would utilise for his in-house investments are met. In the case of more complex and illiquid asset classes, outsourcing can be the only way for investors to get access to this asset class, and thus to diversify their investment portfolio. This is particularly true for smaller entities operating within the framework of a larger group, which may gain access to pooled investments through an external vehicle.

Finally, regulatory aspects also have an effect in the decision-making process of institutional investors. This is so because these rules can prohibit the direct holding of certain asset types. Hence, in order to make said assets permissible, a repackaging of these may be necessary (e.g., insurance companies investing into corporate loans either through securitisation or fund vehicles).

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― Supplement ― ALFI Global Distribution Conference 2014

POST-FINANCIAL CRISIS The trend towards indirect investments by institutional investors gained momentum in the last ten years up until the global financial crisis of 2008 and 2009. Since then, prominent cases like the Madoff scandal, the bankruptcy of Lehman Brothers, and the gating and liquidation of many hedge funds have all heightened the investors’ focus on certain aspects concerning (“meaningful”) risk management, valuation policies, fund governance and asset protection.

As a consequence, institutional investors have begun to scrutinise not only the key portfolio manager involved with a fund or securitisation product, but also the supporting control mechanism, as well as the operational and risk management infrastructure which must take into account risks stemming from fraud, counterparty and liquidity risk. Investors increasingly demand that qualified directors represent their interests on the boards of investment vehicles, making sure to adhere to proper conflict of interest policies. Moreover, the jurisdiction in which a fund or securitisation vehicle is incorporated matters more and more – both from a sovereign credit risk perspective, as well as pertaining to the limitations imposed by the jurisdictional tax, legal and judicial system. Not surprisingly, there has been a growing preference for onshore jurisdictions rather than offshore ones. However it is noteworthy that not all onshore jurisdictions are created equal.

Over the course of the past years, many factors were thought to have caused the financial crisis; in our view, the trend towards indirect investments, particularly in illiquid product categories such as real estate, mortgages and corporate loans in conjunction with implicit short-term leverages, are common denominators worth emphasising.

Further to the above, the central pillars of new financial regulations, which are being rolled out today as a direct response to the crisis, seem to support this view. Both in the US and Europe, the principal goal is to ban, limit or further regulate indirect investments by institutional investors, with an emphasis on banks and insurance companies.

One of the central themes of the new set of regulations, commonly know as the “Volker rule”, is to prohibit US banks from investing in “funds” whose definition is sufficiently broad to include hedge funds, private equity funds,

“The underlying trend has not only remained intact but has in fact continued to grow strongly through the crisis.”

Christian Behring Partner, Behring, Khan & Co.

as well as certain securitisations such as collateralised loan obligations.

The European legislator’s core mission, expressed through the Alternative Investment Fund Managers Directive, has been to extend the scope of a mutual fund type of regulation to all types of funds that are primarily sold to institutional investors, regardless of their specific structure or underlying asset class. AIFMD key concepts, such as the requirement for risk retention for securitisation investments or the appointment of a depository, are directly aimed to remedy conflicts of interest and the potential of fraud, something that less transparent and complex indirect investment structures inherently are more prone to than simple direct investments.

Other regulatory “innovations” such as EMIR, FATCA and Solvency II, amongst others, either contain new reporting and transparency rules to fund and securitisation rules or extend existing rules for the first time to all types of investment vehicles.

Interestingly enough, while these developments are reshaping in many aspects the ways in which institutional investors invest indirectly, the underlying trend has not only remained intact but has in fact continued to grow strongly through the crisis.

In recent years, both in Europe and the US, closed-ended fund structures have seen an

exponential growth and are increasingly expected to fill the funding gap that is left behind by post-crisis undercapitalised or still deleveraging banks. Additionally, as Europe still considers the securitisation market as one of the principal villains of the crisis, running off asset backed securities and CLO structures are being replaced with regulated loan funds.

In times of zero interest rates, and in search of earning a complexity and illiquidity premium, there will remain an unbroken institutional demand for the underlying assets of these structures.

CONCLUSION The continuing growth and demand for indirect investment opportunities, combined with the regulatory tsunami that is engulfing the fund industry’s participants (including its investors), sets very high standards for an effective product development and successful distribution effort.

Professionals involved in these activities not only need to understand the multi-faceted requirements and objectives of the investor universe, but they must also have, at a very minimum, a general knowledge about the market, operational, regulatory, tax, accounting and reporting requirements. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 41

Mutual recognition Is the “Asian UCITS” being built today?

“Asset managers are optimistic about the future Asian market for their UCITS and Asian products.”

Michael Ferguson EMEIA regulated funds & Luxembourg asset management leader, EY

Asia’s evolving investment fund environment ► Several Asian cross-border passports are under development.

T

Text Michael Ferguson ― Illustration Stina Fisch

he Hong Kong and mainland Chinese authorities are reaching the final stages of their discussions on a mutual fund recognition platform.

While China remains the key target market for many managers, there are also two other Asia region mutual fund recognition schemes being discussed. What has been proposed?

The Hong Kong and mainland China mutual recognition (HKCMR) regime would apply to Securities and Futures Commission (SFC) authorised funds domiciled in Hong Kong and China Securities Regulatory Commission (CSRC) authorised funds domiciled in China. Under the HKCMR, funds can obtain authorisation in each other’s jurisdiction. The authorisation would not be automatic, but the process will be streamlined.

The Asia Region Funds Passport (ARFP) is seen as a near-true Asia-Pacific cross-border arrangement with Australia, Korea, New Zea-

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land and Singapore participating. The market has been interpreting it as the Asian equivalent of the European UCITS with passport status granted to eligible funds operating in member countries.

The ASEAN Collective Investment Scheme (CIS) Framework (ACIS) implements a passport for cross-border marketing of CIS meeting common standards, some of which can be compared to UCITS requirements, designed to ensure that retail funds are managed according to industry good practices. The framework initially includes Singapore, Malaysia and Thailand. The participation of the Philippines, Vietnam and Indonesia is predicted for the future, transforming ACIS into a true ASEAN market.

Taken together, the three proposed regimes give global and Asian asset managers access to the key Asia-Pacific fund markets. The HKCMR would bring together China’s enormous market potential and Hong Kong’s fund centre. To many the HKCMR is seen as a gateway to Chi-

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nese investors seeking a wider range of investment opportunities. Hong Kong will offer mainland China investors more diversity and choice of investments.

Chinese managers see the HKCMR as an opportunity to further promote their “local” products in international markets via Hong Kong.

Their Hong Kong asset management subsidiaries will provide a platform for onshore Chinese managers to promote and distribute their onshore products.

Singapore is also likely to benefit. It has a well-developed fund industry, and is a member of both of the Asia passport initiatives.

These new cross-border schemes and arrangements may potentially challenge the current dominant distribution position of UCITS in the Asian region. However, key questions remain about how these schemes will operate in practice, and what the restrictions and limitations will be and whether there is a real appetite for cross-border international products in Asia, particularly among Chinese investors.

UCITS is a recognised global brand with significant marketshare in Asia, underpinned by a long and well established and understood regulatory framework. So notwithstanding these developments, the view among managers is that UCITS will continue to play a leading role in Asia.

The support of the Chinese, Hong Kong and Singaporean regulatory authorities is key to converting the new schemes from concept into reality. Looking forward, schemes may be extended over the medium term. This could start with the extension of the HKCMR to funds from other countries, such as Luxembourg UCITS. A much longer-term development may see the schemes being merged into a single Asian mutual recognition or passport regime.

These proposed schemes have been welcomed by both Asian and global managers as opportunities to enter new markets. However, managers are also aware that new market entrants mean greater competition in their local markets.

Overall, asset managers are optimistic about the future Asian market for their UCITS and Asian products: they believe that Asian markets will continue to grow and the schemes will improve their market access, increase the diversity of investment products available in Asia, and make the industry more resilient. ◄

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Pension reform Implications for funds growth, mix and flows

Lessons from Down Under ► Compulsory defined contribution schemes, like Australia’s, are increasingly popular.

Text Nick Sherry ― Illustration Stina Fisch

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ost countries across the globe are undertaking or attempting major pension reform. This is fundamentally being driven by a demographic-economic-social revolution.

People are living longer and healthier lives; birth rates are steadily declining, dropping below replacement rate.

In advanced economies, against a back drop of higher and often unsustainable government debt to GDP, the defined benefit promise is contracting by a mix of a lower pension payment, higher retirement ages and the search for higher investment returns, and a shift from defined benefit to defined contribution.

Even where the defined benefit promise is more limited, in countries such as the UK and US, open defined benefit funds for public sector employees are facing strong pressure to reduce the benefit and/or close.

New defined contribution systems are emerging, such as New Zealand with Kiwi Saver and the UK with auto enrolment. A few made a significant shift more than 25 years ago: for example, Switzerland and Australia with mandatory superannuation.

AUSTRALIA’S MODEL Indeed Australia has made very major policy reform to its retirement income system – both to “Pillar I”, the basic state pension, and mandatory defined contribution at “Pillar II” – with enormous impact on the fund management and investment sector.

In summary, a mandatory three percent defined contribution charge commenced in 1987 for all employees earning more than A$450 a month. This was increased in 1992 from three percent up to nine percent by 2002.

In 2012 it commenced increasing in increments to 12% by 2020.

There is a further average voluntary employee contribution of between three percent and 3.5%. Over the period almost all generous

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defined benefit funds, often underfunded, in both the private and public sector were closed to new employees.

The Pillar II superannuation system in Australia has grown from A$250 billion 22 years ago to A$1.8 trillion today. It is the fourth largest pension system in the world for a country with 23 million people, now at more than 105% of GDP and growing at an annual rate of ten percent with more than 20% of assets invested offshore and growing fast.

Eighty-five percent of assets are in defined contribution plans with 98% of the members. Given the sector’s size and growth it has a profound impact in Australia and increasingly globally.

Sectors such as infrastructure, where about 12% of funds are invested, have been stimulated.

EVOLVING MARKET NEEDS Today, in many developing economies social family structures that once provided support for the aged are modifying with economic growth and the need for a pension benefit.

Many are or are considering establishing modest basic protection via state operated entities sometimes with a defined contribution component. Chile, China and India are a few examples.

The investment assets of pension funds are long term and diversified. Against this backdrop of change, profound impacts on a country and the global financial system are taking place and will continue.

These include, firstly, modest faster asset growth than the broader financial system. In Australia’s case assets are expected to grow from A$250 million to A$1.9 trillion – over 100% of GDP – in 20 years and projected to double to A$3-4 trillion over the next 10 years and double again to A$6-7 trillion in 20 years.

Secondly, in some countries, expediential growth due to phasing in arrangements and a period of higher economic and population growth. In China enterprise annuity assets are expected to grow from 200 billion yuan today to four trillion yuan in 2020, and in India retire-

“It has a profound impact in Australia and increasingly globally.”

Nick Sherry Senior adviser, Citigroup, Sydney

ment funds are expected to grow from 1.2 billion rupees today to 8.4 billion rupees in 2025.

Thirdly, diversification beyond a country’s borders. In Japan, that means allowing pension fund assets to invest to a greater degree in equities and internationally. In Chile and Australia, a greater flow of funds offshore.

Other impacts include: higher levels of accountability, governance and transparency; many countries and their funds developing socially responsible investment requirements to varying degrees; greater need for global delivery platforms and supervision including

mutual recognition to simplify transactions; and greater accountability and effective competition of fees.

Finally, there is the need for government to fund infrastructure with less reliance on direct government ownership and/or operation. In some cases the privatisation of existing infrastructure to lower debt and/or assist in raising capital for new infrastructure.

The changing world of pensions is and will have a profound impact on the growth of funds, where they are located, the mix of investments and where and from they flow. ◄

― Supplement ― ALFI Global Distribution Conference 2014 ― 45

Picture report ALFI Spring Conference 2014 03

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ALFI also organises, each March, another major international conference which attracts hundreds of professionals from around the world. Here are a few highlights.

Photos Luc Deflorenne 01. Pierre Gramegna (Luxembourg minister of finance) 02. Charles Muller (KPMG) 03. Mark Entin (Russian ambassador to the Grand Duchy) 04. Kerry Jane Nichol (EY)

05. Eleanor de Rosmorduc (Luxembourg for Finance) 06. Mauro Baratta (McKay Williams LLP) 07. Nicolas Mackel (LFF) and Pervaiz Panjwani (Citi Group) 08. Carla Rosen Vacher (US embassy) and Theresa Hamacher (NICSA)

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― Supplement ― ALFI Global Distribution Conference 2014

Marie-Jeanne Chèvremont-Lorenzini photographiée à son domicile par Julien Becker.

Marie-Jeanne Chèvremont-Lorenzini lit Paperjam depuis 2000. Merci

Maison Moderne célèbre 20 ans d’édition indépendante et 200.000 lecteurs. Découvrez 20 ans d’archives sur www.maisonmoderne.lu/20

Picture report ALFI Spring Conference 2014 09

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09. Serge Weyland (Banque internationale à Luxembourg) and Keith Burman (ManagementPlus)

13. Michael Ferguson (EY) and Alexa Coates (HSBC)

10. Thomas Flammant (British embassy)

15. Jeannette Vaude-Perrin (Luther)

11. Bob Kneip (Kneip)

16. Marc Saluzzi (ALFI chairman) and Pierre Gramegna (minister of finance)

12. Julien Zimmer (DZ Privat Bank)

14. Valérie Arnold (PwC)

17. Anouk Agnès (ALFI)

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About Credits and index

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Agnès Anouk 48 ALFI 6, 22, 24, 32, 48 US embassy 46 British embassy 48 Arnold Valérie 48 Asset Management Association of China 32 Atoz 11

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ALFI Global Distribution Conference 2014 in association with NICSA & HKIFA COVER Illustrations Stina Fisch

Banque Havilland 15 Baratta Mauro 46 Behring Christian 40 Behring, Khan & Co. 40 Beythan Hermann 30 BGL BNP Paribas 4 Bil 46 Bradesco 32 Burman Keith 46

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Stina Fisch is an illustrator who passionately handles clear lines, formal reduction, humour and seduction.

If an image is the visualisation of a thought, then drawing is thinking.

With a slight retro touch, the visual vocabulary of Stina is playful and poetic.

Caceis 33 Carmignac Gestion 32 Casa4Funds 27 China AMC 32 China Securities Regulatory Commission 42 Citi Group 46 Clearstream 48 Coates Alexa 48 CSSF 3, 6 de Rosmorduc Eleanor 46

D

www.stinafisch.com

Debruyne Lieven Deloitte Dimmer Gaëlle Dobbins Martin

Write to PO Box 728 L-2017 Luxembourg Offices 10, rue des Gaulois, LuxembourgBonnevoie ISSN 1992-4275 Web www.maisonmoderne.lu Founder and CEO Mike Koedinger Administrative and financial director Étienne Velasti

Publisher Phone (+352) 29 66 18-1 Fax (+352) 29 66 19 E-mail publishing@maisonmoderne.lu Editorial staff press@paperjam.lu Web www.paperjam.lu Publisher Mike Koedinger Editorial director, editor in chief Jean-Michel Gaudron (-48) jean-michel.gaudron@maisonmoderne.lu Staff editor Aaron Grunwald Illustrations Stina Fisch Proofreading Muriel Dietsch, Sarah Lambolez

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East Capital 32 Eckes Werner 48 EFA 48 Entin Mark 46 European Commission 24, 30 European Securities and Markets Authority 24, 30, 34 EY 2, 42, 46, 48

F Facebook 36 Ferguson Michael 42, 48 Financial Stability Oversight Council 8 Financial Times 36 Flammant Thomas 48 Franklin Templeton 32

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L Lehman Brothers 8, 40 LFF 46 Linklaters 30 Longrée José-Benjamin 32 LTCO 49 Luther 48 Luxembourg for Finance 46 LuxFLAG 3, 22

M Mackel Nicolas 46 ManagementPlus 46 McKay Williams 46 Michels Lucien 48 Muller Charles 24, 46 M&A Fund Capital 28, 29

N Nicsa

8, 46

O OECD 3 Old Mutual 32

P Panjwani Pervaiz Pons Bernard Pure Capital PwC

46 26 26 17, 32, 36, 48

R RBS 34 Rosen-Vacher Carla 46

S Saluzzi Marc 6, 48 Seale Thomas 22 Securities and Exchange Commission 8 Securities and Futures Commission 10, 32, 42 Sherry Nick 44 Société Générale Bank & Trust 39 State Street 36 Stuart-Sinclair Christopher 38

T Tencent 36

G Göbel Gudrun 34 Google 36 Gramegna Pierre 3, 46, 48

H

EU Ecolabel : FI/11/001

Design

10 9, 38 48 36

Kneip 48 Kneip Bob 48 KPMG 22, 24, 46, 52 Kurt Salmon 25

Hamacher Theresa 8, 46 Hong Kong Investment Funds Association 10 HSBC 48

V Vaude-Perrin Jeannette

W Weyland Serge

46

Z Zimmer Julien

I

48

48

IFBL 43

J Jane Nichol Kerry

46

In this Index are all companies, people and advertisers mentioned in this special edition.

50 ―

― Supplement ― ALFI Global Distribution Conference 2014

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