Joanne Frearson looks at how new domestic and EU regulation will boost developments in Luxembourg's fund industry
Fund management companies in Luxembourg are looking to try to cash in on a raft of new legislation that is coming their way from both within the country and the EU.
New regulatory proposals are set to increase the distribution of funds from Luxembourg to other countries. In addition, draft bills are in the pipeline to increase the investment parameters of Ucits funds and improve the environment for venture capital funds.
The main regulation issue of recent times has been the broadening of the Ucits directive. This is particularly important because approximately 62% of Luxembourg-domiciled investment funds are Ucits compliant.
This is expected to be passed at the end of the year. The new regulations in the pipeline would allow investment not only in listed shares and bonds, but also in other funds (funds of funds), bank deposits, money market instruments and financial derivatives. These derivatives include investment in standardised option and futures contracts dealt on regulated exchanges as well as over-the-counter derivatives.
The proposals also contain rules that apply to the recognition of investment management techniques that are widely and successfully employed, such as 'tracking' an index. For example, investing in securities of different issuers, according to the same weighting as an official index or securities lending.
Groups are currently gearing up to apply the new Ucits proposals when they are passed. Bill Lockwood, director of Franklin Templeton Luxembourg, says: 'The proposals will effectively broaden our offerings in Luxembourg and once the Ucits directive has passed we will look and see how we can efficiently use the legislation for investors.'
Mark Dickson, global head of product development at HSBC Asset Management, agrees it will have a positive effect on client offerings: 'It is positive for the industry ' anything that gives us more flexibility is welcomed.'
Funds domiciled in Luxembourg are distributed mainly in Germany, Italy, France, Austria, Spain, Belgium, the United Kingdom, Sweden and the Netherlands.
Hoffmann says: 'The main interest currently in Luxembourg is from US fund managers to launch cross border funds targeting Germany, Italy, Spain, France and the Benelux. The American market is saturated and companies are looking elsewhere to target their products.
'In particular, there is continued interest in companies domiciling Luxembourg funds to be sold into Germany. There is lots of interest in Germany because of new distribution channels as funds can be sold through intermediaries and the internet.'
Boudewijn Hoogenraad, head of investment communications at JP Morgan Fleming, explains that the distribution channel varies between countries. In Germany, France and the UK, funds are mainly distributed through intermediaries. Otherwise it is through third-party distributors such as banks, white labelled funds, or funds of funds.
However, European countries are not the only areas companies distribute their funds to. JP Morgan Fleming not only distributes its funds to Europe, but also to Latin America, the Middle East and Hong Kong.
In addition, JP Morgan Fleming has recently transferred 15 of its Hong Kong Unit Trusts to Luxembourg. This transfer has taken place because it had two similar fund ranges that were aimed at offshore investors, therefore, rationalising the product range.
Hoogenraad believes the internet will become a more important tool in the distribution of funds out of Luxembourg in the future. As in the US, the internet is becoming an important tool in distributing funds in Europe. JP Morgan Fleming is adding to its website and is working on giving clients the ability to access their own portfolios.
HSBC sells its core product range to Hong Kong, Singapore and to certain clients in the Americas as well as Europe. Dickson says: 'We try and sell to as many countries as possible and also have a presence in these areas.'
The company sells from Luxembourg because funds registered in the country are Ucits qualifying and most competitor products are based there.
HSBC has three Ucits-registered SICAVs in Luxembourg. The first is the core product which has 26 sub funds. It includes both equity and fixed interest products. The second SICAV is an Islamic fund mainly sold into the Middle East, Hong Kong and Singapore and the third is a segregated portfolio for private clients. It is not open for sale to the retail markets.
HSBC also has two other SICAVs in Luxembourg inherited from French Asset Management after its takeover in June 2000. It is presently reviewing how it should incorporate those. Dickson says: 'We are considering putting them in our core funds or changing their focus.'
HSBC's distribution is through intermediaries, its banking network and through third-party distributors such as funds of funds. Increasingly, sales are through fund supermarkets across Europe.
Presently, equity funds are the most popular asset class in Luxembourg, with over 50% of new funds approved in 2000 equity funds. Impending regulation is set to increase this figure in Luxembourg.
New regulation in the pipeline concerns venture capital and private equity. Hoffmann says there is a draft bill on venture capital and private equity that is hoped will be put forward to the regulatory bodies at the end of the year. The new law is set to change the tax status and facilitate the authorisation procedure for private equity and venture funds.
It aims to change the way investors are defined. Rather than look at the investor's financial situation, the bill hopes to look at the manager's qualifications. This will make it easier to attract investors in this asset class.
Another issue circulating in Luxembourg concerns the cross-border sale of pension funds. In June 1999, open-ended pension savings companies (SEPCAV) and pension savings associations (ASSEP) were established to provide the appropriate legal framework for pension funds.
The new legislation was intended to facilitate the cross border sale of pension products. However, the majority of pensions are still focused on the domestic market. Only five pension funds have been created following the regulations. Hoffman says: 'There is no tax harmonisation for pension schemes in Europe, we do not expect a big boom as we are only adjusting to the new legislation.'
The European Court of Justice is set to challenge cross border schemes that are not compatible with the Treaty of Rome. These types of schemes make it unfair for employees who move to a different country to work as they are forced to pay higher taxes.
Despite the fact the scheme has been slow to take off, Luxembourg remains an important centre for companies to invest their global pension scheme assets.
Hoffman adds: 'Pension schemes are being set up around the world and are being invested in Luxembourg-based funds.'
Fleming invests its pension schemes in its Luxembourg-based funds. Hoogenraad says: 'There is a flourishing mutual fund industry in Luxembourg. In Latin America, our pension fund invests in mutual funds in Luxembourg.'
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