This blog has been written in collaboration with David Capocci.
For decades now, global assets under management have seen incredible growth.
From 38 Trillion USD in 2008 to 100 Trillion in 2020 (Statista) projections are increasing at the same pace as the global population and may even reach 145 Trillion USD by 2025 (CNBC). Closer to home, AUM of investment funds in Luxembourg reached USD 6.4 Trillion by the end of September 2021, cementing the Grand Duchy as a leader in asset management.
But with great growth comes great responsibility. How can the fund industry solidify Luxembourg’s competitive hedge position? In this blog, we break down the 7 key initiatives asset managers should consider in 2022 and beyond.
Play a leadership role in shaping a sustainable future
Global warming is the biggest threat our planet is facing today. Asset owners and asset managers have the power to (re-)direct the huge amount of assets under management to finance the ecological transition. They have the responsibility to support initiatives of governments and industry groups to direct capital flows in the most productive and sustainable directions. Asset owners and managers’ voices are heard by corporate boards and have the potential to reach those in government who can further support the fight for our planet. You can read more about how capital markets can save the planet here.
Embrace technology disruptions
We are only at the beginning of the digital tsunami that is expected to occur over the next decade. To become agile organizations, companies need to foster a culture of change and innovation. Teams must be allowed to experiment and fail, and fast, cost-saving technologies, services and products should be implemented to respond to client needs. This culture change starts with educating the leaders; for example, at KPMG we attend a Digital Masterclass and, like many other companies, we now have a Chief Innovation Officer in the Executive Committee.
Capture additional profit pools around investor needs
With the majority of financial assets sleeping in deposits and illiquid real estate assets, there are many opportunities for growth revenue. What solutions could be offered to unserved/unsatisfied investor needs and to the new generation of investors? A more compelling value proposition can take many forms such as higher returns, simplified access, improved diversification, risk control, fulfillment of ESG goals, and gamification to name a few.
Under an attractive framework, new products like ELTIF and PEP could help retail investors save enough money for their pensions and create a virtuous cycle.
Explore the challenges and new opportunities created by DLT and asset tokenization
Digital Ledger Technology (DLT) and asset tokenization have the potential to revolutionize financial markets and form a new type of infrastructure. Luxembourg acting as back and middle office for the fund industry is highly subject to blockchain disruption, and certain players such as transfer agents, clearing and settlement houses may disappear as a result. It’s vital that Luxembourg asset managers not only understand these disruptions but find ways to capitalize on them.
The brochure “Asset tokenization and its implications on securities markets” explains the opportunities and challenges for asset tokenization adoption. Let’s imagine a global legal and regulatory framework, a trusty infrastructure, a large base of investors, digital real assets and the use of DLT. This winning combination would allow for many improvements such as global and new investor reach, increased liquidity, transparency, market timing, compliance, process automation and cost reduction, product innovation, etc.
Lean on asset tokenization to help responsible investing
Through Green STOs (Securities Token Offering) involving the issuance of green tokens – such as renewable energy assets, carbon emission certificates or stake in forests – asset tokenization has real potential to support responsible investing efforts. Currently Luxembourg is the leader in the green bonds market, but it remains a small market because of higher costs and smaller interest from institutional investors. Green tokens on DLT would provide access to a broader pool of investors, reduce costs and increase efficiency and trust to immediately check the sustainability criteria. Green tokens could be acquired by retail investors who are more inclined to invest in ESG.
Let’s turn Luxembourg into a digital fund hub
The model that has made Luxembourg successful for decades is also contributing to the transformation of the Luxembourg fund industry into a digital hub. Within this digital hub, stakeholders work together to solve issues and engage in the development of a new ecosystem.
There are more and more first movers popping up, simultaneously benefiting from the competitive advantage that comes with being first, and further cementing Luxembourg’s position as a digital fund hub.
Examples of real estate and fund tokenization are multiplying in Luxembourg. The start-up BlocHome offers to acquire shares in real estate from an investment of 1000 EUR, using the technology developed by Tokeny, the last winner of KPMG Fintech Awards.
FundsDLT and UBS AM have successfully concluded a proof-of-concept pilot that aimed to explore a blockchain distribution model. “The proof-of-concept has shown that a distributed ledger-based fund ecosystem may not only reduce costs and risks for all parties involved, but also simplifies the distribution of fund solutions with a significant improvement of the customer experience. As per our conviction, DLT will lead to more cost-effective products for the investor with a greatly simplified investment journey and will have a lasting impact on the fund industry.” (Claudio Schneider in FundsDLT and UBS AM explore blockchain based fund distribution (bourse.lu).
Recently, CSSF allowed investments in crypto assets for alternative investments funds under certain conditions (CSSF guidance on virtual assets – CSSF) and Coinhouse has since become the first private crypto bank. It is also the 5th Fintech to get a license in virtual assets after Bitflyer, Swissquote, Paypal and Bitstamp.
Talent attraction is key to success
Big challenges can only be tackled with great people and culture. Being able to attract talented people is one of the biggest contributors to a company’s success. As companies grow, the country will continue to transform. Luxembourg asset managers, as well as the Luxembourg government, need to spend the necessary time and resources to not only attract the right talent, but also to create a work culture that supports retention.
