Moving up the value chain: bringing asset management to Luxembourg
Moving up the value chain: bringing asset management to Luxembourg
The CFA Society of Luxembourg has published a report, “Beyond fund administration: the future of asset management in Luxembourg”, in which it presents a set of concrete proposals for promoting asset management in the financial centre.
Interview with Leon Kirch CFA, President of the Luxembourg CFA Society and founding partner of EVP-European Value Partners., an independent investment management boutique.
LFF: Why is asset management important for the future of the Luxembourg finance industry?
LK : The local finance industry is built around two main pillars: private banking and fund administration. In the past, both areas have contributed substantially to wealth creation and will probably continue to be important going forward. Nevertheless they both face major challenges. Those of the private banking sector are well documented. However, we believe the challenges faced by fund administration are widely underestimated and misunderstood. In essence, fund administration is a high volume-low margin business that is, at least by financial industry standards, labour and IT intensive. Therefore there is a strong economic incentive for companies to delocalise these activities to lower cost countries, especially as the majority of products have been standardised over time. We believe the only reason this has not happened yet on a larger scale is the regulatory burden faced by fund promoters when they try to delocalise. There is a need to diversify the financial sector and develop more niches. We believe the development of the asset management activity is an interesting way to move up the value chain, cement the competitive position of Luxembourg as major financial centre.
LFF: What makes you think that Luxembourg can excel in this activity?
LK: Interestingly enough we got a lot of positive feedback on Luxembourg. First, there are several structural elements in favour of Luxembourg, like its multicultural population, its quality of life, its modern infrastructure, its geographical location and its relatively attractive level of taxation by EU standards. Secondly, there is a sound foundation for developing asset management activity in Luxembourg. Examples of these “building blocs”, as we call them in our study, are the quality and responsiveness of the regulatory authority, a favourable legislative framework and the presence of best in class service providers to whom asset managers can outsource non-core activities.
LFF: What are the major shortcomings of Luxembourg?
LK: The main shortcoming of Luxembourg in this field is the lack of image and profile. We are under the impression that Luxembourg is off the radar screen of decision makers in asset management. For example, after the recent tax increases in the UK, the Anglo-Saxon press covered extensively the exodus of high profile fund managers from London to Zug in Switzerland. We did not find any mention of Luxembourg as an alternative despite its attractiveness. Another shortcoming is certainly the lack of a deep talent pool of investment professionals compared to, for example, Zurich and London. Over the long term Luxembourg University (founded in 2003) will certainly constitute a plus. In our survey, professionals also mentioned the low frequency of direct flights and the absence of intercontinental flights in and out of Luxembourg.
What would you change in order to encourage asset managers to come to Luxembourg?
LK: As mentioned before, Luxembourg has several strong competitive advantages. Our challenge is make sure these are known and understood in the industry. This is the reason why we welcome the different initiatives taken in that field as we are convinced that every Euro spent to increase the brand awareness of Luxembourg as centre of excellence in finance is money invested in a useful way. We should also remember that asset management is a people business and that the asset management community is relatively small in terms of number of investment professionals involved. In other words, by attracting a few asset managers to Luxembourg, we could well end up in attracting more as the good news spreads. In our study, we also come to the conclusion that Luxembourg will probably not be able to convince the very large, diversified asset managers to move their investment decision makers to Luxembourg as these want to centralise their activities in larger financial centres. We believe that the opportunity for Luxembourg really lies in the smaller niche players. They need the flexible, business friendly environment Luxembourg is able to provide. In our working paper, we present a case study where we propose the creation of a Luxembourg Emerging Asset Manager Fund. This Fund could provide talented portfolio managers with a platform where they can demonstrate their value-add before they “fly on their own”.
You mentioned Luxembourg University. How does this establishment contribute to the development of the financial centre?
LK: Luxembourg must continue to strengthen links between the university and the industry. To us, the University of Luxembourg will be a key source of highly skilled employees and practical research. Here again, in the working paper we present a case study where we show that the Luxembourg CFA Society is actively supporting the application of Luxembourg School of Finance to the CFA Partner Program. A successful application would mean that Luxembourg School of Finance becomes one of a select number of universities worldwide able to teach the CFA curriculum to its students.
Léon, you are President of the Luxembourg CFA Society. What is the CFA Institute (Society) and what does it stand for?
LK: The roots of the CFA Institute go all back to 1947 and Benjamin Graham was one of the founding members of the association. From the start, the association was driven by the belief that security analysis was more than a trade: it was a profession. Over more than 50 years, the CFA Institute has grown to become the biggest global, not-for-profit association in finance with more than 96,000 investment professionals. This network aims to set the highest standards of ethics, education and professional excellence in the investment profession. It awards the CFA (Chartered Financial Analyst) and CIPM (Certificate in Investment Performance Measurement) designations. In 2003 we founded a local CFA Society in Luxembourg and became part of a network of 136 Member Societies in 57 countries. The Luxembourg CFA Society currently has more than 150 members, mainly CFA charterholders working in banking / insurance and financial services.
How is the CFA Programme perceived in Luxembourg?
LK: Over the years, the CFA programme has become an “international passport” showing that the investment professional meets a high standard in terms of investment knowledge and adheres to a strict set of ethical standards. This is not different in Luxembourg. More than 200 candidates sit the CFA examinations every year in Luxembourg. Employers recognise and value the CFA charter more and more. These days, it is not rare to see job ads where the CFA charter is a requirement.
Is the CFA program similar to the one offered by universities?
LK: No. The CFA program is a self-study, graduate level program that includes three sequential exams covering ethics, investment tools, portfolio management and wealth planning. On average it takes candidates four years to go through the whole programme. Candidates must furthermore show a minimum of four years of work experience and adhere to the code of ethics in order to receive the charter.