Unique solutions for unique situations
The results are in and for management companies (ManCos) it’s all about out-of-the-box thinking. We have witnessed unique approaches be the key to achieving scalability in the UCITS business model. But will ManCos be able to find equally effective solutions when it comes to the scalability of alternatives?
In this survey, we take a closer look at how Luxembourg ManCos are refining the value proposition of asset managers in a time full of uncertainty.
A message from our asset management risk and regulatory leader
In an increasingly complex market environment, asset managers have shown true resilience with the development of agile operating models. This agility has enabled scalability and operational effectiveness of the UCITS model, however, such a high degree of scalability has not yet been applied to alternative investment strategies.
It’s time now that ManCos start to develop a targeted strategy for alternatives – in particular in the onboarding phases of new strategies based on robust governance structures, sound process workflows and the recruitment of highly-skilled professionals in core substance functions.
A remarkable 57 percent of assets under management are held by the 20 largest ManCos in Luxembourg, out of a population of over 300 ManCos (UCITS and/or AIFM). These “large-scale ManCos” understandably play an important role in influencing product innovation and the digitalization of the market.
We wanted to get a clear understanding of the driving forces shaping the Luxembourgish asset management market, so we set out to analyze the key characteristics of the operating models of these large-scale ManCos.
We would like to thank the 18 ManCos that shared the features of their business models, as well as key strategic priorities, for the years to come.
11 out of the largest 15 ManCos in Luxembourg
Employing over 1,100 full-time employees (FTEs)
18 ManCo respondents
Over 3,000 managed sub-funds
€1,825 billion of total AuM
Representing 40% of the Luxembourgish market
In the results of this survey, we’ve outlined the key forces that are shaping the Luxembourgish asset management market.
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Delegation – the centerpiece of the Luxembourgish business model
Even though 56 percent of ManCos perform at least one operational function either fully or partially internally — such as portfolio management, fund administration, transfer agency and distribution — delegation remains the centerpiece of the Luxembourgish ManCo business model.
Due to the Commission de Surveillance du Secteur (CSSF) increasing its regulatory scrutiny on the oversight of delegates (CSSF Circular 18/698), ManCos have increased the number of staff responsible for overseeing delegates and formalized their oversight control framework further. Nevertheless, only 33 percent of ManCos ranked the review of their outsourcing operating model as a top-three priority for the coming years.
The focus on core substance is growing
The largest ManCos in Luxembourg continue to position themselves as centers of expertise of control and oversight functions. As control and oversight teams play an essential role in safeguarding asset managers’ business value, a ManCo’s substance can be best assessed by focusing on risk management, compliance and delegation oversight, which KPMG defines as “core substance functions.”
Across the ManCo population, seven out of 10 ManCo employees in Luxembourg are working in operations or support functions that are not core substance per se. However, as regulatory scrutiny by supervisory authorities is growing and ManCos are refining their delegation operating models, the proportion of core substance FTEs in Luxembourgish ManCo offices is likely to increase.
Composition of the Luxembourg office
The dawn of the asset management data revolution
While ManCos are increasingly embracing technology for governance processes and delegate oversight, there’s a general lack of technical solutions in their day-to-day management decision process. Only one respondent ranked adopting a digital solution as a key strategic priority, and only a third of our respondents considered it a top-three priority.
When it comes to technological adoption, add-ons that aid the oversight of delegates are the most common, especially those applied to distributors. This is largely driven by the sheer volume of distribution arrangements to oversee. Our survey suggests the use of technology delivers significant efficiency gains as, on average, one FTE can oversee 98 percent more contracts by using dedicated oversight tools.
ESG is the leading strategic priority for the coming years
Refining the value proposition of asset managers remains a top priority for most ManCos to attract clients and increase profitability.
In this context, integrating environmental, social and corporate governance (ESG) standards into their product offering and corporate culture represents the biggest strategic challenge — but also the biggest opportunity — for most ManCos. Concretely, 60 percent of ManCos consider ESG as their top strategic priority for the years to come.
Top Priority vs. Top 3 Priority
Achieving scalability for alternatives requires a targeted strategy
Eighty-seven percent of ManCos do not see alternatives as a “new” area of strategic priority. For most ManCos, the expansion into alternatives is instead a continued reflection on a process set in motion some years before.
Although AIFs only account for 9 percent of total AuM and 15 percent of total sub-funds, they add significant complexity to ManCo business models due to the nature and variety of alternative strategies. Therefore, to achieve scalability when integrating alternatives into the product portfolio, ManCo operating models require a targeted strategy.
The branch business model is widening
Across the survey respondents, 50 percent of ManCos have branches in a total of 13 jurisdictions across Europe. These branches are increasingly offering services beyond the traditional sales-only business and are progressively becoming an integral pillar of the ManCo value chain.
How ManCos are using their branches
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