UCITS funds have established themselves as one of the European Union’s most successful financial exports, with a global presence spanning more than 70 countries outside the EU. After European investors, Asian and Latin American investors are the largest holders of this type of vehicle. Why funds listed in Europe?
In the opinion of Serge Weyland, CEO of the Association of the Luxembourg Fund Industry (ALFI), the country’s central location in Europe, its strong regulatory framework, the investor protection it offers, and its discretion, though not a lack of transparency, are the main advantages investors find when choosing a product listed in Luxembourg or, more broadly, in Europe. “These conditions are not found in other jurisdictions or in other offshore investment centers such as, for example, the United Arab Emirates or Singapore. Although it is true that more and more countries and regions are developing regimes similar to that of the European fund industry,” he acknowledges.
For Weyland, the European hub, led by Luxembourg, has proven its validity, having successfully weathered recent global and financial crises. “The nearly 40-year track record of UCITS and AIFMD vehicles through the dot-com bubble, the 2008 crisis and subsequent sovereign debt crisis, and COVID-19 has shown that we are dealing with a robust regulatory framework. In addition, the coordinated work of supervisory institutions ensures consistency in the regulatory approach and in how systemic risks are managed. This reassures international investors, and this is also why institutional investors in Latin America have long trusted European products and, in particular, Luxembourg funds,” emphasizes the CEO of ALFI.
Latin American Investor and US Offshore
According to Weyland, a clear example of this trust in the European framework in recent years is the interest of Chilean pension funds. Following this trend, he notes that new jurisdictions such as Argentina, Brazil, and Peru are beginning to look at passported funds listed in Europe.
“We also see that many private banking and institutional investors in Latin America who used U.S. ETFs are moving away from these ETFs to switch to European-listed funds because they are easier to manage from a tax perspective. So I think there are many reasons why, for high-net-worth families and private investors in Latin America, the UCITS and AIFMD framework offers confidence, probably more than some of the more recent regimes in other financial centers,” he argues.
From the perspective of US offshore investors, Weyland acknowledges that using Miami as a financial hub creates a direct connection with Europe and, specifically, with Luxembourg: “Historically, this type of investor used UCITS and alternative funds, and now we are seeing a return to Luxembourg. I think another factor has come into play. After the 2008 crisis, the country’s rating remained strong, something that did not happen in other European jurisdictions. We have never lost the triple A, and international investors place great value on being in a solid and financially strong country,” he states.
Interest in Alternative Funds
From the European fund industry, and particularly from Luxembourg, there is a focus on ensuring that ELTIFs achieve the same “recognition and success” as UCITS among these investors. In fact, Weyland believes that another strength of this jurisdiction is the wide range of alternative funds it has developed. “We now have €5 trillion in UCITS and €3 trillion in alternative investment funds in Luxembourg, and of those €3 trillion, a large portion of the assets are, of course, institutional assets in different types of vehicles. Many are in LPs, but also increasingly in vehicles such as ELTIFs, which can also be used for broader distribution, although volumes are still relatively small compared to the rest,” he states.
According to his analysis of the industry, large family offices or larger private investors have invested in Luxembourg through partnership vehicles, RAIFs, or the reserved alternative investment fund regime, or SIF, a specialized investment vehicle.
“I think that has been Luxembourg’s strength: being able to offer a ‘tool kit’ of funds and fund structures that can be tailored to the needs of a global investor base. Luxembourg funds are currently distributed in more than 70 countries, which positions us as the number one domicile in the world for global distribution. That agility in finding new tools to make investors’ lives as easy as possible sets us apart,” he asserts.
Brazil: Yet to Be Conquered
Up to this point, everything highlights what Luxembourg offers and what international investors value, but what barriers does the industry face? In Weyland’s view, one of them is Brazil: “We know that Brazilian investors can now invest abroad, but they remain very focused on domestic allocation. They have $2 trillion in funds domiciled in Brazil, but this is also linked to the high interest rates of their central bank, which are still between 12% and 14%. For them, it is easier to invest locally in domestic bonds offering that level of return than to direct money to global markets where that same level of return is not always achieved. However, we believe that diversification will also reach these markets.”
By contrast, he acknowledges that the strong trend toward digitalization in the country’s financial services could help open the development of new investment platforms to products listed in Europe. “Many of these platforms are brokerage platforms, which favor direct investment in equities and bonds. In my opinion, funds are also gaining ground on these platforms, as are ETF share classes,” he concludes.
