While slowly getting back to normal, the country’s fund industry should already tackle future challenges and issues, and start differentiate from other financial centers.

Soon after the lockdown, asset managers first need to grow their business, review their operating models and reassess their risk, Ravi Beegun and Alan Picone from KPMG suggests. They should also prepare for a second pandemic and an economic recession.

Ravi Beegun and Alan Picone, as the Luxembourg fund industry is exiting the lockdown, what will be its business priorities?
One of the most urgent priorities for asset managers will be to grow their business again, by reducing their costs and protecting their margins, as their revenues are likely to have dropped during the confinement.

COVID has accelerated the pace of digitization in a number of organizations, with benefits in terms of increased efficiency and effectiveness. However, the asset management industry in general still has more progress to make in its digital transformation journey compared to other industry and needs to continue driving such changes post COVID.

In terms of organization and business, Environmental, Social and corporate Governance (ESG) is one of the major issues they need more than ever to consider due to increasing regulatory and political pressures. The confinement has also shown ESG into another dimension that helps improve the work life balance of staff and their feel-good factor.

It has raised the awareness that people could work remotely, that the way we consider mobility and commuting to work could improve and an added benefit is that pollution levels could drop significantly.

Furthermore, the fund industry will have to review its operating models. For instance, the importance of risk management has emerged with the pandemic highlighting areas where outsourcing chains present vulnerabilities and where further reinforcement in the operating model are required. Now risks such as the sanitary risk exist and will remain, but contingency plans can be improved with the experience already gained.

Ravi Beegun, partner at KPMG (photo: KPMG)

Some of Luxembourg’s relevant distribution markets have been deeply impacted by the virus: Such as the UK, Italy and China. Hong Kong is facing political instability. How will this affect its fund industry?
It is however difficult to predict to what extent Luxembourg funds will be affected by the economic situation in the countries which have suffered the most from COVID.

From what we understand, the Luxembourg fund industry hasn’t so far suffered that much from the pandemic. In March, as the stock markets plunged, funds’ net assets dropped as well. But the number of funds which were in real difficulty were much lower compared to what could have been expected. Today the levels of assets under management are more or less back to normal because the markets have recovered.

Likewise, the alternative fund industry has not suffered much from the pandemic. There is still plenty of liquidity waiting to be invested. Investors are only waiting for more opportunities to invest in.

On the spike of the Coronavirus, big names in the private equity and venture capital businesses were already identifying new opportunities and good deals that could sustain the economy.

They now continue tracking special and tactical opportunities as well as market dislocations and distressed areas. The pandemic has been a catalyst for new ideas of doing business. Those who are at the quest of investing in companies at very early stage, will be the first to take advantage of it.

Alan Picone, partner at KPMG Luxembourg
(photo: KPMG)

What are your forecasts and expectations on the post-Covid era?
A second wave of the pandemic is still to be expected. An economic crisis is probably coming too. The level of savings will continue increasing, as future remains uncertain. Whether some of those savings will convert into funds, we don’t know yet.

Interests rates are and will remain ultra-low for a while. Therefore, pension and sovereign funds, who are looking for a certain amount of yield and need to deliver, will need to reallocate a higher proportion of their assets into alternative asset classes.

In that context, how does Luxembourg position and differentiate from other financial centres?
The ALFI, together with the industry, has identified five objectives, that will help the Luxembourg fund industry to differentiate itself: Sustainable finance, pensions and savings, continuing making UCITS accessible around the world, alternative investments, and driving innovation and the digital transformation of the industry.

Luxembourg is also the second largest place in the world in terms of funds distribution and product engineering. As a natural distribution platform, the country can differentiate by processing and offering the financial solutions of tomorrow, such as new funds, new strategies and new products.

But, to remain in the top league, in ESG, pension vehicles for instance, we need both people who are able to understand and develop and service those products, in combination with scaling-up on the digital side to deliver increase customer value at reduced costs. And we remain confident, as Luxembourg has a good track record of getting the needed skills onboard. Even if these skills are not solely based here.

Ravi Beegun is Partner, Head of Asset Management at KPMG Luxembourg. He is also a member of the Boards of the Association of the Luxembourg Fund Industry (ALFI), of the Luxembourg Association for Risk Management and of KPMG Luxembourg Foundation.

Alan Picone is Partner – Advisory & Consulting Solutions at KPMG Luxembourg and specialises in Risk and Asset Management.