EY Luxembourg has just released the 2018 edition of its "Investment Funds in Luxembourg - A technical guide" on the occasion of its 25th anniversary.

The guide has been designed to answer many questions on setting up and operating investment funds in Luxembourg and the 2018 edition has been updated to cover recent legislative and regulatory changes. 

This edition deals with the postive trends seen in the industry over the past year, such as increases in assets under management by 15% on average, asset flows by 5 % and profits by 10%. These trends were supported by strong underlying demand for investment products driven by an ageing demographics, the shifting for long term savings to individuals and a growing middle class in emerging markets and rising equity markets across the globe, coupled with a relatively benign interest rate environment, which resulted in very strong asset flows into the passive sector with continued greater focus and flows to alternatives.

However, the guide also discusses how these initial positive headlines mask some key fault-lines that the industry is facing and will have to deal with over the coming years. Many of these have been on-going for a number of years, and include implementing the ever-evolving regulatory agenda, an increasing cost base arising from implementing the regulatory agenda along with having to absorb certain costs that were previously charged to the investor, downward pressures on overall fees and the investment cost of dealing with technology and digital innovation in all parts of the value chain coupled with the related competitive disruption challenges and the increasing investor demands for a digitalised service experience. 

Alongside these challenges the phenomena of “winner takes all” is accelerating, with the top 10 global managers attracting over 80% of all flows:  “biggest is seen as best” as size drives better operating margins and asset retention. In addition investors, both retail and institutional are increasingly focused on the non-financial returns of their investments with a growing demand for compliant solutions. The likely outcome of all of this over the coming 3 years will be an assets under management growth rate of around 4 – 5% per annum with revenues remaining broadly flat and the gap between winners and losers getting wider.

So, the remaining key question is: how to remain relevant and continue to grow in these changing times? According to the guide, a twin track strategy of enhancing distribution and getting bigger is required, in order to make the most of the remaining good times whilst preparing for disruption and leaner times ahead.

The Investment Funds in Luxembourg guide may be downloaded from the EY Luxembourg website.