“Fund managers are making record bonuses” is a headline often heard in London, Frankfurt, and Paris, but rarely in Luxembourg. While we dominate in back-office services, these jurisdictions excel in providing front-office services, an area Luxembourg’s fund industry needs to develop.
Over the past five years, the Luxembourg fund industry has experienced a slowdown in the growth of AUM and the number of funds, which has been detrimental to the economy. The solution is to grow the industry via horizontal or vertical integration.
Countries such as China have successfully expanded their economy through both horizontal and vertical integration and are steadily moving up the value chain in terms of goods they produce and export. Luxembourg has a similar opportunity in the fund industry.
Vertical integration
Horizontal integration would involve expanding into new areas of back-office servicing, but this would be challenging as the back-office is widely developed and mature. The alternative is vertical integration, which would involve developing front-office services.
Luxembourg would need to focus on attracting Portfolio Management-related roles, such as research teams who can inform Portfolio Managers about asset allocation and security selection, traders to execute transactions, and sales professionals to sell these services globally.
As a rule of thumb, economies that produce high value-added innovative goods and services have a higher GDP than those that do not. In the Fund Industry, the front office is where the most value is added, potentially resulting in a positive contribution to the economy.
However, it is questionable whether Luxembourg could attract front-office roles, as they tend to be located close to investors, in places like Wall Street, not Kirchberg. Additionally, the Grand Duchy currently lacks the adequate infrastructure to foster and develop skilled talent.
Academic institutions
While Luxembourg has already developed much of the necessary infrastructure and should not worry too much about its distance from investors, given that the majority of front-office roles can be performed anywhere, it does need to worry about its academic institutions.
Training and education opportunities, as well as research and innovation possibilities, are quite limited in Luxembourg, across all fields of study, but especially in Finance. Whereas London, Frankfurt, and Paris host prestigious universities and think tanks, attracting top talent.
To attract talent, the government would need to invest heavily in attracting leading authorities in Finance to its universities and research centers. This would be the final piece of the puzzle in a country which already has so much to offer to professionals.
Hopefully one day, Luxembourg will attract the front office of companies such as BlackRock and Blackstone, and we’ll finally hear the headline “fund managers are making record bonuses in Luxembourg”. This would really add a new facet to the economy.
Watch out Wall Street, Kirchberg is coming for you.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft.lu
