In Luxembourg—a glorified back office—we all know someone who toils away in fear of financial regulators, mindlessly crunching numbers and churning out reports, yet unable to explain the fund industry’s role in society. And that’s a real shame.
So, let’s change that.
The purpose of the fund industry
Industries like healthcare are easy to understand—their purpose is to protect people’s health. When people fall ill, they need treatment. Without healthcare, people would die. Ironically, the same is true without the fund industry, but that’s much harder to grasp.
The purpose of the fund industry is to transfer excess savings (i.e., capital) from where they are not being utilized to those who can put them to productive use. For example, your pension contributions may ultimately help fund the construction of hospitals.
All this mindless number crunching and reporting is about determining who can put capital to the best use while balancing risk and reward. We all work in silos, but our work ultimately contributes to funding society’s ambitions.
So how did it all start?
From risky ventures to modern mutual funds
The upper classes have long pooled their capital to fund economic ventures. The Dutch and British East India Companies are prime examples—investors combined their resources to finance ships that would import precious goods from the East.
These investments, however, carried extreme risk due to a lack of diversification. Huge profits could be made if a ship completed its journey successfully, but investors would lose everything if it sank or was attacked.
These pooled investments were a precursor to mutual funds, but they lacked strategy, diversification across multiple assets, and liquidity, and they were highly unregulated. Still, they served the fundamental purpose of allocating capital where it was needed.
Today’s mutual funds serve the same purpose of funding real economic activity. However, unlike early investment pools reserved for the wealthy, they are professionally managed, diversified, and well-regulated. They spread risk across multiple investments and are accessible to all—even your average Joe.
For example, UCITS funds can buy bonds from energy companies, which then use the capital to develop nuclear, solar, and wind energy projects. These projects create jobs, employ workers, and stimulate demand for resources, contributing to economic growth.
Luxembourg’s disconnect from the real economy
Yet, due to Luxembourg’s focus on back-office activities and the highly siloed way funds are administered, we never get to see the real-world impact of our work. All we see are numbers and reports, but in reality, we have a tangible effect on people’s lives.
Luxembourg has drifted too far from the true purpose of the fund industry, becoming lost in the cult of investor protection and regulation. Gaining a better appreciation of the real impact we have might help us make better investment decisions.
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 Luxembourg.
