The negative trend of the market environment unfortunately impacted on the Luxembourg investment fund sector in 2002. For the first time in its history, the Luxembourg collective savings industry recorded a massive decline in net assets under management of some 84 billion Euros, which represents a drop of 9% over one year.
Nevertheless, a slight recovery was witnessed during June 2002-2003, the total net assets shrank by 12 billion euros or 1.3 %.
There is a marked decline in the Undertakings for Collective Investment in Transferable Securities - UCITS by roughly 52 billion Euros; however, this decline was offset by new subscriptions amounting to over 40 billion euros.
On a closer look this decline was largely attributable to the negative performance of equity funds which suffered from the impact of the fall in prices on the world's principal stock markets. Equity funds established in Luxembourg displayed a decline in assets under management of 53,51 billion euros over one year, falling from 293.78 billion euros at June 30, 2002 to 240.27 billion euros as of June 30, 2003, which equates to a drop of 18.21%.
Diversified funds segment remain stable with respectively 62.65 billion euros at the end of June 2003 and 62.29 in June 2002.
On the other hand, in the case of bond funds the net assets increased from 368.42 billion Euros to 418.31 billion euros in June 2003 (up by 13.5%).
Funds investing their assets in futures and options increased by 147% from 0.87 to 2.15 billion Euros.
TRENDS IN UCITS MARKET: The number of non UCITS is relatively stable with 915 at the end of June 2002 and 913 fund at the end of June 2003. Net assets under management with the non UCITS fund have slightly increased from euro 74.32 billion to euro 77.80 billion over the same period. Assets under management with non-UCITS investing in fixed income securities increased during the period under review, while equity funds and balanced funds suffered significant declines in assets under management.
The number of institutional units funds rose from 415 to 422, and net assets under management with this fund category increased from euro 39.42 billion to 41.70 billion.
STATISTICAL DATA
LEGAL AND REGULATORY DEVELOPMENTS
A - UCITS DIRECTIVES
The major event was the implementation into Luxembourg law on 20th December 2002 of Product Directive 2001/107/EC and of the Management Directive 2001/108/EC approved by the European Parliament and the European Union Council on 21 January 2002 (together with UCITS III Directive) allowing Luxembourg to be the first Member State to transpose both directives in its national legislation and thus provided Luxembourg's investment fund industry sufficient time to carry out the work needed to bring their funds into line with the new legal framework.
B - INVESTOR PROTECTION
On 27 November 2002, the Commission de Surveillance du Secteur Financier - CSSF (the Luxembourg regulator) issued a new circular concerning the protection of investors in the event of an error in the calculation of the NAV and the consequences of failing to comply with the rules of investment, which apply to undertakings for collective investment.
C - ALTERNATIVE INVESTMENT STRATEGIES
On 5 December 2002, the CSSF specified a series of specific rules applicable to Luxembourg undertakings for collective investment adopting so-called alternative investment strategies ie, Hedge Funds.
D - LONG-FORM REPORT
The CSSF circular 02/81 of 6 December 2002 introduced long-form reporting for investment funds and will be applicable to funds with periods ending on or after 31 December 2003. The long-form report will focus on both the organisation of the fund and its controls and will disclose, at a reasonably detailed level, how the fund is organised.
E - RECOGNITION OF TRUSTS AND MODERNISATION OF FIDUCIARY RELATIONSHIPS
The 1985 The Hague Convention on the Law Applicable to Trusts and on their recognition has been adopted by the Grand Duchy of Luxembourg. The law of 3rd July 2003 on trusts and fiduciary agreements further modernises and thus replaces the pre existing legal framework on fiduciary relationships under Luxembourg law, specifically including investment companies with variable capital (SICAV - Luxembourg's off shore funds), as well as unit trust management companies, on the list of qualified trustees/fiduciaries.
ACTIVITIES OF THE ASSOCIATION: The Association Lexembourgeoise des Fonds d'Investissement - ALFI, the Luxembourg Investment Fund Association, has set up an ad hoc working group aiming at the reorganisation of the UCITS status of existing guaranteed funds/capital protected funds by the European Commission and, in particular, to grant these funds the benefit of the grand fathering clause under the Product Directive 2001/108/EC.
Ethical code and "corporate governance"
ALFI has started a revision process of its ethical code together with the Luxembourg Association of Compliance Officers (ALCO) with the objective of having a single ethical code for the Luxembourg fund industry. The revision process focuses on the ethical standards set by the UCITS III Directive, applicable to managers of collective investment undertakings, further taking into consideration FEFSI's, Federation of European Funds, recommendations for business ethics.
FIGHT AGAINST MONEY LAUNDERING: ALFI has set up a think-tank to analyse to what extent Directive 2001/97/EC of 4 December 2001 amending Directive 91/308/EEC, concerning the prevention of the use of the financial system for the purposes of money laundering, is applicable to investment funds and to what extent existing legislation in this area runs the risk of being affected.
DERIVATIVES PRODUCTS: Within the scope of the implementation of the UCITS III Directive, ALFI has been examining risk management methods, derivative instrument types, the global risk concept, the counterpart risk concept and guarantees and derivative products used as techniques and risk management instruments.
ALFI has been closely monitoring the savings directive developments and has assisted the Luxembourg Ministry of Finances in its negotiations together with the Luxembourg Banker's Association (ABBL), in the implementation process of the savings directive. ALFI has further carried out an in-depth study into the timeliness of calling for a change in the tax system of collective investment undertakings in order to allow the later to benefit from the advantages offered by the double taxation treaties. ALFI has further intensified its lobbying efforts to abolish the annual registration tax on institutional money market funds.
INVESTMENT FUNDS E-COMMERCE: ALFI is closely monitoring European and national regulatory developments in e-commerce ("distance selling of financial services", law on data protection, etc) and has started to analyse the accounting of the "e-shareholding" project with the law on electronic signing and studying operational aspects. Furthermore, ALFI has examined the problems associated with customer identification and opening accounts via the internet. ALFI continued its efforts to develop a certification of transactional websites of the Luxembourg investment fund industry.
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Total assets Of which:
under Total UCITS nationally domiciled Non-UCITS nationally domiciled
management number of Net assets Number Average net Net assets Number Average net
(Eur bn) funds units (Eur bn) assets by funds (Eur bn) assets by funds
End of period (Eur m) (Eur m)
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June 2002 888.03 7,783 813.70 6,868 118.48 74.32 915 81.23
Dec 2002 844.51 7,806 766.54 6,874 111.51 77.97 932 83.66
June 2003 876.55 7,628 798.76 6,715 118.95 77.80 913 85.21
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Total Total Of which:
Assets Number Fixed income Equity Balanced Money Market Others
under of Net Number Net Number Net Number Net Number Net Number
manage- fund of assets assets assets assets assets
ment units (Eur bn) (Eur bn) (Eur bn) (Eur bn) (Eur bn)
End of period (Eur bn)
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June 2002 888.03 7,783 368.42 2,217 293.78 3,383 62.29 911 89.66 246 73.87 1,026
Dec 2002 844.51 7,806 388.42 2,225 238.29 3,296 58.94 920 88.56 248 70.30 1,117
June 2003 876.55 7,628 418.31 2,189 240.27 3,074 62.65 911 84.67 261 70.65 1,193
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