A second working area relates to supplying investor information. Editorial
Nowadays, no financial center and no investment activity focused either on institutional or
private investors can be conceived without a powerful system to transmit prices and infor-
mation relating to the various products. Presence and Permanence
In this field, the evolution of the statute of CCLux is close to our hearts, and the
installation of an electronic on-line data base containing the prospectuses and management While ALFI's board of directors and president have
reports of the Luxembourg domiciled funds will be a priority. changed, the Association's ambitions remain
unchanged. We want to
Lastly, the efforts made in order to improve Luxembourg's attractivity for hedge funds and
to work out a new legislation for venture capital funds will be continued. be responsive to our members, understand their
motivation, follow up on their evolution, anticipate
their needs, reconcile possibly conflicting interests,
Presence on the labour market: promotion, information, identify common stakes beyond the driving
training forces of competition and the market,
As I mentioned in my introduction, the fund industry accounts for approximately 7000 communicate with the Luxembourg authorities,
jobs in Luxembourg and the fast development of some of its activities should make this private and political organisations, liase with the
figure grow in an extremely significant way during the next few years. supervisory body, but also with professional
One of the major risks of our industry at the present time is to be victim of its own success associations and agencies that cover other profes-
by lacking for qualified staff. sions of the financial sector, contribute actively in
view of the promotion of our financial centre,
The absence of trained staff in a sufficient number on any level can have a fundamental
impact on service quality and costs. Moreover, whereas we entered into a period of fund be vigilant in respect of international developments,
engineering, the need to attract "talents" which otherwise could turn towards other jobs extend bilateral relationships to sister associations,
within the banking sector or to other financial centers is more obvious than ever. above all those that cover jurisdictions where the
It will be one of ALFI's priorities to further intensify the global promotion of our industry, major sponsors of Luxembourg based funds
both among those who will enter the labour market and those willing to reorientate their originate, contribute to the building of the single
career towards our industry. European market while ensuring that Luxembourg's
vital interests are being taken into account, support
the action of FEFSI,
Corporate governance and ethics
anticipate and prepare the future by putting in
Now that private and institutional investors expect promoters and managers to offer
place training programs for the young
transparency, a steadily growing quality of the information dispatched, precise details on
operational procedures and an exemplary deontology, the Luxembourg fund industry must professionals of our industry, by educating the
take care of these elements. investors, by implementing the code of ethics and
guidelines for auto-regulation, by working out
In order to do so, ALFI's recently set up technical committees "corporate governance" and
"ethics" have an important role to play and will be monitored very closely. meaningful statistical data and feasibility studies.
Our essentially international, composite and heteroge-
neous Luxembourg fund industry with its global
ALFI's organization structures and local distribution networks serves both
In order to increase its means of action, ALFI has recruited a General Manager a few the collective savings and private undertakings and
months ago, which will considerably modify the role of its President. enterprises. It creates new jobs and generates tax
This new presidency will be the occasion to organize the operation of the General Manager revenues. It is about to become omnipresent while
/ President binomial in order to achieve a good sharing out of the tasks and an excellent reassembling the components of the very tissue of the
global synergy. financial world and by intervening directly in the
On the other hand, the role of the various technical committees and the contribution they financing of the economy. The industry is fully aware
made over the years are obvious; it is advisable to encourage them, to motivate them, to that the actors bear high responsibility. Its importance
recognize the merit of the participants and to keep the committees in good working order so within the Luxembourg economy is well established.
that they continue to play their role and to provide their technical contribution in the future.
Its international role is recognised.
Lastly, the modification of the statutes of our association in April 2000 opened Alfi to all
the professionals working in and for the investment fund industry, be they established in Based on the guidelines given by our board of directors,
Luxembourg or abroad. The consequence of this modification was that ALFI could the Secretariat General together with the numerous vol-
welcome numerous new members over the last months. unteers within our technical committees will endeavour
One of the objectives of the new presidency will obviously be to integrate them, to ensure to accomplish with determination the objectives of the
the representativeness at the level of the technical committees and to take into account association: the defence of the members' interests
their interests and desideratas. and the efficiency of the investors' protection.
Guy LEGRAND Robert Hoffmann
President General Manager
Automated Compliance Checking ALFI's New Board
Systems in Luxembourg Guy Legrand,
The fund management business has never before been under the spotlight as it is currently.
Regulators are taking a higher degree of interest in activities than ever before and clients Pierre Ahlborn,
are placing increasingly onerous restrictions on what fund managers and administrators Banque de Luxembourg
can or cannot do on their behalf. Add to this a squeeze on margins and you have Jacques Bofferding,
irresistible pressure towards automation and the need for that buzz-phrase of the late Banque Générale du Luxembourg
1990's - Straight Through Processing - STP. Freddy Brausch,
This is nowhere more true than in the area of compliance. Compliance has long been the De Bandt, Van Hecke, Lagae, Loesch
Cinderella of the fund management ball, if not the downright ugly sister. Long considered Christoph Cramer,
a mere cost centre, removed from the focus of STP, and upstream from the decision Union Investment
support and order generation process, compliance systems have suffered from lack of Jacques Elvinger,
systems resources. And yet, change is sweeping through the market and increasing Elvinger Hoss & Prussen
interest is being shown in automated compliance systems.
Organisations are waking up to the potential cost of inefficient or absent compliance Kredietbank Luxembourg
capability, not just in terms of the manpower that is occupied by this function, but also the Yves Francis,
real cost of errors or deliberate investment breaches. JP Morgan Fleming
In Luxembourg, where the predominant market need is for administrative post-trade Jean-Michel Gelhay,
checking, there is a particular set of requirements. So what are the things that you need to Banque Degroof Luxembourg
look for when assessing the capability of systems and suppliers in the field of automated Richard Goddard,
investment restriction checking? ABN AMRO Investment Funds S.A.
Support of the regulations and understanding of the local market Manuel Hauser,
Fully documented CSSF rule coverage is a must. The supplier needs to have the UBS Fund Services (Luxembourg) S.A.
necessary expertise to discuss your interpretations of the rules. In addition, the Claude Kremer,
regulations for funds domiciled in other jurisdictions but administered in Luxembourg Arendt & Medernach
should also be covered by the prospective product. John Li,
Support for all types of investments KPMG
Most systems test equities adequately. What about your balanced funds with a mix of William Lockwood,
fixed income, equities, money market instruments and derivatives? Can you test the Franklin Templeton International Services S.A.
true potential underlying instrument and issuer exposures? Iain MacLeod,
Support for all types of funds Credit Suisse Asset Management
Flat funds are one thing, but what about funds-of-funds structures? Can the system perform Julian Presber,
a 'look-through' to give you the effective overall exposure of the fund product? State Street Bank Luxembourg S.A.
Support for complex rules Marc Saluzzi,
Does the system pre-structure the types of rule you can build or do you have flexibility
easily to build any rules through the combination of simple concepts?
Bayern LB International Fund Management S.A.
Support for the management of breach resolution
Once the system has detected a breach, how easy is it to track how the breach is being European Fund Administration (EFA)
resolved - i.e. whose responsibility is it, how long will it take, etc? The compliance Paul Suttor,
system should combine this information with details of the original breach to provide Crédit Européen
a complete history of each incident.
Eric van de Kerkhove,
Ease of systems integration Deloitte & Touche
Has the compliance product been designed with easy links to any administration or Patrick Weydert,
accounting system? Deka International S.A.
In addition to these qualifying questions to be asked of a prospective supplier, there are a Julien Zimmer,
number of things to look at internally to assess how difficult it will be to implement DG Bank Luxembourg S.A.
automated restriction checking: Patrick Zurstrassen,
Are your client mandates in an electronic form already (e.g. simple database)? Crédit Agricole Indosuez Luxembourg S.A.
Are the mandates in a form, which can be represented by a set of checks - or are some
'subjective'. An example of the latter is 'No investment in illiquid stocks'. This requires
a definition of liquidity, which might be the holding as a % of the average daily traded
volume, but is this data available?
Data availability and accuracy is the single biggest challenge to effective restriction
checking. Some rules, which at first glance appear to be easy to check, without
reliable data become unreliable or impossible. Issuer data is a particularly common
source of problems - especially if you are looking for exposure that includes cash and Guy Legrand,
money market instruments. DEXIA-BIL, president
These points also lead to another reason to choose a supplier who has broad experience at Rafik Fischer,
mandate review and rule creation. The supplier's business consultants should be able to KBL, vice-president in charge of national relations
advise as to whether, in their experience, such information is available from suppliers and
which is the best supplier for a particular type of data.
Crédit Agricole Indosuez Luxembourg S.A.,
So, who to turn to, to help you choose which way to go?
vice-president in charge of international relations
The two approaches are to either employ third party consultants to manage the system and
supplier selection process, or to manage it directly yourselves. If you choose the latter,
there are several suppliers positioned in the market with various products. These suppliers Banque de Luxembourg, Treasurer
include LatentZero (a product developed in the UK and now marketed in Luxembourg), Manuel Hauser,
MacGregor, LineData, Charles River, etc. UBS Fund Services (Luxembourg) S.A.,
Swiss Fund Promoters
Henry Kelly Julien Zimmer,
KellyConsult Sàrl DG Bank Luxembourg S.A.,
firstname.lastname@example.org German Fund Promoters
Franklin Templeton International Services S.A.,
Anglo-Saxon Fund Promoters
Development of the Investment Arendt & Medernach,
chairman Legal Committee - National Affairs
Fund Industry in the Freddy Brausch,
De Bandt, Van Hecke, Lagae, Loesch,
Central & Eastern Europe chairman Legal Committee - International Affairs
Elvinger Hoss & Prussen,
The year 2000 marked the 10th anniversary of political and economic changes evidenced chairman Fiscal Committee
within central and eastern Europe since the parliamentary victory of the Solidarity Jacques Bofferding,
movement in Poland, the success of the Velvet revolution in the Czech Republic, German
Banque Générale du Luxembourg,
unification and the symbolic collapse of Berlin wall in 1989.
chairman Internet Committee
Over the past decade central & eastern European countries started to differentiate
themselves and re-group into three separate sub-regions, being Central Europe (Czech Lucien Euler,
Republic, Hungary, Poland, Slovakia and Slovenia), Baltics (Estonia, Latvia, Lithuania), Fastnet
and the Balkans (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Macedonia, Romania chairman Training Committee
and Yugoslavia). Depending on political stability and economic recoverability there might
also be future changes within Russia and the CIS. Henry Kelly,
The countries of central Europe (CE) - Czech Republic, Hungary, Poland, Slovakia and KellyConsult
Slovenia - can be characterized by their strong and clear political and economic aspirations to chairman Operational Techniques Committee
join the EU. Three of them: Czech Republic, Hungary, Poland have already joined NATO. It
is likely that some of them (if not all of them) will join the EU in the first wave of accession. Thomas Seale,
European Fund Administration (EFA),
This article describes the current status of the investment fund industry and perspectives
for further development in three countries of central Europe: Czech Republic, Hungary chairman Marketing Committee
and Poland. With the biggest capital markets in the central European region and good Dominique Valschaerts,
financial infrastructure, the investment fund industry is most advanced in these CCLux
countries. Furthermore, their accession to the EU will further stimulate growth of the
investment fund industry. chairman Statistics Committee
continued on page 6
Development of the investment FEFSI Survey:
fund industry... (continued) Taxation of UCITS -
Economic fundamentals and infrastructure
During the last 10 years or so, the Czech Republic, Hungary and Poland together managed to
attract US$ 74 bn of foreign direct investment (FDI). Together with the processes of
privatization and restructuring and employment of required know-how, this has enabled them The European Federation of Investment Funds and
to transform their economies. Companies (FEFSI) has issued a new survey on the
In terms of the financial services industry, the banking industry was the first to go through principles of taxation of UCITS in 20 FEFSI member
the restructuring and privatization process. This process, combined with the introduction countries. This survey, that has been first launched in
of the regulatory requirements of The Basel Capital Accord, has resulted in significant early 1992, is updated annually by members of
improvement of its condition. Now, after a decade, the banking industry has reached a FEFSI's Tax Committee. It contains general remarks
consolidation stage in some of these countries. Development of the insurance industry and its purpose is to provide a country-by-country
followed (particularly on the life insurance side), in conjunction with the introduction of overview of taxation of UCITS.
pension system reforms. At the same time the National Stock Exchanges were established In 2000/2001, (some minor) changes in the taxation
or re-established, and securities markets legislation and related regulatory regimes were of UCITS were observed in Austria, Belgium, Czech
introduced which enabled the development of domestic capital markets. Republic, France, Germany, Greece, Ireland, Italy,
This has fuelled economic growth. In the year 2000 the Czech Republic eventually overcame Luxembourg, Norway, Portugal, Spain, Sweden,
its recent recession with the 2.5% p.a. GDP growth. In Poland GDP growth continued at Switzerland, United Kingdom. Poland participated in
approximately 5% p.a. over the whole decade, and in the case of Hungary, growth has been the survey for the first time since joining FEFSI.
at 5% p.a. since 1996. On the other hand government spending and budget deficits remain No changes were noted in Denmark, Hungary, and the
high, unemployment is rising (Poland -14.5%) and inflation remains a problem.
Market size FEFSI is considering posting the survey on its web
Investment fund laws and regulatory regimes were introduced in each of the three
countries and were subsequently adjusted to conform with EU legislation as a part of an
overall requirement for national legislation to comply with the "acquis communautaire".
Supervisory power over regulation and supervision of the industry was placed with the
Czech Securities Commission, the Hungarian Banking and Capital Markets Supervision
Board and the Polish Securities & Exchanges Commission.
As of 31st December 2000 market capitalization of the three largest stock exchanges in the
region (Warsaw-WIG, Budapest-BUX and Prague - PX50) amounted to US$ 42.7 bn. Assets Reshape European
under fund management domiciled in these countries amounted to US$ 3.5 bn (139 funds)
indicating that 8.2% of market capitalization was under fund management at this date.
By comparison this figure represents just 0.4% of total net assets under management
in Luxembourg. So the natural question is: what is the central European potential for
development of the investment fund industry?
Eventually, population size and its associated savings will constitute the region's comparative Fund supermarkets in Europe - distribution platforms
advantage. EU accession will lead to a fall in a risk premium and increase in market that blend a wide range of retail-oriented packaged
valuations. In the transition period it is the development of contractual savings that shifts the investment products with turnkey administration and
structure of demand for financial assets towards longer maturities. record-keeping capabilities - could represent as much as
25% of net new inflow into Europe's fund industry by
2005, according to the latest report in The Cerulli
Domestic market players Report™ series, European Fund Supermarkets.
Currently, domestic markets are very concentrated with only a few dominant players, and
those being a mixture of national and international promoters. The report states that fund supermarkets will represent
between 10% (in Spain) and 25% (in the United
Although there are about 15 fund managers based in the Czech Republic, the market is Kingdom and Germany) of net new inflow into mutual
dominated by two players which together have 80% of the market share: Komercni Banka funds by year-end 2005. As a result, CA's admittedly
(18%) and Ceska Sporitelna Banka (acquired by Erste Bank - 62%). optimistic forecasts call for Europe's fund supermarkets
Similarly in the Hungarian market, the three largest players have 90% of the market: OTP to hold nearly 275 billion in assets by 2005,
Bank (49%), Budapest Bank (acquired by GE Capital - 31%), and CA IB Securities (10%). representing at least 4% of the region's mutual fund
There are about 15 fund managers in the Polish market and the major promoters include industry and a blistering 75% compound annual growth
Pioneer (49%), Skarbiec (owned by BRE Bank SA and ADIG- 21%), and DWS (15%). rate. (The current level in the U.S. is roughly 6% of
It is worth noting that foreign controlled promoters dominate the markets (except for assets and 16% of net new sales in long-term funds.)
Hungary) although none of them has yet managed to build a strong central European regional According to the report, fund supermarkets will
presence. The development of the pension market and availability to distribute foreign represent the product choice and open architecture
domiciled funds may affect the future share of current market players. European consumers are increasingly demanding.
In terms of domestic products (apart from existing balanced, bond, equity, money market, and
privatization funds) one can observe the effects of a recent regulatory concession allowing
New Fund /
investment funds to move away from domestic securities and enabling the emergence of some
more global or European outlook funds (Hungary, Poland). The first "tracker funds"
(Hungary) and "guaranteed funds" (Poland) were introduced to the market and the concept
of "fund of funds" was recognized in the Czech Republic.
As far as the distribution of foreign domiciled funds is concerned the markets are currently BANQUE DEGROOF LUXEMBOURG
quite closed in terms of the public distribution of foreign domiciled funds. Distribution of such Part I SICAV Bankpyme Strategic Funds SICAV,
funds is either: not possible (Hungary); possible through a registration process which requires Big House, EUR, 60% equities, 40% bonds, one
to meet national prospectus and reporting requirements (Poland); or possible through a third at least of the equity investment consisting in
registration process which recognizes European passport (Czech Republic). equities of companies directly or indirectly involved
in the real estate business; European Fund, EUR,
securities issued by issuers of European (60%) and
Foreign market players non European (40%) OECD countries.
Central and eastern European capital markets also attracted foreign promoters who set up
funds domiciled outside the region, which invested in central & eastern European securities BANQUE GÉNÉRALE DU LUXEMBOURG S.A.
(including Russia). As at 30th June 2000 there were US$ 5.6 bn of assets managed by 114 Part I SICAV DAB Adviser I Fund: D & P Welt
such funds, of these US$ 3.4 bn (61%) were invested by funds domiciled in Luxembourg. Portfolio, EUR, international equities of companies
presenting a high growth potential; Fidentus
Biotech, EUR, equities of biotechnology and phar-
Further developments maceutical companies; Elite Global Equities, EUR,
Future development of the investment fund industry will be stimulated by three main factors: equities of international companies having shown a
European Union enlargement solid growth in the long run and equities of " New
Economy " companies.
Growth in market capitalization Part I SICAV Fortis L Fund, Fortis L Fund Bond
Pension system reform Convertible Europe, EUR, equities worldwide.
EU accession BNP PARIBAS FUND ADMINISTRATION
As new members accede to the European Union they are expected to adopt all relevant EU Part I SICAV Parvest: Parvest US High Yield Bond,
legislation. The current EU calendar assumes that accession will not start prior to USD, below investment grade bonds issued on the
US markets or by US issuers; Parvest World
1st January 2003. The accession process will lead to the harmonization of national legal Technology, USD, securities issued by companies
systems with the EU UCITS Directive, which will automatically enable a distribution of active in technology related sectors (telecommuni-
the Part 1 UCITS in the central Europe. The Czech Republic and Poland have already cation, Internet, EDP services), Parvest European
adopted laws providing for recognition of European passport for UCITS. In the case of Corporate, EUR, investment grade bonds of private
Poland this law will become effective when Poland joins the EU. Similarly, Hungary issuers, issued on the European markets or by
foresees changes to its legislation in the course of this year. The ongoing harmonization of European issuers.
national legal and regulatory systems will lead to a decrease of market entry costs and
eventual elimination following the EU accession. CITIBANK INTERNATIONAL PLC
Market capitalization Part I SICAV Axa World Funds: European Small
Currently the Polish stock exchange is the largest in the region with a capitalization of US$ 25.5 Cap Equities, EUR, small and medium sized
bn, followed by US$ 9.4 bn in Hungary and US$ 7.8 bn in the Czech Republic. Macroeconomic companies domiciled in European countries;
advantages, ongoing privatization and the development of pension funds should contribute to European Opportunities, EUR, European undervalued
further growth of domestic capital markets. The opening of capital markets following the EU stocks with growth or re-value potential; Financial
accession process should have a positive effect on market valuations. Sector Equities, EUR, equities issued by companies
belonging to or involved in the banking, insurance
Pension system reforms and/or diversified financial sectors worldwide; Euro
High Yield Bonds, EUR, invested primarily in
Private pension funds regulations and infrastructure (modeled on Latin American sub-investment grade bonds denominated in Euros,
solutions) have recently been introduced in the Czech Republic, Hungary and Poland. In with an emphasis on lower rated bonds.
the near future we should see further development of contractual savings associated with
the mandatory and voluntary elements of the pension systems reforms. In Poland alone it KREDIETBANK LUXEMBOURG S.A.
is expected that there will be approximately US$ 1 bn annual cash inflow associated with Part I SICAV MC Premium: Global Power Fund,
the second pillar of the pension fund. EUR, equities of electricity, gas and water supplying
All these factors will lead to a further opening up of the markets within these countries and companies.
increasing macroeconomic stability within them. This in turn will most likely lead to a Part I SICAV Vitruvius: Italian Equity, EUR, Swiss
decrease in risk premium and stimulate further economic growth. For the investment fund Equity, EUR / CHF, equities of Italian / Swiss
industry these outcomes will constitute positive developments, as they, in turn, will lead to companies with high growth potentials in the long view.
Part II SICAV Schoellerbank Funds: Value
increases in liquidity flows into the capital markets of Central Europe. Protection, EUR, trading assets; Value Hedge /
Value Hedge Protect, EUR, fund of funds.
Dariusz Nowak Part I SICAV Urquijo Fondos KBL: Global
Biotechnology, USD, biotechnology sector.
Dariusz Nowak is a partner of PricewaterhouseCoopers. He can be reached on: Part II SICAV Sigma Fund: Enhanced, EUR, fund
+352 49 48 48 2520 or e-mail: email@example.com of funds.
New Part II BSI - New Biomedical Frontier
Investor's confidence remains (SICAV), USD, companies with a high growth
potential in research and development in biomediacl
unshaken despite market turbulence New Part II SICAV Sinope Alternative Funds:
Long Short Global Bond Fund 300 Eur, EUR, Long
Short Global Bond Fund 300 USD, USD, market
neutral investment policy.
At the close of the year 2000, assets under management with the Luxembourg domiciled New Part II SICAV Jefferies Equity Fund: Private
investment funds amounted to 874.6 bn. In October, they had reached a peak of Equity.
924.13 bn, before declining stock prices started to push them down. New FCP KBC Life Priviledged Portfolio Fund,
Defensive, Dynamic, Neutral, EUR, fund of funds.
New Part II Miralt SICAV: Europe Multitech, USD,
It is true that the year 2000 growth rate of "only" 19.1% was relatively low compared fund of funds.
to the 51 per cent increase achieved in 1999, but the growth in assets of 140.1 billion New Part II SICAV C-Quadrat European
in absolute figures in 2000 was the second most important boost achieved by the Pro-Funds: Blue Chip, Special, Balanced, EUR,
fund of funds.
industry since the beginning of the 1990s, after the record addition of some
247.7 billion in 1999. LLOYDS TSB BANK
Lloyds TSB Bank has integrated its Lloyds
Further to this, net inflows of fresh money also reached a record level of euro 168.2 bn. Americas Asset Management SICAV (LAAM)
On the other hand, strong declines of stock prices made that financial markets accounted sub-funds Brazil International Fixed Income Fund
and Argentina International Fixed Income Fund as
for a loss in value of 28.1 bn on an annual basis, which is the largest decline in net assets new sub-funds into its Lloyds TSB International
due to financial markets' performance ever suffered by the Luxembourg fund industry. Net Liquidity SICAV under the denomination LIL
subscriptions however remained positive even during the last four months of the year, Brazil (US Dollar) Fund and LIL Argentina (US
when the so called New Economy Markets brought a lot of bad news. Dollar) Fund respectively, while its LAAM sub-
funds US Large Cap Equity Fund and Brazil Active
Equity Fund have been integrated as new sub-funds
Over the year 2000, the record number of 278 new funds have been added to the official into its Lloyds TSB International Portfolio
list of funds domiciled and registered in Luxembourg. The number of new sub-funds SICAV. The LAAM US Small Cap Equity Fund
launched by the increasingly popular multiple compartment funds grew by 1,119, so that compartment has been integrated into an existing
the Luxembourg investment fund industry offered the investor a choice of no less than LIP fund under the denomination LIP - Smaller
Companies Fund, while LAAM sub-fund Argentina
6,995 different fund portfolios at the close of the year. Equity Fund has been liquidated, which lead to the
dissolution of LAAM.
During the first four months of 2001, the overall trend remainded positive, but the
evolution of assets under management continued to be heavily affected by stock market
performance. Whilst total net subscriptions amounted to 42 bn, financial markets had a
negative impact of 20.74 bn. The 21.26 bn increase of assets under management
represents a 2.75 growth over the 2000 year end total. The number of fund units increased
by 232 to 7.227.