Management companies (mancos) based in Luxembourg looked after €5.3trn in assets at the end of 2021, a 22% year-on-year gain, the consultancy PWC has reported. That came on top of a 4% gain observed in 2020 and 17% recorded in 2019. PWC said that mancos employed 6,581 staff in the grand duchy as of 31 December 2021, up from 4,874 at the end of 2018.
Such growth makes mancos a shining segment of Luxembourg’s investment funds industry. But what exactly are management companies and what exactly do mancos do?
Before diving into mancos, it’s helpful to understand the concept of fund delegation. Under the EU’s fund delegation rules, different management and operational functions can be handled by different business units or service providers in more than one country. The practice is widely used by Luxembourg-domiciled investment funds.
Luxembourg is home to several thousand investment funds, but the staff who run them are sited globally. Portfolio managers, who select which investments to make and when to sell, are typically located elsewhere. An Asian real estate fund manager, for example, will probably be based in a major property hub like Hong Kong or Singapore, all the better to spot potential deals and keep an eye on current holdings.
What’s typically handled in the grand duchy are administrative, legal, regulatory compliance and risk management matters. This is where mancos come into the picture.
Internal or external management companies
Mancos exist to create economies of scale and to take advantage of deep specialised knowledge.
“Essentially, mancos allow the asset manager to focus on generating alpha, through activities such as picking stocks and in-depth sector and market analysis,” the fund service provider Apex Group said on its website.
Asset managers can create their own in-house manco or tap an external service provider to take on certain tasks. Mancos take charge of each investment fund. After a fund is started (or transferred to its care), mancos will, in turn, insource or outsource specific functions (most often returning portfolio management to the original asset manager).
While the manco market has been growing at a healthy clip, companies face tight profit margins.
“The industry’s cost base continues to increase faster than technology solutions can be developed and implemented to contain the costs, and there is healthy fee pressure from clients,” Olivia Tournier-Demal, managing director, MJ Hudson in Luxembourg, has said.
In addition, there are hefty expenditures. “Management companies have had to make considerable investments in human and IT resources to adapt and keep up with their ongoing obligations,” she commented.
More than half of mancos (59%) told PWC they were currently investing more in “initiatives to realise cost efficiencies” and 75% said the “increased cost of business” was a “main threat to Luxembourg’s current manco model”.
Cloud over fund delegation model
The European Commission has been reviewing the EU’s fund delegation rules, causing some concern in Luxembourg’s funds sector.
Earlier this year, Mairead McGuinness, the European financial services commissioner, told fund industry executives that there is “room for targeted improvements”. Yuriko Backes, Luxembourg’s finance minister (DP), has said that she would “defend the cross-border model” at EU level. Claude Marx, director general of Luxembourg’s financial regulation agency, has said that the commission’s initial focus on “quantitative vs qualitative” parameters are “not helpful”.
The new rules, whatever their final form, are expected to be approved in the fourth quarter of this year.
Next week’s jargon buster: Priips.