A recent poll of Luxembourg management companies (mancos) by the consulting firm KPMG recorded a notable change in certain activities being insourced or outsourced.  

First, a bit of background: mancos handle operational tasks on behalf of asset managers--either internally or by outsourcing or ‘delegating’ the function--allowing fund firms to concentrate on investment-making. Portfolio management is traditionally a delegated function.

Mancos can be part of a corporate group serving the firm’s fund family, or an external service provider, or both. Functions can sometimes be partially delegated, indicating that a specific fund or asset class within a firm’s portfolio is handled differently, or a hybrid model has been put in place in certain geographic territories, often because a branch office is present in the jurisdiction. They employ roughly 5,000 people in the grand duchy.

The KPMG survey found that the corporate secretary function went from 39% internal in 2021 to 60% internal in 2022. Distribution shifted from 11% partially delegated in 2021 to 55% partially delegated in 2022.

Delegated manco functions

According to an annual KPMG survey of mostly larger management companies:

Data sources: and . 2021: based on 18 mancos surveyed, IT function not reported; 2022: based on 20 mancos surveyed.

Delano spoke with Alan Picone, asset management consulting leader at KPMG in Luxembourg and one of the report’s co-authors, about what accounted for the big shifts and more generally about how Luxembourg mancos decide to insource or outsource certain functions.

Mancos have “two types of functions,” Picone explained. The first set are “pretty much outsourced by construction. To the extent that there’s no business resources on the ground, the only natural option is to outsource.” For example, “portfolio management is one of the key functions of a [fund manager], but it is by design outsourced. Portfolio management is not operated from Luxembourg.

“When you’re an asset manager, you’re not necessarily involved in fund administration, transfer agency and so on. So, for that purpose, you still bear a certain responsibility and touch this, but you need to surround yourself with experts that have the ability to deliver on your behalf, so to speak. So that’s where the outsourcing arrangements come naturally.”

Other functions could either be insourced or outsourced. “The key analysis consists in undertaking what we call a core versus non-core analysis,” Picone said. “At the end of the day, it’s mostly considerations around cost arbitrage, in light of the value that is brought. So you could have certain organisations that could actually outsource certain functions, but opt for a full insourcing because they consider it’s core to their business.”

Cost considerations

Cost savings are not always the primary driver and sometimes they are not realistically deliverable. But they are definitely evaluated. “Very often, a consideration for outsourcing is attached to a certain economical rationale. To spare some money, so to speak. That’s undeniably a factor,” he said.

However, there are “interesting considerations as operational risks become more and more prominent. Outsourcing means developing a framework around the oversight of the functions that have been outsourced and that’s absolutely fundamental in Luxembourg and elsewhere in the EU. But given the fact that Luxembourg typically is orchestrated in such a way that a number of functions are outsourced, so not just a minority, but a number... then the importance from our side is absolutely fundamental.

“In the eyes of regulatory bodies, such as [the European Securities and Markets Authority] and the [Luxembourg Financial Sector Supervisory Commission (CSSF)], it is a very important point of vigilance. You want to ensure that whatever function is outsourced, the right level of commensurate oversight is applied, basically. So before outsourcing, you want to make sure that you are in a capacity to, A, oversee, and B, that the level of operational risks and trade off by the outsourcing is acceptable. That means due diligence exercises, that means key performance indicators, that means a certain amount of diligence has been taken beforehand to qualify the appropriateness of potential outsourcing. That’s a factor not to neglect. And that is getting a lot of importance,” Picone stated, “because of regulatory scrutiny”.

No formula for level of insourcing or outsourcing

Regulators are not looking at a magic number for what portion of activity is kept in-house and how much is externalised, he said. “There are some organisations that outsource a very significant part of their activities, whilst others have a tendency to insource, and both of these models are absolutely fine from a regulatory perspective. They just entail a different approach on resourcing. The ones that outsource the most tend to have oversight departments that are, by definition, more staffed. Whenever you outsource, the flip side coming along with it is that you need to have a very granular perspective on what you outsource, for the oversight process. Conversely, when you insource, then, of course, you don’t need to have oversight activities, per se, because it’s insourced. But then you have the operations in-house. There’s no net economy of resources if you go that route... it’s just a question as to where to put the resources, either on the oversight or in the execution.”

Mancos running private market funds are more likely to outsource more functions, according to Picone. Alternative funds are “one of least scalable asset classes... the economies of scale are relatively limited.” That is often because each private market fund has unique characteristics or focusses on a unique segment that requires specialist skills. In contrast, Ucits retail funds are relatively simpler to scale up. “There is a certain mechanics, there is a certain operating model already in place,” he said.

Corporate secretary and distribution changes

As for the big shift in the corporate secretariat function moving in-house and distribution function going hybrid, Picone said those two trends were definitely taking place, but noted a fairly massive caveat. That is: sample bias. “We need to be a bit vigilant about how we interpret the results year-on-year [because the survey] population is not the same. The top 10 largest management companies change from one year to the other simply because of the evolution of their results. And the [mancos] that have responded to the survey this year are not exactly 100% the same as the ones that responded to the survey last year. There’s overlap, clearly, but it’s not a one-to-one correspondence.”

At the same time, there was real movement in both categories. 70% of mancos who participated in this year’s KPMG poll said that “their first priority is their review of the operating model and the transformation of their operating model,” he noted. “So it’s very much a market under transformation.”

Referring to the corporate secretary function, Picone observed that “the hybridity that you had before in the cosec was essentially local operations supported by the group.” That has been transitioning as corporate groups realise that management companies are best suited to run these activities, he said.

The growth in hybrid distribution models is due to “the business expansion through branches” in new markets, which favour partial delegation.