Short history of cross-border fund distribution in the European Union
In 1985, the foundation for the cross-border distribution of investment funds within the European Union (EU) was laid by the European Commission’s Directive on “Undertakings for the Collective Investment in Transferable Securities” (UCITS). It provides a harmonised regulatory framework for all EU Member States to create, manage and market investment funds to retail investors across EU borders. This allows UCITS funds domiciled in one Member State to be easily offered to investors in another Member State, which benefits the European Union’s vision of the single market.
As UCITS funds are retail investment products, they feature a high level of investor protection and prudential supervision under the UCITS Directive—boosting their success in countries outside the European Union, in particular in Asia and Latin America, where they are a well-known brand.
Luxembourg as the most important domicile for cross-border funds
According to the European Fund and Asset Management Association (EFAMA), at the end of June 2021, EUR12.9 trillion1 were invested in UCITS funds. Of this amount, 36% were invested in UCITS funds domiciled in Luxembourg and 2.1% in those domiciled in Spain.
Luxembourg is the biggest domicile of UCITS funds and the second biggest worldwide domicile for investment funds after the United States. Compared with the United States’ huge internal market, the vast majority of Luxembourg-domiciled UCITS funds have attracted investors outside the country. According to figures provided by PwC2 and the Association of the Luxembourg Fund Industry (ALFI), Luxembourg boasts a 56.5% share of all authorisations for the cross-border distribution of investment funds, making it the leading domicile for these types of funds. The reasons for Luxembourg’s unique position are manifold.
Luxembourg was the first EU Member State to transpose the first UCITS Directive into local law in 1988. It was able to attract asset management firms from the United States, the United Kingdom and Switzerland, who were keen to offer their expertise to continental European investors. Since Luxembourg transposed the Directive without any changes, it also attracted asset managers from other EU Member States that transposed the Directive with further conditions.
Over time, several service providers specifically dedicated to the investment fund industry either established a presence in Luxembourg or were created locally. This created a highly specialised cluster that transformed Luxembourg into the ideal environment for those wanting to create and distribute cross-border investment funds. Asset managers in financial centres such as London, Paris, Frankfurt and Milan have established a presence in Luxembourg and offer Luxembourg-domiciled UCITS funds in their home countries and other markets.
At the end of August 2021, of the asset managers with UCITS funds domiciled in Luxembourg, the top countries of origin were3 the United States (20.5%), the United Kingdom (16.9%), Germany (14.0%), Switzerland (14.0%), France (10.3%), and Italy (6.4%).
Spain as a market for foreign funds
At the end of 2020, almost 7,700 foreign funds were offered to investors in Spain—making it Europe’s seventh most important market for foreign funds, just behind Italy4. Almost 4,400 of the foreign funds offered in Spain, or 57%, were domiciled in Luxembourg. Therefore, Spain is an attractive market for foreign asset managers, especially for those with funds domiciled in Luxembourg.
According to INVERCO5, the Spanish fund association, foreign asset managers managed EUR238 billion of assets for Spanish investors at the end of June 2021. As EUR300 billion was managed by asset managers based in Spain6, foreign managers represented 44% of the investment fund market in Spain in terms of assets. The five biggest foreign managers offering funds to Spanish investors are Blackrock (representing 17.8% of assets managed by foreign managers), Amundi (11.1%), JPMorgan (9.5%), DWS (6.7%) and Morgan Stanley (4.9%).
Spanish asset managers in Luxembourg
Spanish asset managers manage only a relatively small part of the total assets of Luxembourg-domiciled funds. The main Spanish asset managers with funds domiciled in Luxembourg are to our understanding Banco Santander, Asesores y Gestores Financieros, MAPFRE Asset Management and BBVA. As such, Spanish promoters play a relatively minor role in the Luxembourg fund industry compared to the size of the Spanish financial market and of its financial institutions. One reason could be that Spanish promoters prefer to offer Spanish-domiciled investment products to their clients in Spain and may have a greater focus on Latin America, where they are strong actors in the local financial markets.