AGEFI Luxembourg - avril 2024

AGEFI Luxembourg 26 Avril 2024 Fonds d’investissement ByArianeKESREWANIandCédricLeBERRE,Senior InvestmentSpecialists,UnionBancairePrivée(UBP) A s 2023’s concentratedmarket rally is extending into 2024, equity investors areworried about a potential consolidation or pullback. Risks of disappoint- ment caused by geopolitics and elections, interest ratemoves or AI inadequacies are high. They couldweigh onmarket senti- ment after the accumula- tion of more than 30% returns since the end of 2022, more thanmaking up for the -18%performance drawdown recorded in 2022 (MSCI ACWorldNR index inUSD). Looking at the more balanced MSCI AC World EquallyWeighted,itsrollingtwo-yearperformanceis still in the red, reflecting hownarrow themarket has been. Yet, over the longer term, that index delivers strongerannualisedperformancesthantheMSCIAC World–+7.3%vs +6.1%from31.12.1998 to29.02.2024 – proving the benefits of amore diversified portfolio compared to a systematically rebalancing one. Momentumon aGlobal Scale Geographically, global equity markets are currently showing considerable exposure to the US with 70% of theMSCIWorldconsistingofUSnames, thehigh- estweightreachedin100years.Furthermore,the‘mo- mentum’approachhasbeenstronglyoutperforming other investment styles so far this year, since 2023’s winning stocks have kept outperforming into 2024, confirming the limitedmarket breadth. The ‘momentum’ factor tracks recent winners but nevertheless struggles when there is a rapid change in market trajectory as it rebalances with a lag: it was the worst-performing style in 2023 and 2021 when themarket shifted into rally gears. US: TheMagnificent Seven still Dazzling theMarket Onaregionallevel,somelocalmarketsarealsoshow- ing high levels of concentration. StartingwithUS eq- uities,the“Magnificent7”techbehemothshavebeen drivingmarketsoverthepastmonths.Theleadership of the tech sector and large market caps is especially pronouncedwithmega-cap technames reaching the largest weights in the US indices. Overall, the 10 largeststockscurrentlyaccountforaround33%ofthe S&P500,wellabovethe27%sharereachedatthepeak of the techbubble in 2000. The earnings picture is also dominated by these names,whichaccount for 25%of EPSgrowthexpec- tations for 2024. Valuation levels are high, at 21x for the S&P 500, although not as extreme as during the 2000 bubble, when they reached 25x. Investors that generallypreferpassiveallocationstoUSequitiesare seeingconcentrationincreasedespite also holding the lower-growth parts of themarket. Throughpas- sive solutions, investors are closely following the largest mar- ketwinners, but arealsoexposed to the risk of being tied to the largest losers, should the market trend reverse abruptly. Europe: Nuts About theGranolas In Europe, it’s the 11 giants knowncollec- tively as the Gra- nolas that have taken centre stage. They have been powering up half the performance of the Stoxx 600 in the past year, with a 25% weight and a combined market capitalisation of EUR 2.6 tn. How do they compare to the USMag 7 names? Similarly, they are internationally exposed, quality growthcompounders,buttheyshowlowervolatility than theMag 7, with lower valuation levels. Concen- tration risks could be less biased to one sector in the Europeanmarket, but are stillworthpointing out. The Swiss heavyweightsNestlé, Roche andNovar- tis have generally formedmore than 45%of the SPI in aggregate. While Nestlé and Roche in particular can look back on a long history of sustainable and attractive levels of value creation, all three compa- nies currently face some headwinds. 2024 could re- veal opportunities at the other end of the Swiss equity market, namely in the quality small- and mid-cap space, which can’t be accessed via passive solutions. A supportive environment for that seg- ment should be confirmed in 2024, with the prospect of a GDP growth recovery nowperceived by themarket asmore tangible after theSNB’smove to cut rates by 25bps inMarch. Japan: Hot Topix Although the Japanese market may seem less con- centrated, deeper inspection reveals nuances to bring into the comparison. The expansive nature of theTopix index, comprisingnearly2000 companies, demands attention. Notably, the proportion of the 30 largest entities within the Topix has grown re- markably, reaching their highest weighting since 1995. This trend is reminiscent of the concentration of the Mag 7 in relation to the 500 other companies constituting the S&P composite index. This goes to show that, if you scratch the surface, you will see differentmarket structures andmore evolving com- plexities than first meet the eye. Navigating theNarrowStraits Animportantquestionfor2024is:willthemarketstay narrow and how should investors handle it? When the risks of a negative market surprise are elevated, passive solutions can pose fundamental challenges, especially given the current concentration levels at bothglobal and regional level, as outlined above. Research shows that in times of recession or chal- lenged fundamentals, corporate profits drop 20% onaverage onayearlybasis, drivenby cyclicalmar- gins and lower pricing power. In this market con- figuration, active strategies delivering diversified sources of performance through bottom-up stock selection are likely to fare better. Focusingonbuildingadiversifiedandbalancedport- folio of value-creative companies has proven – over 2023, but more importantly over any market cycle – most likely to deliver consistent results that are less driven by active bets on regions, sectors or market caps.For2024,investinginstrategiesthataimatbeat- ing the risk of “mean reversion”, which is often ob- served following concentrated market rallies, could be worth considering for investors. There are such strategies to be found, whether in global, European and Japanese equities, Swiss SMIDs or tech stocks. Diversification is crucial, especially in 2024 By Wolfdieter SCHNEE, Head Fund Client & Investment Services at VP Fund Solutions 2 023was a year that had a number of challenges and surprises to offer: re- cord interest rates, political and eco- nomic risks and fears of a significant economic slowdown. Nevertheless, VPBankGroupwas able to successfully further expand its asset servicing with fundmanagement and custodianbank activities. Reviewof themarkets in 2023 The friendlymacro environment with extremely low interest rates has no longer existed since 2022. Rather, 2023 wascharacterisedbyrecordhighinterest rates, political andeconomic risks and fears of a strong economic slowdown. This resulted in significantdisadvantagesforinvestmentactivities.To makemattersworse, consumerswere cautious. Due to lower inflationrates and thehopeof lower interest ratesinconjunctionwithasignificantlymoreresilient US economy, the stockandcreditmarkets havenev- ertheless risen sharply. Last but not least, the current interestratelevelimpactsinvestors’strategicassetal- location (SAA) and has changed the relative attrac- tiveness and weighting of asset classes compared to the years of zero interest rate policy. Powerful fund industry A fund is used to transform a service into a product and thus simplify access to this service. Inspired by constant demand, the fund industry has developed intoaprofessional,innovativeandhigh-performance industry over the last fewdecades. The industry has highly regulatedvehicleswithprovenprocesses that giveinvestorsconfidence.Theyhelptoprotectthein- terests of investors at all times - such as compliance withinvestmentguidelinesforriskdiversification,in- vestment restrictions or risk limitations. Importance of the funddomicile A fund domicile must fundamentally fulfil the fol- lowing aspects: excellent reputation, guarantee of political stability, transparency, infrastructure, spe- cialist knowledge and the necessary capacities for the structuring and operation of collective invest- ment schemes. Basedonthis,thefollowingissuesareattheforefront when selectingadomicile for an investment strategy in the formof a collective investment scheme, taking intoaccounttheintendedinvestorsand targetmarkets:flexibilityinthedesign of the investment idea as a financial product, the expertise and quality of the service providers required to op- erateacollectiveinvestmentscheme, acceptance by investors and, last but notleast,thedurationoftheapproval process by the supervisory authority. Tax lawaspects are just as important. Due to the fact that the fundmanagerorinitia- tor is often domiciled inadifferentcountryto the product or manage- mentcompany,theexis- tence of functioning cooperation between the supervisoryauthoritiesisan- other key factor. Development, innovative ability and innovative strength An ideal ecosystem, coupledwith a stable economic andpoliticalsystemincludingmoderninfrastructure, promotes talent and innovation. Innovation in the sense of newideas and inventions and their success- ful commercial implementation in new products, servicesorprocessesisoftenduetoaninteractionbe- tween people, technology and business. Innovation can also consist of the transformation or abolition of unwanted or outdated technologies, products or processes that are no longer effective. It also requires thewillingness to change and get rid of old habits. VP FundSolutions – successful for over 25 years WithVPFundSolutions, VPBankGrouphas an in- ternational fund competence center with over 25 years of experience. VP Fund Solutions is repre- sented in Luxembourg and Liechtenstein. Luxembourg is the secondmost important fund lo- cation in the world and an attractive domicile for setting up fund management companies. In Lux- embourg, the fund industry has developed into a professional, innovative andhigh-performance eco- nomic sector over the last fewdecades. Luxembourg was the first member state to imple- ment the EU Harmonization Directive (UCITS or UCITSDirective)intonationallawin1988.Morethan 30yearslater,Luxembourgfundsmanagedfinancial assets ofmore thanEUR5 trillion as of the endofQ4 2023. In the case of alternative investment funds (AIFs) it is EUR 950 billion. For several years, the Grand Duchy has been the second most important fundlocationintheworldaftertheUSA.Ontheother hand,inthemarketforfundmanagementcompanies (FMCs), a consolidation of providers has continued to be observed over the last fewyears, alongside the establishment of new companies. This shows that Luxembourg remains an attractive domicile for set- ting up and running an FMC - but also that FMCs needacriticalsizeandasolidbusinessmodelinorder to remain viable. At VP Fund Solutions in Luxem- bourg,overhalfoftheassetscanbetracedbacktoini- tiators fromGermany. Dynamic development inLiechtenstein The fund industry in Liechtenstein has also devel- oped impressively in recent years. With future-ori- ented fund regulation, Liechtenstein has positioned itself as adynamic, cross-borderhub forprivate label funds, particularly inGerman-speaking Europe. The costs and duration of the regulatory approval process are key aspects, alongside specific specialist knowledge and the ability to develop and offer tar- getedsolutionsfordemandinginvestmentneeds.For a small economy, market access to the EU internal market plays an important role, which is why this is always at the top of the agenda for Liechtenstein. Liechtensteinisparticularlystrongwhereahighlevel of specific specialist knowledge and the ability tode- velopandoffertargetedsolutionsfordemandingin- vestment needs in the area of non-traditional investments andpension provision are required. Asset management is usually delegated, with more andmore clients settingup their own assetmanage- mentinLiechtenstein-thisisbecauseofaccesstoEu- ropeintheareaofMiFIDactivities.Thefundindustry in Liechtenstein has developed excellently, particu- larly in recent years. Liechtenstein is now one of the most important cross-border hubs for private label funds in Europe. Asset Servicing – service provider in the fund industry Within VP Bank Group, the fund business is re- ported in the “Asset Servicing” business segment, which includes the fund management and custo- dian bank activities of VP Bank Group. The two fund management companies VP Fund Solutions (Luxembourg) SAandVP Fund Solutions (Liecht- enstein) AG, two legally independent entities, carry out the fundmanagement activities. The cus- todian bank activities include the custodian bank functions of VP Bank AG, Liechtenstein and VP Bank (Luxembourg) SA. TheAsset Servicing division has the goal of creating value for clients and their investors through advice, the ongoing provision of services and the provision ofknow-how.That’swhytheAssetServicingdepart- ment has specialised in (alternative) asset classes or strategies-bothintheareaofUCITSandAIFs,where wecancreateclearaddedvalue.Withourconsulting services in Liechtenstein and Luxembourg, we are close to the client. As a one-stop shop, we can cover the entire value chain of an asset servicing service provider at both locations. Last year, theAsset Servicing division launched ad- ditional successful fund projects, acquired new, renownedandpromising clients andachieveda sig- nificant increase inassets undermanagement.At the endof2023,thisbusinessareareportedCHF12.5bil- lion in assets undermanagement. More than 94%of the assets under management come from private labelfunds,whilearound6%canbeattributedtoVP Bank products. Last year, VP Fund Solutions, as a sub-divisionofAsset Servicing, recordedanewhigh of 90 clients in both locations, Luxembourg and Liechtenstein, aswell as around 266 funds. Outlook Regulatoryrequirementscontinuetoincreaserapidly -thismeansthatfinancialserviceprovidersmustcon- tinually develop their processes and, above all, sup- port standard processes digitally. There is great potential here for the futureof innovativeproviders - by solving their administrative processes digitally in order to have enough time for the core competence of personal advice. A consistent IT strategy and tar- geteddigitalisation initiatives are therefore essential. The fact that the market is changing significantly with its increasingdegree of digitalisationoffers ex- tensive opportunities for fund service providers. The corresponding service providers operate with a platform idea: Thismeans that they aim to imple- ment cost- and time-intensive solutions in order to offer themon a smaller scale. Funds can therefore be seen as a valid and highly attractive option for outsourcing services. The cre- ationandadministrationof a fundenables the trans- formation of previously fixed costs into variable costs and thus a reduction inoverheadcosts. Bycon- centratingon the respective core competenciesusing a flexible infrastructure, future challenges can not only bemastered efficiently, but can also be used to one’s own advantage. Funds therefore offer a vari- ety of advantages - and tailor-made solutions meet individual client needs. More information: www.vpbank.com/en/vpfundsolutions World Fund Day: Successful fund business of VPBank Group