World Fund Day: Successful fund business of VP Bank Group

Review of the markets in 2023

The friendly macro environment with extremely low interest rates has no longer existed since 2022. Rather, 2023 was characterised by record high interest rates, political and economic risks and fears of a strong economic slowdown. This resulted in significant disadvantages for investment activities. To make matters worse, consumers were cautious. Due to lower inflation rates and the hope of lower interest rates in conjunction with a significantly more resilient US economy, the stock and credit markets have nevertheless risen sharply. Last but not least, the current interest rate level impacts investors' strategic asset allocation (SAA) and has changed the relative attractiveness 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 into a professional, innovative and high-performance industry over the last few decades. The industry has highly regulated vehicles with proven processes that give investors confidence. They help to protect the interests of investors at all times - such as compliance with investment guidelines for risk diversification, investment restrictions or risk limitations.

Importance of the fund domicile

A fund domicile must fundamentally fulfil the following aspects: excellent reputation, guarantee of political stability, transparency, infrastructure, specialist knowledge and the necessary capacities for the structuring and operation of collective investment schemes.

Based on this, the following issues are at the forefront when selecting a domicile for an investment strategy in the form of a collective investment scheme, taking into account the intended investors and target markets: flexibility in the design of the investment idea as a financial product, the expertise and quality of the service providers required to operate a collective investment scheme, acceptance by investors and, last but not least, the duration of the approval process by the supervisory authority. Tax law aspects are just as important.

Due to the fact that the fund manager or initiator is often domiciled in a different country to the product or management company, the existence of functioning cooperation between the supervisory authorities is another key factor.

Development, innovative ability and innovative strength

An ideal ecosystem, coupled with a stable economic and political system including modern infrastructure, promotes talent and innovation. Innovation in the sense of new ideas and inventions and their successful commercial implementation in new products, services or processes is often due to an interaction between 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 the willingness to change and get rid of old habits.

VP Fund Solutions – successful for over 25 years

With VP Fund Solutions, VP Bank Group has an international fund competence center with over 25 years of experience. VP Fund Solutions is represented in Luxembourg and Liechtenstein.

Luxembourg is the second most important fund location in the world and an attractive domicile for setting up fund management companies. In Luxembourg, the fund industry has developed into a professional, innovative and high-performance economic sector over the last few decades.

Luxembourg was the first member state to implement the EU Harmonization Directive (UCITS or UCITS Directive) into national law in 1988. More than 30 years later, Luxembourg funds managed financial assets of more than EUR 5 trillion as of the end of Q4 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 fund location in the world after the USA. On the other hand, in the market for fund management companies (FMCs), a consolidation of providers has continued to be observed over the last few years, alongside the establishment of new companies. This shows that Luxembourg remains an attractive domicile for setting up and running an FMC - but also that FMCs need a critical size and a solid business model in order to remain viable. At VP Fund Solutions in Luxembourg, over half of the assets can be traced back to initiators from Germany.

Dynamic development in Liechtenstein

The fund industry in Liechtenstein has also developed impressively in recent years. With future-oriented fund regulation, Liechtenstein has positioned itself as a dynamic, cross-border hub for private label funds, particularly in German-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 targeted solutions for demanding investment needs. 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. Liechtenstein is particularly strong where a high level of specific specialist knowledge and the ability to develop and offer targeted solutions for demanding investment needs in the area of non-traditional investments and pension provision are required.

Asset management is usually delegated, with more and more clients setting up their own asset management in Liechtenstein - this is because of access to Europe in the area of MiFID activities. The fund industry in Liechtenstein has developed excellently, particularly 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 reported in the “Asset Servicing” business segment, which includes the fund management and custodian bank activities of VP Bank Group. The two fund management companies VP Fund Solutions (Luxembourg) SA and VP Fund Solutions (Liechtenstein) AG, two legally independent entities, carry out the fund management activities. The custodian bank activities include the custodian bank functions of VP Bank AG, Liechtenstein and VP Bank (Luxembourg) SA.

The Asset Servicing division has the goal of creating value for clients and their investors through advice, the ongoing provision of services and the provision of know-how. That's why the Asset Servicing department has specialised in (alternative) asset classes or strategies - both in the area of UCITS and AIFs, where we can create clear added value. With our consulting 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, the Asset Servicing division launched additional successful fund projects, acquired new, renowned and promising clients and achieved a significant increase in assets under management. At the end of 2023, this business area reported CHF 12.5 billion in assets under management. More than 94% of the assets under management come from private label funds, while around 6% can be attributed to VP Bank products. Last year, VP Fund Solutions, as a sub-division of Asset Servicing, recorded a new high of 90 clients in both locations, Luxembourg and Liechtenstein, as well as around 266 funds.

Outlook

Regulatory requirements continue to increase rapidly - this means that financial service providers must continually develop their processes and, above all, support standard processes digitally. There is great potential here for the future of innovative providers - by solving their administrative processes digitally in order to have enough time for the core competence of personal advice. A consistent IT strategy and targeted digitalisation initiatives are therefore essential.

The fact that the market is changing significantly with its increasing degree of digitalisation offers extensive opportunities for fund service providers. The corresponding service providers operate with a platform idea: This means that they aim to implement cost- and time-intensive solutions in order to offer them on a smaller scale.

Funds can therefore be seen as a valid and highly attractive option for outsourcing services. The creation and administration of a fund enables the transformation of previously fixed costs into variable costs and thus a reduction in overhead costs. By concentrating on the respective core competencies using a flexible infrastructure, future challenges can not only be mastered efficiently, but can also be used to one's own advantage. Funds therefore offer a variety of advantages - and tailor-made solutions meet individual client needs.