Serge Weyland, CEO of ALFI, Shares Insights on European Finance and Capital Markets

2024-05-05 11:58:00

Serge Weyland, CEO of ALFI (Association of Investment Funds of Luxembourg) since January 2024, knows Belgium well after studying there at the Solvay business school (ULB) when his father was a diplomat as Luxembourg’s permanent representative to the European Union. “My father co-wrote the Maastricht Treaty. I grew up in a very pro-European environment. And I try to complete this project again today“, he says. “Fortunately we have had moments like the Maastricht summit in the construction of Europe. The euro is vital to the stability of Europe. I am not sure if we would have gone through the Covid crisis as well without the euro”, he says.

Father of four children, this 51-year-old Luxembourger worked in the banking and asset management sector (notably as CEO of Edmond de Rothchild Asset Management) before taking over the management of Alfi, which has a total of 1,400 members by him. What he getsexciting” in his new job he is “the human side, which has a foot in the management company industry in Luxembourg, exchanges with regulators and the various ministries as well as the European Commission who ask us questions about our views on the main European projects.“. Having spent almost 30 years in the private sector, he is delighted to “to take a small height” and “try to put a stone in the European finance and capital market building”.

What is your role as head of the Luxembourg investment fund association?

We have three priorities. The first: to ensure that European regulations and their transposition in Luxembourg law contribute to the development of asset management. It is a huge industry that represents 17 trillion in assets in Europe. The second: help seize new opportunities, including alternative management. And the third: to promote Luxembourg solutions in Europe and beyond outside the Grand Duchy.

What amounts are we talking about?

4.5 trillion of funds are exported outside the European Union. This is a genuine European export product. Europe is also in a good position thanks to its two main European regulations, one for general public investment funds (Ucits), and the other for alternative funds (AIFMD).

Investing according to your values: the whole issue of thematic fundsWhat do we mean by alternative funds?

Alternative management covers in particular hedge funds, ie leveraged funds, and private equity investing in unlisted companies. That’s where we find European SMEs that we want to help grow. Here we are facing one of the great challenges at the European level, which is to ask ourselves how to develop our champions of the digital or energy transition. One of the solutions relates to private debt which is often aimed at unlisted companies. We will desperately need this non-bank funding for major renewable energy, infrastructure or digital projects.

How can we secure this funding?

One of the biggest challenges is to encourage European savers and households to use their savings more in the capital markets. Because the vast majority of them are still invested in savings or current accounts. Over the past 15 years, this has represented a loss of purchasing power and stock market investments have brought in much more. Figures from EFAMA (European Fund and Asset Management Association) show that 14 trillion of savings are invested in bank accounts in Europe, including the UK and Switzerland. This is significant. This represents approximately 41% of household savings.

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“There is a risk that European savings will be heavily focused on American markets in an investment strategy with low commissions (such as ETFs, Editor’s note).

So isn’t Belgium an isolated case with its 300 billion in savings accounts?

This is true everywhere in Europe. With some excellent exceptions such as the Netherlands, Sweden and Denmark that have developed savings products, especially in the second column of retirement savings (company savings). In Sweden, almost 10% of salary is automatically deducted to be invested in pension savings in the form of an investment. With such regulation family participation in capital markets can be developed. If we work on the second pillar, we will force workers to take an interest in the capital market.

Isn’t one of the problems with investment funds the high costs?

As part of the previous CMU (Capital Market Union) which aims to develop capital markets within the European Union, very important regulatory work was carried out to force fund and asset managers to be extremely transparent in terms of costs of. But it is true that in certain European countries that have structured the second pillar in the form of insurance products, there is still a challenge to accumulate costs. The average cost has fallen even if there are still variations. The difficulty is to make such a comparison. We cannot compare a passive ETF that doubles the American S&P 500 index with a fund whose objective is to invest in European SMEs, which requires a lot of work. I would also like to say that our industry is much more regulated than most other fields. Look at real estate or car marketing. No one is surprised by how much their car salesman or real estate agent earns for skills that don’t always exist.

Yes, your invested money can “change the world”. This is what we call impact investing.So ETFs have the lowest fees?

We should not forget the fact that there is no management information in passively managed ETFs since we follow an index. This works very well when the markets are rising. On the other hand, when they are more volatile, it is useful to diversify your portfolio. The passive management products that have performed well are the dominant American products such as the S&P 500 which includes 100% American stocks. MSCI World is 70% invested in US stocks even though it is supposed to be a global index. Due to the rise of technology stocks such as the Magnificent 7 (with Tesla, Microsoft, Apple, etc.) there is a particularly strong American bias in these indices. A low commission investment strategy (such as ETFs, Editor’s note) risks directing European savings heavily towards American markets. We need to develop savings products or incentives to redirect them towards the European economy.

What routes are planned?

The report of former Italian Finance Minister Enrico Letta, which aimed to lay the groundwork for the next legislature of the Commission and define the objectives of the capital markets (SCMU), outlines several ways. He discusses the development of the 2nd retirement pillar and possibly considering tax incentives to invest in Europe. We could imagine differentiated tax measures depending on the destination of the investment. I am sorry to see protectionist trends emerging on the capital markets in Europe.

Do you have examples of conservation?

For a fund, especially private asset funds, to be eligible for life insurance in France, it must be domiciled in France. France used the tool of life insurance to finance the French economy. We should take inspiration from this type of mechanism but apply it on a European scale. All European funds should be eligible. Conservatism should not be national but European for all savings products.

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We need a European telework regime.”

Ireland is a competitive location for the fund’s activity. What are you doing to avoid losing market share?

Luxembourg and Ireland are similar in many ways as pan-European fund distribution houses. Luxembourg funds are distributed to 80 countries. Ireland covers slightly less. Luxembourg has 4,300 billion in Ucits funds (traditional management) and around 2,000 billion in alternative management, which has developed very strongly. Some of the activity was previously located outside Europe, which generated jobs. Ireland benefited most from the increase in ETFs investing in the United States, thanks to favorable tax treatment with the United States. On the Irish market, a single player, in this case BlackRock, represents almost 1000 billion in assets.

I think that Luxembourg today has a variety of strategies that are not comparable to what we see in Ireland.

Has Ireland benefited more from Brexit?

It is not necessary. Different countries benefited from Brexit. Germany benefited from the relocation of banking licenses, France was able to attract some asset managers, especially in Luxembourg in alternative management and a little insurance. It was evenly distributed.

Brexit costs the British economy 100 billion pounds a yearThere is no war between the places?

I would say that there is healthy competition between financial centres. Specialization at the European level makes sense. The least, again, is national protectionism. This is not healthy for the development of Europe and it is not good for European savers because it involves additional costs.

Isn’t the development of the Luxembourg market hindered by the difficulty of hiring people with the necessary skills?

Finding talent is indeed a challenge. We are recruiting further and further within the European Union and even outside the EU. Covid has also changed the situation due to the development of telework. As a cross-border region, Luxembourg sometimes competes with other financial centres. And the reason for this is tax conventions between European countries and European legislation regarding teleworking. To take advantage of the tax system in Luxembourg, you will need a maximum of 35 teleworking days. A person living in Trier, Germany could benefit from working for a bank in Frankfurt as they will not be subject to the 35 day telework limit. This is a matter that Europe must work on because this limit creates tension on the job market. And this is not necessarily in line with the objectives to reduce the carbon footprint. There needs to be a real European telework regime. There were bilateral negotiations. But this is not enough. The same problem arises in other cross-border regions.