Within days the entire workforce was working remotely, with little disruption to output. Meanwhile investors were relatively relaxed too, with only a marginal outflow from Luxembourg-based vehicles.
“This experience shows that the industry is well organised, well-regulated and was well-prepared, and that there is a government looking after the industry,” noted Gilles Dusemon, a partner at Arendt & Medernach. In particular he highlighted the speed with which working from home was implemented.
Nicolas Mackel, CEO of Luxembourg for Finance, suggested that 85-90% of financial sector staff were working remotely three weeks after the lockdown. That the government could persuade the neighbouring countries to waive remote working restrictions for cross-border commuters was a key achievement.
Relatively moderate asset drop
Net assets in Luxembourg funds were down by 11.1% in March. However, only about a quarter of this was due to the net effect of investors withdrawing. Most was related to falling valuations of assets held by funds. So while the drop in net assets to the end of March wiped out all the gains reported during last year, this has to be put in context. The top to bottom fall from January 2020 to March 2020 was 13.4%, but this compares to the 28.1% fall between August 2007 and the depths of the global financial crisis in March 2009.
Net assets in Luxembourg funds: global financial crisis vs covid-19 crisis
X-axis: Months since pre-crisis peak. Y-axis: 100 = pre-crisis peak. Source: CSSF
Statec estimates that value added fell by 25.8% in the entire Luxembourg economy between 23 March and 17 April. However the financial sector only accounted for about one-tenth of this decline, despite representing nearly quarter of total economic output. The national statistics agency reckons value added in financial services was down 10%. This compares to 21% for all business services, 17% for real estate, and 90% for both the catering and construction sectors.
No investor over-reaction
Global equity markets fell by around one-fifth in March, after having rebounded substantially in the middle of the month, and this rally consolidated into May. If this trajectory is confirmed, the overall impact on the Luxembourg fund sector may not be too severe. As well, some businesses will have benefitted as an increased volume of transactions will have generated fees.
“Investors didn’t seem to over-react during the crisis,” remarked Yannick Arbaut, a partner at Allen & Overy. “Yes there were some issues around liquidity but our clients said this was to a lesser extent than they feared.” He added that while he received many early questions about funds’ options for suspending redemption requests, “the reality was that not so many had to take these steps.”
Yannick Arbaut, partner, Allen & Overy: few asset managers had to gate funds. Photo: Allen & Overy
Quick remote working
One of the successes for the sector was the speed with which it switched to working from home. “Some businesses had better plans than others, and some companies had to make some quick purchases of hardware, but in general the financial sector coped well with the move to remote and home working,” remarked Yves Reding, the CEO of ICT services firm EBRC.
Internet connections also stood up well to the strain, both within Luxembourg and cross-border. In this context, Reding noted the importance of the European Commission’s move to ask the likes of Netflix and Amazon to reduce their demands on the system. However he also saw the move to teleworking has seen a spike in cybercrime. “Home working has created vulnerabilities in those companies without a strong culture of risk management regarding cyber-attacks,” he said.