The Belgian fund landscape is unusually complicated. A history of fiscal and regulatory uncertainty exemplified by frequent tax changes, some of which are retroactive, has led most Belgians to prefer Luxembourg as the investment centre of choice. The result has been a long-standing and heavyweight presence by Belgian fund groups in Luxembourg. With Belgian investment know-how and fund expertise readily available to foreign investors through their Luxembourg presence, why look at Belgian domestic funds?
The short answer is that the range of funds on offer in Belgium is very different and arguably more interesting than the Luxembourg range. Tax has had a distorting effect on the local product. The varying impact of capital gains and income taxes applied to actual and deemed dividends has resulted in most bond and money market funds being domiciled in Luxembourg where they are free from such taxes, and have the added advantage of being available in anonymous bearer share form. In Belgium, equity Sicav suffer no capital gains tax and negligible income tax, and they are exempt from withholding tax on revenues arising from Belgian transferable securities. In addition, investors in Belgian Sicav can benefit from the wide range of double-tax treaties signed by Belgium. According to the most recent Lipper data (September 1999) these equity Sicav accounted for 36% of total Belgian-domiciled fund assets. Moreover, in the flourishing global bull market this equity sector was the only sector posting noticeable growth. In the 12-month period to the end of September 1999, these funds enjoyed growth of $4.4bn.
Belgian money managers now offer (amongst their domestic and Luxembourg ranges) a choice of funds more varied than most would expect from a country recognised more as a political than a financial centre. This choice includes a colourful selection of “protected” funds that deliver varying forms of downside protection whilst tracking every imaginable stock market index. Specialist institutional vehicles and balanced pension funds are also important to the range. The equity funds cover the full spectrum of international offerings and Belgium has an advanced selection of specialist sector or themed funds.
One-year performance data from Standard & Poor’s Micropal shows these themed funds leading the way with respectable returns. Over longer periods (five years), the leading fund across all sectors showed a near threefold return. Cross-border comparisons do not stand up to deep analysis but they are sufficient to prove that Belgian funds are able to compete with their better-known counterparts. The top-performing fund returned 291% over five years. The equivalent European equity fund in Switzerland delivered a return of 233% and the German equivalent was 258%. The French equivalent was better at 298% but by a margin that was not much more than incremental. Of course, each of these countries can show equity funds that performed better over the same period, primarily in the technology sector. For example, Germany’s leading equity fund (DIT Technologiefonds) returned 542% over the same period and in Luxembourg the top performing equity fund was Putnam’s Emerging Info Science at well over 1000% but Belgian managers were relatively late entering the technology bubble and have no similar funds with a five-year track record.
No data exists on the extent to which foreign institutions invest in Belgian funds, although volumes are thought to be low. From a regulatory perspective there is nothing to inhibit them and fiscally Belgium offers a positive incentive in the number of double taxation agreements it has in place. Moreover, most funds are Ucits and quoted on the Belgian stock exchange so they are acceptable from a technical point of view. The real hurdles that limit foreign investment into Belgium are commercial and probably have more to do with lack of active promotion than any formal or informal barriers. “Institutions have always invested in our Luxembourg funds,” comments Marc Bayot, strategic adviser for Fortis Bank. “Unfortunately, they will tend to look at the domestic funds only when they want to invest in the Belgian stock market, and this has not performed well over the past year.”
The Belgium financial market is in the process of metamorphosis. Until recently, the investment culture was largely retail and focused on fixed interest investment. “There has traditionally been no culture for institutional investment,” says Thierry Lohefte, partner of lawyers Linklaters & Alliance. “Belgium has never had big banks or big intermediaries and
therefore they have never had the power to invest in large teams of analysts, nor have they developed the marketing expertise that would really expose them to this type of investment.” The change has now begun and, following the acquisition of Belgian’s two leading banks by Fortis and ING, they have more muscle to sell the advantages of their local product in an international arena. The Belgian market remains a medium to small cap market that has suffered from mediocre performance but Belgian fund managers are proving their expertise in global and sector markets.
The metamorphosis is nearly at an end but the butterfly seems hesitant to fly. The choice of funds exists and many have performance that compares well with the cross-border competitors who are beginning to push hard into Belgian territory. However, to attract foreign investors, the Belgian fund houses need to display their wares more aggressively.
Diana Mackay is managing director, European Fund Industry Services, in London