In 2002, Luxembourg Spezialfonds defied the generally negative volume growth in both the Luxembourg and other European investment fund markets. Fund volumes increased, contrary to expectations, by 5.5%, compared to an increase of 6.1% the previous year.
Volumes in Luxembourg funds open to the general public (public funds), however, were 9.7% down in 2002 on the previous year, when Luxembourg public funds had grown in volume terms by 6.2%.
But the most surprising figure emerging from an analysis of growth in Luxembourg Spezialfonds in 2002 was the level of net sales receipts, which at e8.94bn exceeded all previous records. The year before, receipts by Luxembourg Spezialfonds totalled e3.57bn and e5.46bn in 2000.
There were therefore three predominant factors in the Luxembourg Spezialfonds market in 2002: firstly, a concentration on fewer funds (–1.5%), but with a lot more subfunds (+6.9%); secondly net sales receipts almost treble those of the previous year; and as a consequence of these, a substantial growth in volume.
It should be remembered that investors in Luxembourg Spezialfonds may not be natural persons (individual persons), but must show that they are investisseurs institutionnels (institutional investors). The number of investors in each specialised investment fund is not, however, limited (as is the case with Spezialfonds in Germany, for example). Another unusual feature is that the term investisseur institutionnel is not limited to legal entities, that is to non-natural persons; rather, it is defined as a company or organisation with a professional cash management system. From this definition, it follows that not only insurance companies, pension funds, industrial concerns or financial institutions are able to own such Spezialfonds; it is also those (private) bodies of assets that have a professionally organised asset management system (eg, as family holdings or ‘discretionary mandating’ of a bank).

Concentration on fewer funds
This growing tendency to concentrate on fewer Spezialfonds can be clearly seen in detail in Table 1. The number of Luxembourg Spezialfonds has fallen by two, or 1.5%, from 135 funds at the end of 2001 to 133 at the end of 2002. Over the same period, however, the number of subfunds rose by 28, or 6.9%, from 405 to 433. Accordingly, in the case of the Spezialfonds (see Table 2) the average volume per fund remained high and essentially constant, at about e102m at the end of 2002 (previous year e103m). For every specialised investment fund at the end of 2002, there were almost 3.3 subfunds, compared to exactly three at the end of the year before.
One notable aspect in this analysis would appear to be the fact that, since 2001, an average Luxembourg specialised investment fund (ie, subfunds) has been more than 10% larger than a German specialised securities-based/money market/holding investment fund, after this average size of Spezialfonds in Luxembourg had for some years lagged well behind the corresponding size of German Spezialfonds. In terms of a Luxembourg Spezialfonds (that is, not of the subfunds) this had long been ahead (in 2002 with an average size of e331 m, in 2001 e307m, in 2000 e257m – which gives some indication of the huge rate of increase).
For the purpose of comparison, the corresponding average ratios for the Luxembourg public funds at the end of 2002 are given below (the figures in brackets are the ratios for the year before):
q Subfunds per fund 4.08 (4.01)
q Volume per fund e443m (e500m)
q Volume per subfund e104m (e125m).
That means quite simply that the structures of the Luxembourg Spezialfonds, on the one hand, and the Luxembourg public funds, on the other, are gradually moving into line with each other, and that this process will continue in the near future.
Over the past year, the share of Spezialfonds volume in the Luxembourg investment funds market as a whole rose from just under 4.5% to over 5.2%, and with securities markets in decline this is something that could only be achieved by a sharp increase in net sales receipts. The current up-to-date list of Luxembourg Spezialfonds is published on the internet by the Luxembourg government financial sector regulator, the Commission de Surveillance du Secteur Financier.
At under ‘Entités surveillées’, for instance, can be found the Liste Officielle au 31 Decembre 2002 des Organismes de Placement Collectif Soumis à la Surveillance de la Commission de Surveillance du Secteur Financier Conforemment à la Loi du 19 Juillet 1991: (showing 133 Spezialfonds).
This sharp increase in net sales receipts by the Luxembourg Spezialfonds, totalling e8.94bn, means that over 20% of the year-end funds volume of Luxembourg Spezialfonds was derived from new business in 2002.

Countries of origin of Luxembourg Spezialfonds holders
There was a real sensation in 2000 when figures were published for the first time by the CSSF that made it possible to identify the countries where the promoters of the Spezialfonds were domiciled, and thus de facto the countries of origin of holders of those funds. Few would have suspected that institutional investors from the countries that emerged as leaders – such as Belgium, the US, Japan and South Africa – were, and still are, investing quite as heavily in the Luxembourg Spezialfonds market (see Table 3). But now increasing numbers of investors from ‘traditional’ specialised investment fund countries, such as Germany and the Netherlands, are coming to the fore. The existing promoter-domicile countries (Belgium and the US) are still out in front, albeit with slightly lower shares, and Japan is third largest in terms of volume, 54.4% up on the previous year, but Germany (despite a decline in the Allianz Pimco fund volume) is now the fourth-largest promoter-domicile country, with 57.5% volume growth compared to the previous year, followed by the Netherlands in fifth place with 76.9% volume growth. South Africa has been pushed down from third place in 2000 to sixth largest promoter-domicile country at the end of 2002. The importance of France, the UK and Switzerland as promoter-domicile countries, and therefore as investor-origin countries, has remained more or less constant or has fallen slightly.
There is still just one plausible assumption for Belgium’s strong showing among Luxembourg Spezialfonds. Because Belgian investment law does not allow fonds dédiés (as institutional funds are known in French) that are structured in the same way as the specialised investment fund investment medium, the upturn in Luxembourg Spezialfonds of Belgian provenance is explained by the efforts of Belgian insurers to underlay their successful ‘unit-linked or portfolio-linked life assurance policies’ (known as Branche 23) with Luxembourg specialised funds rather than Belgian public funds. Although the average volume per Luxembourg specialised sub-fund of Belgian provenance was smaller in 2002, at e112m, compared to the previous year’s e180m (which points to the establishment of many new sub-funds), it was still above the sectoral mean of e102m. But what is really impressive is the range of variation in the average volumes of Luxembourg Spezialfonds at the end of 2002 among investors of different provenance (em):

Investor Per Per
origin fund sub-fund
Belgium 1,138 112
Netherlands 1,001 1,001
US 420 276
Japan 332 114
Germany 253 135

It is easy to see just how significant these figures are when we consider that the volume of an average German specialised (securities-based/money market/holding) investment fund is about e90m.

Range of variation of investment policy and legal forms
Since 1991, in the development of Luxembourg Spezialfonds, the funds have only gradually extended over the whole spectrum of possible investment policies. But meanwhile they have developed very clear preferences (table 4). Three types of specialised investment fund – in order of importance, bond funds, equity-based funds and funds of funds (with the importance of the latter now tending to decline) – together make up almost 90% of the total volume of Luxembourg Spezialfonds. If we combine Tables 2 and 5, as in Chart 1, we can draw further extremely interesting conclusions about Luxembourg Spezialfonds:
q With well over 60% of total volume and numbers of both funds and sub-funds, the Fonds Commun de Placement (FCP), or mutual fund, predominates; it has the legal form of a trust and is similar to the requirements of the German fund legislation;
q With between 30% and 38% of total volume and numbers of both funds and sub-funds, the next largest is the company-law form société d’investissement à capital variable (SICAV), or open-ended investment companies (OEICS);
q The société anonyme d’investissement à capital fixe (SICAF), or closed-end investment trust, a form of fund even closer to the Aktiengesellschaft, is represented by only two companies, and can virtually be disregarded;
q Chart 1 provides even clearer confirmation of the assertion that the Luxembourg specialised investment fund market is concentrated on fewer funds, and especially so with the FCPs.

Listed Spezialfonds
The fewest changes in 2002 were seen in listed Luxembourg Spezialfonds, as only the FCP City Institutional Fund, for which Citibank was acting as listing agent, no longer appears on the schedule of 10 listed specialised funds as updated at the end of 2002, out of which 64 sub-funds or unit/share classes are individually and officially listed on the Luxembourg stock exchange.
Under current stock market practice, a (Luxembourg) specialised investment fund can only be officially listed on the Luxembourg exchange if at the time of the market listing a minimum of five different institutional investors have an interest in the specialised fund concerned. The listings of the Spezialfonds are shown in the Luxembourg stock exchange gazette (Côte Officielle) with the remark that they are “valeurs mobilières réservées aux investisseurs institutionnels”, or marketable securities reserved for institutional investors exclusively. This makes it quite clear that investors who are ‘natural’ persons cannot acquire a unit/share of such a fund.
Luxembourg Spezialfonds may be held externally, provided they are not ‘listed’, because they are protected by a restricted disclosure requirement. First and foremost, Luxembourg Spezialfonds do not need to make a sales prospectus available to the public. Specialised investment funds that have the legal form of a corporate body must nevertheless lodge their statutes with the commercial register, and insert them in Luxembourg’s Official Gazette, Mémorial C. But these statutes often give little away, and especially not who the initiator of the fund is. However, every Luxembourg investment fund, irrespective of type and legal form, must have a domicile address in Luxembourg which is publicly available in the list of Luxembourg investment funds that must be kept in accordance with Article 72 of the Luxembourg law on UCITS of 30 March 1988. But they must also have a ‘promoter’, whose name does not have to be published, but can often be deduced from the domicile address, depository bank, administrator and other similar information.
It was possible for all domicile addresses to be attributed in the domicile list (Table 7) of the Luxembourg Spezialfonds, thanks to the information provided by the CSSF as at the end of 2002. From a German point of view, the players on the Luxembourg Spezialfonds market identified so far are ADIG, DEKA, Landesbank Rheinland-Pfalz, M M Warburg and Oppenheim, plus SEB (formerly BfG) and probably HSBC Trinkaus & Burkhardt; new on
the list in 2002, with a ‘German-specific’ domicile address, is the
Luxembourg-based HVB-Group’s Activest. The large Allianz specialised investment fund Allianz Pimco Advisory, however, whose FCP units have a stock market listing in two classes in Luxembourg, is managed by Crédit Agricole Indosuez in Luxemburg, which also acts as the listing agent. It is therefore rather surprising that every one of the Luxembourg Spezialfonds with German promoters, and probably with German investors too, (as can be seen from Table 7, in combination with Table 6) are FCPs and not investment ‘company’ funds; in the case of the Luxembourg specialised investment fund with the legal form of a joint-stock company (SICAV or SICAF) German investors could under certain circumstances avail themselves of the DBA (double taxation treaty) ‘interlocking rights’ (see letter of the BMF dated 21 May 1999 with reference number WD3 S. 1300 34/99, published in Finanz Rundschau 1999, S. 1084)(1).

Momentum from harmonisation
The value in absolute terms of Luxembourg specialised investment fund volumes is astonishingly large, even though the proportion of Spezialfonds on the Luxembourg fund market is still small in percentage terms, at 5.2%. This could, however, be due rather to the international over-dimensioning of the Luxembourg public funds market, and to the flexibility of the Luxembourg public umbrella funds, which can conceal specialised fund-like entities, even in individual subfunds of large public umbrella funds.
There are positive indications for the future development of the specialised investment fund as a financial instrument in Luxembourg. This is also true for German institutional investors, especially if further progress is made on Fereira’s European harmonisation model and the ban on unilateral discrimination by intra-EU ‘financial services’. In 2002 the volumes of Luxembourg Spezialfonds of German provenance rose by over 57% compared to the year before, having already grown in 2001 by a good 22% over the year before. And in the German Finance Ministry’s ‘2006 Financial Market Promotion Plan’ the future prospects are as almost as rosy in the German tax firmament for foreign investment funds of all types because of the full equalisation with domestic funds. Whether that will become reality in Europe as a whole, however, could be open to doubt – no matter how desirable it seems.
Hans Karl Kandlbinder is an investment consultant based in Grafing near Munich. Frankfurt-based lawyer Till Entzian will in the near future be continuing studies on Spezialfonds as an independent consultant