It was a surprise when, through the publication of my article on Luxembourg specialised investment funds (LSI) in the Luxembourg supplement published with the February issue of IPE, it became evident that LSI had already reached a volume of nearly e40bn by autumn 2000. Since then, the 2000 year-end figures have become available, confirming the great impact of LSIs.
In Table 1 Luxembourg public funds and LSIs are juxtaposed, allowing the volumes and growth of both kinds of funds to be seen at the same time. LSIs, which have only been possible in Luxembourg since the law of July 19, 1991 came into force, refer those undertakings of common investments (UCIs) whose shares or units are not destined for public offering.
They had a rather restrained beginning, but saw a tremendous upswing from 1996 to 1999 at least doubling in volume, if not tripling, each year.
Table 2 shows the development of the different legal forms of LSI as unit trusts (Fonds Communs de Placement, FCP), joint stock companies with variable capital (Sociétés d’Investissement à Capital Variable, SICAVs) or in other forms (such as Sociétés Anonymes d’Investissement à Capital Fixe, SICAFs or Sociétés à responsabilité limiteé, Sàrl). SICAVs/SICAFs as well as Sàrl are legal entities in thier own right, while FCPs legally need a management company for their administration and respresentation. At any rate, all LSIs, in whatever legal form they have been organised, profit from the reduced taxe d’abonnement, down to one basis point.

Unit trusts and umbrellas predominate
Moreover, most LSI (Table 5) are formed as so-called umbrella funds so that the number of sub-funds is more important than the number of legal fund entities.
On average with each LSI legal fund entity there are 2.7 sub-funds in the case of FCPs and 2.9 sub-funds in the case of SICAVs. This does not mean anything extraordinary for LSIs, since in Luxembourg public funds there exist four sub-funds per legal fund entity on average.
From the beginning, after the law of July 19, 1991, the predominant form of LSI was FCP ; the SICAV-form appeared from 1992 on, while the other legal forms can be neglected. At the end of 2000 there were only two such other LSI-forms, one SICAF and one Sàrl, both single entity funds without any sub-funds.
Generally it should be noted that the Luxembourg supervisory authority, Commission de Surveillance du Secteur Financier, publishes on the internet monthly updated lists of LSI ( under “entités surveillés” then “liste … du 19 juillet 1991”).

LSI as Luxembourg Stock Exchange traded funds
It was a true innovation when in 1996 an LSI appeared on the list of stock exchange quotations at Luxembourg for the first time (Table 2 in connection with Table 6). Naturally there is a clear note next to the quotation “valeurs mobilières reservées aux investisseurs institutionnels” – that is, reserved for institutional investors only, but still such a stock exchange quotation of LSIs seems to be a special feature. Many LSIs are founded for one or a limited group of institutional investors only. But there are some good reasons for doing so. Continental insurance companies and pensions funds may by national law invest only in stock exchange quoted securities.
For German institutional investors an additional fiscal peculiarity has to be taken into account. Non-German funds that are not registered for public sale in Germany or cannot be registered in Germany on account of the lack of a public offering, but at the same time are owned by German tax-liable investors, these are burdened with heavy duties according to German Foreign Investment Act § 18 section 3. One can circumvent this “90% Substanzbesteuerung” of gains by making out of such a ‘black’ fund, a ‘white’ one, which then is taxed like a German domiciled fund, by double stock exchange quotation (Luxemburg officially on the one hand and at the regulated market on a German stock exchange on the other hand, which can be managed rather easily according to inter-EC-stock exchange regulations) and by regularly fulfilling special German obligations for publishing certain tax-relevant figures (according to German Foreign Investment Act § 17 section 3 Number 1 lit. b). Evidently this route has been taken by at least one LSI with its 18 sub-funds (see Internet publication: fonds/index.html – “Bundesamt für Finanzen. Zum amtlichen Handel oder zum geregelten Markt an einer deutschen Börse zugelassene ausländische Investmentanteile mit inländischem Vertreter, § 17 Abs. 3 Nr. 1 b AuslInvestmG”.).

Breakdown of LSIs as to investment policy
An insight into the development of LSIs can be obtained from Table 4, where the gradual diversity of LSIs over the period of time is shown as to individual investment policies. LSIs started in 1991 as funds investing in comingled stock exchange quoted securities ; already in 1992 pure bond funds were added as well as one leveraged fund and one fund of funds.
The range of LSIs was widened by pure equity funds in 1993, while in 1994 one property fund and one futures/options fund appeared. In 1995 the first LSI was founded that invested preponderantly in non-quoted securities. The array of LSIs was completed in 1996, when the first money market fund was created. At any rate, the differentiated growth of LSI as to investment policy can be deduced easily in Table 4. A concentration may be observed with four kinds of LSI investment policies (as at December 2000):
Bond funds 26.8 %
Equity funds 32.5 %
Comingled funds 10.6 %
sub-total 69.9 %
and, actively during recent years:
Fund of funds 25.3 %
Total 95.2 %

Statements to LSI despite their restricted publicity
LSI – as far as they are not stock exchange quoted – are practically exempt of publicity requirements. Naturally SICAVs/SICAFs/Sàrl have to publish their statutes, which normally do not say much about the most interesting aspect of an LSI – the institutional investor and where that institutional investor is from. However, there is one important legal prescription applying to every kind of UCI – each Luxembourg fund must have a Luxembourg domicile and that domicile is inscribed in the list of funds to be kept and published by the Commission de Surveillance du Secteur Financier according to Article 72 Lux. OGA-law of March 30, 1988. Normally Luxembourg funds do not set up a domicile of their own, but are granted domicile by another Luxembourg institution, with which the fund is connected in some other way (administration/paying agent, custodian or sponsor). From the domicile addresses one can deduce the domicile granting institutions.
This the author has done in a research work with the help of banking lists, branch and/or telephone directories as shown in Table 7: out of 153 domiciles only one domicile was not clearly attributable, all others could be attributed to 42 institutions listed alphabetically in Table 7.
This list of domiciles is interesting, but it does not disclose anything about the LSI investors or about the countries of origin of the LSI promoters. But thanks to a list of the countries of origin of the sponsors of LSIs the following conclusion is a valid one – the country of origin of the sponsor is at the same time the country of origin of the investor.
The list shown in Table 5 was published for the first time in the February issue of IPE, then comprising year-end 1999 and end of October 2000 figures bringing new surprising results to light.
Almost four fifths of the LSI volume is comes from four countries (Belgium, US, Japan and South Africa). The growth rate of Belgium-sponsored LSI volume is in the year 2000 with over 80 % in comparison with the year end before the strongest. The LSI volume which comes from other continental countries is relatively small, that which comes from UK is evidently even shrinking !
While the absolute LSI volume is great, the relative proportion of LSIs to the whole Luxembourg fund potential remains rather small on account of the overwhelmingly size of the international public funds market there.
Lately, fund constructions which are similar to LSI can be found embedded in sub-funds of large public umbrella funds, what might well be the reason that LSI growth in 2000 was not as great as the four years before. Yet the future development of LSI is regarded as being positive, especially when the European harmonisation of financial services is further progressing according to the resolutions of Fereira when one-sided discriminations of inter-EU financial services will step by step disappear.
Hans Karl Kandlbinder is an investment consultant based in Grafing near Munich