Oversight now the key task
Origo Consulting offers help as an outside investment consultant, describing and analysing investment processes in depth.
A mainstay of Luxembourg’s successful fund business are the companies managing the funds. Managing a fund means to handle investments, marketing and administration. Earlier, such companies were known under several names, but from 2018 they are all recognised as “Fund Managers”. A large group of such companies are still known as Management Companies or ManCo’s for short.
Managing a fund does in this context not mean to control and make major strategic decisions on behalf of a fund. It simply means to have the responsibility that fund is respecting laws and regulations.
A Fund Manager may delegate the three areas of responsibility but will still responsible that they manage comply with the law and regulations. Fund Managers are expected to exercise oversight over their outsourced function.
Fund managers come in two main “types”. Those owned by a larger banking group and the independent ones offering their services to external suppliers of investment funds.
The business model has always been as follows: a portfolio manager with a good idea for a fund and with some investors in tow goes to a Fund Manager to have a fund set up. The Fund Manager then does the legal footwork, delegates the portfolio management to the portfolio manager, outsources at least some of the administration and signs agreements with distributors friendly to the portfolio manager’s project.
Once the fund is up and running, the Fund Manager supervises the outsourced administration and collects data to control the distributors. The Fund Manager also performs risk management for the funds and oversees the Anti-Money Laundering efforts related to distribution.
In 2018 new rules were introduced concerning control of the investments in the funds. Fund Managers in Luxembourg must now be able to oversee the investment processes.
So far, investment process oversight is quite similar to having yet another compliance function.
Having a deep understanding of investment processes of the delegated portfolio managers is an essential part of the operational and financial risk management of the Fund Manager itself.
However, the requirements are now that the Fund Manager knows the investment team, portfolio management process, the decisions regarding investment and disinvestment, the way the investments correspond to the strategy laid out in the prospectus and how risk is handled (read here, pages 67-70). It strongly resembles our investment process =
These requirements are nearly the same as the main pillars of Origo’s work when describing investment processes. Not that we copied those.
We have used those elements since we did our first investment process analysis. We can confirm that the requirements are relevant and reasonable if you want to understand an investment process.
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