Foreign asset managers have been waiting to get a bigger slice of the pensions cake in Italy since pre-euro days. Not only the country’s pensions market, but also its large mutual funds market has been a strategic focus for them within Europe.
But just as pension funds in Italy are starting to recognise the particular skills and experience which asset managers from abroad have to offer, pensions consultants say impending political change in the country has thrown the future direction of the industry up in the air.
“Clearly, the future of employee benefits will be influenced by the new tax regime,” says Attilio Pellero of Milan-based consultants William Mercer. “The chances are that in the next 12 months even this government will try to reduce taxes in order to gain support in public opinion.”
In April, regional elections in Italy saw victory for the centre-right. Media magnate Silvio Berlusconi of Forza Italia is now widely expected to win the next general election which will probably take place next April. Already, Berlusconi has called for immediate general elections.
Forza Italia’s Giulio Tremonti seems likely to become finance minister in a Berlusconi-led government.
Now, just three asset managers have more than 57% of Italy’s Lira460bn (E238m) of pensions assets under their wing. Intesa SGR has a 22.3% market share, according to data from Iama Consulting, followed by Monte Paschi with 18.4% and Arco SGR with 16.9%.
But, despite this concentration at the top, Marcella Frati of Iama Consulting says the asset management market in Italy offers broad scope for development. “It’s a sector that is only just beginning,” she says. Italy’s mutual fund market is the third largest in the world and legal changes have recently promoted growth in the sector.
And since September, she says, there has been increased interest in sector funds, emerging markets funds and equity funds.
“So we think there is a lot of room for foreign players because they have experience in specialist funds,” says Frati. “Italian fund managers have historically been good at bond investments.” Pension funds in Italy are likely to use asset managers more in the future than they do now, she says, so pickings for asset managers, including those who have recently moved in, should be rich.
Pension funds in Italy have traditionally been heavily invested in government bonds for a variety of reasons. Tax treatment has favoured government bonds, and funds have in many cases looked to bonds to provide security against underperformance, consultants say. Most importantly, yields of treasury bonds were strong, before suffering a significant drop three to four years ago. Returns on government stock have harmonised within the Euro-zone, slashing the attractiveness of the securities for long-term investors. The 10-year bond yield now hovers at around 6%.
So, external asset managers are now fighting to make pension funds recognise the value of putting large tranches of their assets into equities.
“Asset managers are clearly visiting all pension funds, trying to explain that they could be a little bit more aggressive,” says Piero Marchettini of Adelaide Consulting in Milan. Because recent performance figures have been so feeble, pension funds are willing to sit up and listen to this new advice, he says.
For many years, members of Italy’s pension schemes have taken a passive attitude to the investment of their retirement assets, but awareness is growing. More and more consumers are now demanding better investment performance, consultants say.
“There is a growing sense of urgency among pension scheme members that funds review their policies,” says Marchettini. The pension fund of chemicals and pharmaceuticals industry employees has returned only around 5% over the last two years he says.
Trends in asset management of pension funds in Italy mirror those of markets elsewhere – there is movement towards multi-manager funds, says Frati. This is a specialism offered above all by many international asset management groups.
“Domestic companies are now more open to making advisory agreements with foreign players. We recently talked to someone about possibly developing hedge funds and funds of funds,” she says.
Last year the old self-managed pension funds, which were in most cases invested in bonds, suffered very poor performance, especially since the portfolios were seen on the basis of actual value. Some funds even had negative performance, says Marchettini.
However, though still disappointing, figures were slightly better for insured funds which have more flexibility on valuation.
However, the picture was very different for Italy’s open-ended pension funds which saw returns of up to 50%, or even higher, he says. While these funds only have a very limited presence in the market, their performance is very significant, he adds, because they were, in many cases, invested in stocks including those of the new economy.
This has fuelled the debate among old funds, where the approach is very conservative. And so now the question under discussion has become: is now the time to change their old ways? Rachel Fixsen