Italy is not what it promised to be. Those foreign managers who rushed (and continue to rush) to set up shop in Italy in anticipation of finding their European pot of pensions gold, have woken up to the harsh reality of the matter – they appear to have been misinformed.
This realisation has come at a rather bad time. For many US and European managers alike who have trodden the UK and Netherlands pensions trail, the Italian market has embodied the third strategic link in their expansion programme pan-Europe. Equally it has become a key focus for asset managers in Europe who have otherwise grown weary of waiting for France or Germany, who consistently fail to deliver on their significantly larger pension fund potential. But the truth of the matter is that whatever the Italian closed end pensions market promised, the actual growth levels in the market are not sufficient for the wealth of asset managers entering the fray. Basically, there is not enough to go round.
After months of anticipation, when the much heralded pension fund bang arrived with little more than a whimper, the set up rate of closed end funds – the main target of international managers - has been frustratingly slow. While RFPs are currently circulating by the likes of Cometa and Fondenergia, the only solid new pensions business to be awarded has come fromFonchim which was notable for its distinct lack of international flavour.
The levels of activity in Italy from foreign managers setting up shop and sharpening their marketing strategies continues unabated however. Paribas Asset Management which first set up in Italy in 1979 has entered every single RFP to date and has been shortlisted on some of them. It is now in the throes of creating its first open-ended pension fund with insurance company Cardif for ‘professional workers’ which will be sold via external distributors. Morgan Grenfell Asset Management SGR (MGAM) which received authorisation in January to manage institutional business is already running DM1bn (E511m) in assets sourced mostly from banks and foundations and is equally as gung-ho about its future plans. “Our goal is to participate in all the pension beauty parades,” asserts Sergio Albarelli, chief business officer of the new operation in Milan.
Like their contemporaries, MGAM is targetting the entire Italian institutional market, encompassing the corporate and closed end pension funds, the private pension schemes for self employed workers (CNPAs), foundations, banks and insurance companies. The CNPAs are particularly attractive, according to MGAM’s Albarelli. “This is a very rich area – there are lots of assets there.” CNPAs have traditionally had very strong ties with the domestic managers though poor management of the assets, MGAM believes, will leave them open to new business propositions from international managers.
One of the areas that foreign managers have been looking to gain the most ‘institutional’ business is as sub advisers to Italian banks. An example of the outsourcing activity is the recent $1.3bn (E1.2bn) mandate awarded to AXA Asset Management by Fondicr in international assets, previously managed by Rothschild Asset Management. Axa is managing the assets for Italian pension funds, foundations and other institutional investors through a joint venture it has set up with the Italian asset manager following the mandate.
SSGA, one of the two international benefactors of the Fonchim mandates , albeit indirectly through its partnership with Mediolanum, is currently managing the assets of Italy’s first indexed fund on behalf of its Italian partner and is considering taking its own products into the market, though Eric Stock at SSGA is not expecting a wave of indexed fever to hit Italian investors just yet. “The concept of indexation is relatively new,” he points out. UK fund manager Flemings has decided to position itself as a global balanced manager , running around 90% of its Italian institutional assets on an absolute return basis, and is keeping itself just very focused on its target client base. “We are effectively focusing just on institutions,” explains Manfredo Catella at Flemings in Milan. “We want to build up a structure that can achieve this target.”
MGAM’s parent, Deutsche Bank is taking care of the open fund side of the business and has positioned itself very much as a direct competitor to the local banks. It now has over 200 branches throughout Italy giving its mutual fund subsidiary, Deutsche Bank Fondi access to the much vaunted distribution channels. In acknowledgement of its growing influence in the market in fact, Mediobanca is in the unusual position as a local provider seeking to close a deal with a German bank in order to gain greater control of an Italian adversary, Banca Commericale Italiana (BCI) - Deutsche Bank has a pivotal stake in BCI.
In the absence of a strong equity culture, balanced managers such as Flemings have also wisely realised the importance of establishing a solid presence in the area of bonds. For foreign asset managers who are not offering international fixed income products, business will be very limited. As a result global fixed income managers JP Morgan and Credit Suisse have firmly entrenched themselves in the market. Credit Suisse which has only recently opened up its offices in Milan has declared that it intends to run E2bn in Italian assets by the end of 1999 (double its current amount) and E3.5bn by 2001. JP Morgan, marketing itself as a global fixed income player has gained some high profile Italian business particularly the recent set of Cariplo mandates. The majority of the manager’s institutional business has been sourced from endowments, foundations and insurance companies has been in global and US fixed income. Pension fund business is yet to be forthcoming.
The big name of the game in the Italian market is clearly gathering assets and closed end funds remain at the top of every asset manager’s agenda. “It is very important for us,” says MGAM’s Albarelli. “Obviously every international asset manager wants a slice of the business.” The foreign managers have made it very clear that they are serious in obtaining these assets. However, the one factor which distinguishes the local managers from the foreigners exists as the very brick wall met by virtually every non-domestic asset manager to date in the Italian market – and, according to many in the industry, could prevent them from fulfilling this aim. And that is what the local is prepared to sacrifice in order to achieve these assets.
When a market attracts such substantial international attention the domestic suppliers will give their all to protect their territory. The Italians are no exception to this rule. So one should not be surprised that the main impediment to the foreign asset managers’ progress has been created by their Italian rivals - in bidding for pensions mandates, domestic managers are driving down fees to levels which are deemed simply unacceptable by the international asset management community.
It has not been unheard of for fees as low as five basis points to be touted in the bid to gather assets. Evidence of this was first seen in the Fonchim beauty parades. “For every one foreigner there were at least two Italians who were pitching 50% lower,” says Hugh Twiss, CIO at Simcogef in Milan. Cutting on the commission also effectively cuts out the competition as very few asset managers who already have to incur the costs of setting up in a new market can justify entering such a price war. It is simply not worth their while, says Twiss. “If you are competing against Italians who are doing it for next to nothing, you are not going to make much money,” he says.
Even for equity mandates, fees are pretty low with the maximum to be expected of around 20 basis points, says Twiss. “Word gets around,” he says, “And then most clients think that being charged a commission for having their money managed is bad news and also think they should be paying as little as possible. So it is a vicious circle.”
If closed end beauty parades continue in the same vein as Fonchim, and by many managers and consultants accounts, they will, then international asset managers are being left with little choice but to look elsewhere in the market for business. “We are not prepared to go that low,” assert’s Manfredo Catella at Flemings in Milan. “The problem is the fee level is too low to justify a consistent investment management service.” MGAM is willing to compromise on fees but flatly refuses to operate under Italian standards. “If you want to get that business you have to be prepared not even to break even but to operate at a loss,” reasons Albarelli at MGAM in Milan.
For foreign managers accessing Italy then, the first step has been to strongly reassess their strategy, according to Massimo Greco at JP Morgan SGR in Milan. “I am seeing some institutions coming to terms with reality,” he says. Foreign managers have flooded into the market on the basis of blind faith, he says, and have had a shock when confronted by the comparative lack of interest from funds. “Managers were a bit naïve in coming to terms with the complexity of winning pension business in Italy. They are realising this market is harder.”