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Italy: Fondo Cometa: Activist investor

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Fondo Cometa, Italy’s largest pension fund with €5.2bn in assets, is discussing terms to implement its new activist investment strategy for domestic equities. Carlo Svaluto Moreolo reports

Italy’s private pension sector still seems immature. Limited interest in pension investment shown by Italian workers, long-lasting ties with strong trade unions and strict limits on investment are only some of the reasons that make Italian pension funds unlikely candidates for leadership and innovation. However, a small number of pension funds are reaching critical mass and exploring innovative and ambitious strategies, at least compared with their Italian peers.

This is the case of Fondo Cometa, Italy’s largest pension fund, managing €5.2bn of pension assets for 470,000 workers in the metal industry. Cometa recently completed an overhaul of investment managers and announced a new ‘activist’ strategy which has the potential to bring a degree of innovation to Italy’s equity investment sector.

The fund, which forecasts annual growth of €900m, announced in May that it had completed the selection of nine new managers, in this year’s largest European manager search. The fund’s board renewed the five-year mandates for 100% of its portfolio, which consists of sub-funds Sicurezza, Reddito, Monetario Plus and Crescita.

Earlier this year, at a workshop hosted by Assofondipensione, Cometa’s chairman Fabio Ortolani announced that it intends to pursue a new ‘activist’ strategy focusing on Italian blue chip companies.

Cometa plans to invest €300m, around 5% of its portfolio, directly in companies listed on the Milan bourse, buying shares in large Italian firms. The innovative aspect of Ortolani’s strategy is that, unlike other Italian pension funds, the board has publicly said that it wants to be an activist investor. Cometa has, in other words, made known that it will make extensive use of its voting rights and seek to have an stronger influence at shareholders’ meetings.

While this is not an innovation for European pension funds and investment managers, Ortolani’s announcement drew a lot of attention in the country. Italy’s rather intricate company ownership structures mean it is often difficult to influence executive boards. Moreover, Italian pension funds are not known to have an active attitude in equity investment, preferring to focus on asset classes that are perceived as less risky, and focusing on beating benchmarks rather than influencing company strategy as a way of securing higher returns on investment.

Ortolani views the new strategy as a way to steer the Italian pension fund sector towards a regime of ‘economic democracy’, one where pension fund investors have a stronger bond with the country’s productive sector. The idea is that Cometa’s influence on the strategy of the companies it invests in could potentially create a virtuous circle, which would benefit both the companies and the members of the fund itself. While Cometa will not be able to invest in the companies that employ its members, investing in companies of parallel sectors could have a positive impact across the board.

“We have talked about this in the past,” Ortolani told IPE. “Investment in private pensions represents a point where labour and business can meet. I think that in Italy the conditions exist for workers and firms to meet and develop a dialogue. The law in Italy says that pension funds also hold voting rights in shareholders’ meetings, but nobody has made active use of these rights.”

Cometa’s chairman, a former treasurer of Unione Generale del Lavoro (UIL), one of Italy’s three main trade unions, suggests that the strategy would serve to give workers better representation where business decisions that affect them are made. He asks: “Why are those who are involved in the creation of the surplus - the workers - represented as minorities at shareholders’ meetings? We think there should be a space where the needs of firms and those of workers can be discussed.”

Cometa’s strategy is yet to be implemented, and the terms will be explored with the newly-appointed investment managers. It is not clear whether it will open new avenues for Italian pension funds or consolidate the status of trade unions in the country. The boards of the more than 30 closed pension funds, which account for a large slice of the sector in terms of assets, already comprise of a majority of trade union representatives, who share decision making power with company representatives.

Andrea Scaffidi of Tower Watson says: “There are other pension funds which intend to pursue an activist strategy. Pension funds that existed before the law of 1993, instituted as closed pension funds, already seek to influence company decisions. This is a novelty for closed pension funds, which have to be more transparent, and that is why Cometa publicly announced its strategy.”

Ortolani’s views may surprise readers unused to Italy’s often polarised political rhetoric. Scaffidi, for one, believes that Cometa should emphasise the technical aspects of the strategy, rather than the political ones.

“It’s an interesting strategy, given that today Italian pension funds are generally not orientated towards equity investment,” says Claudio Pinna, managing director of Hewitt in Italy. “However, the decision to focus on Italian companies represents a constraint. Diversification is key in equity investment, and Italian companies already have ties with trade unions through closed pension funds.”

Scaffidi adds: “Cometa’s idea is that because they have the money that Italian companies spend on wages and pensions, then they should put it back into Italian companies. But the strategy will work only if it follows a diversification principle.”

Ortolani suggests the fund is not ready to pursue the same activist in foreign companies: “We could invest in foreign companies, but not until there is real globalisation of business, we have to focus on our companies for the time being, and give credit to their efforts.”

Cometa’s chairman will be aided in the implementation of the strategy by nine new Italian and European asset managers, selected in May after a long process. Ortolani saw a long queue build behind his door, with 65 managers bidding for the mandates. The list was reduced to 11 managers, with the mandates of UGF and Cattolica Assicurazione reconfirmed for another five years for Cometa’s guaranteed return sub-fund Sicurezza.

Allianz Global Investors was appointed to manage a €670m active balanced global portfolio; Amundi to actively manage the fund’s €615m portfolio of global fixed income; Eurizon Capital SGR and Generali will manage another €570m each of fixed income.
State Street Global Advisors and Halbis (part of HSBC Global Asset Management) were selected for passive mandates, and will each manage €525m of the global balanced portfolio. State Street Global Advisors and UBS will each manage €445m of Cometa’s balanced passive fixed income investments. Pioneer was selected for the passive management of €170m in global balanced investments.

Finally, Russell will manage Cometa’s €1.2bn currency risk exposure.
Mangusta Risk helped Cometa in the process of reviewing the mandates, which expired last April, and will also help the fund transition to its newly-appointed custodian, BNP Paribas Securities Services. Italian pension regulator Covip has to approve the appointments.

Ortolani said the new appointments will save Cometa’s members €800,000 a year. He told IPE that the board had began monitoring the fund’s strategic asset allocation before the onset of the financial crisis. “We asked not only our members, but also the companies, as well as the employers’ representative bodies and the trade unions, and we realised the needs of the fund were no longer aligned with the asset allocation.”

“We did a study to find a way of balancing active and passive mandates, especially for the sub-funds that are more popular with our members. Based on the statistics of the previous three years, we decided what was the right mix of active and passive mandates, and set up the bidding process.”

Ortolani notes the structure of the Italian investment management sector is such that pension funds often have to adapt to managers’ needs rather than the opposite. “We were convinced, that even in Italy, pension funds should be able to choose a manager on the basis of their investment needs, rather than having to make a choice based on the managers’ investment products. This is something that cannot be done in Italy and we hope Covip will contribute to the resolution of this issue.”

The fund’s board hopes that the exposure it received after the appointment of the new managers, and the announcement of the strategy, will also contribute to an increase in membership. “We have disseminated information about the fund along with the bidding process, we want to inform people of the technical aspects, and solicit a new information and aggregation campaign,” Ortolani concludes.

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