Italy: Three sparks needed to ignite the Italian pensions market
State Street Global Advisor (SSGA) is one of the leading Italian institutional asset managers, managing €10bn of domestic institutional investors’ funds as of June 2013. It holds 13 mandates from closed pension schemes such as Cometa and Fonchim and 15 mandates from casse di previdenza, a sector where the Milan-based asset manager is the undisputed leader, giving the firm a broad view of the Italian institutional investment market. Marco Fusco, SSGA’s head of southern Europe outlined the three sparks he believes are needed to ignite the Italian market.
First, lawmakers need to introduce compulsory membership – workers should be compelled to put their money in second-pillar schemes as soon as they begin their career, with the possibility of opting out after a few years. Second, pension schemes need to adjust their structure to their risk management needs, which is something the regulator, COVIP, has encouraged but which many funds have seen as a chore rather than an opportunity.
Third, the Italian institutional investment market will not take off unless lawmakers create incentives for investors to participate in the long-term financing of the economy. Pension schemes should have the opportunity to invest in assets such as infrastructure, as the recent EU Green Paper on long-term investing states. This way, Fusco says, the wheels of both the pension sector and the economy would start moving. Yet if Italian pension schemes want to invest in infrastructure they need to take a more serious approach to risk by developing internal structures to manage it.
Fusco presents a mixed picture of the Italian market, which offers both challenges and opportunities for a large asset manager such as SSGA. Like their European counterparts, Italian schemes are increasingly worried by tail-risk events due to serious shocks in the economy, according to SSGA-sponsored research by the Economist Intelligence Unit. This means that asset managers are constantly under pressure to adapt their clients’ investment strategy, but Fusco adds, managers have a chance to experiment with new products that are geared towards stable returns.
“We discuss many possible approaches to cope with tail-risk events,” says Fusco, “from managed volatility strategies to smart indexing. We have had a lot of success by building dividend-focused portfolios and we have made interesting experiments in the fixed income world, building portfolios that profit from the crisis of sovereign debt. By looking at a country’s ability to repay its debts rather than the amount of debt, we have built more fundamental and better-performing portfolios.”