Like everywhere else in Europe, Italy has had an institutional asset management market forever. But ask Italians and they will tell you that theirs is really only happening now. The sense of excitement that comes from the process of moving savings to investments is palpable.
The arrival of the pensions market, as imminent as ever, is seen as the key development and there appears to be no self-respecting asset manager not having a shot at the recently an-nounced mandates of Fonchim, the chemical sector pension fund, the first of the expected wave of mandates for the huge industry schemes being put into the market.
The reality is that the phenomenal growth of mutual funds is transforming the market. And how these have grown - up by 80% last year, with inflows into funds hitting peaks this year. At end-1997, some L600trn ($340bn) was invested in domestic funds, double the amount of two years previously.
Five years ago, it is probably fair to say that the Italians were solidly into their domestic bond investments and of the country's enormous public debt, equivalent to 120% of GDP, around 90% was reckoned to be in the hands of individual investors.
The euro has changed all that, some years before its arrival. As Rome-based bank Mediocredito Centrale observes: In Italy investment funds have really taken off in the last two years. The rapid fall in state securities yields, affected in 1997 by the euro convergence process brought about a situation ideal for the development of the funds sector." The mass of savings managed by institutional investors rose from L500trn in 1995 to over L950trn and the share of household financial assets in the hands of institutions rose from 16.5% to 32.8% in the same period, says Mediocredito.
Take Milan-based Ducato Gestioni. This three-year-old venture was formed to be the asset management arm for mutual funds of Monte dei Paschi, which has the distinction of being the world's oldest bank, dating back to 1472. Since then, it has built up assets of $10bn in a range of 15 mutual funds sold through the bank's 1,100 branches. Another fast-growing Milan financial group, Mediolanum, has around 400,000 invest-ors in its range of mutual funds.
Ducato, which has modelled its investment process on Anglo Saxon lines and been rewarded with some top-performing funds, now sees itself moving into the pensions market in the two-pronged approach being adopted by a number of managers. The first is to be a prospective manager to be considered by the Fon-chims. Says chief executive Nicola Romito: "For these funds we will be offering our services as an asset manager. We intend to be in the race for this business." The other drive will be to launch open pension funds for individuals, which can be regarded as an extension of the mutual fund market using the specially constructed funds authorised for pensions purposes.
At Fondigest, the asset management arm of Gruppo Cariplo, Elisabetta Usuelli says: "We have benefited from our experience in funds and we have been pre-paring for years to be a force to be reckoned with in the up and coming market for pension funds." Its sights are firm-ly on both the closed funds, such as Fonchim, and the open funds, where it will launch two multi-compartment funds later this year.
Another group determined to wrest a share of the new industry schemes is Eptafund, owned by six leading Italian banks and based in Milan, with $4bn in 18 funds. Chief executive Marco Bolgiani says the group will want to manage these assets as part of its drive into the institutional market, for which it has tied in with US group Alliance Capital.
Stephano Russo at Morgan Stanley in Milan comments: "The mu-tual fund manager firms are slowly be-coming more institutional and the ar-rival of the pensions market is going to make that happen a lot faster. I regard this as one of the first steps towards institutional markets developing."
But everyone is being cautious about the actual funds that will come on to the market initially from the pensions flows, particularly since authorisation of the open funds is still awaited. Eptafund's Bolgiani says: "We will have many funds beginning, but at the outset the amounts raised will be relatively small - though in the longer term, it will be exactly the opposite."
Some see the industry and open funds being in competition, which may be a reason for the delay in authorisations coming through. "The in-dustry funds are likely to get a head start, as the trade unions are going to do as much as they can to delay the approval of the open funds, as they want as many enrolments as they can to these funds. It is no secret that they are havingdifficulties in getting people to subscribe to their funds, as the individual worker has free choice." But Mediocredito is optimistic longer term. "It is estimated that pension fund assets will approach L10,000bn by the year 2000 and L100,000bn by2005."
The new industry schemes will bring a flow of discretionary segregated accounts to the institutions. "The segregated account market has been almost non-existent," says Bolgiani. "But we should see a very significant increase." Some will want to see their money go into mutual funds as it makes it easier to manage, he says. "How much will go into funds and how much to segregated ac-counts is im-possible to say."
David Booher of research consultant Intersec's Milan of-fice has doubts as to how far in-vestment managers will be able to show their paces as he ex-pects the industry pension funds to be very conservatively managed. "In-vestment managers will not be given instructions by the funds 'to make us rich'. Rather they will be in a structured pro-cess as to their objectives, what the risk level is going to be and what the tracking error is. Funds will try to create their own capital stable products by giving investment managers clearly defined parameters around those benchmarks."
Morgan Stanley's Russo wonders if they are going to be at a disadvantage compared with the open funds, which can have different risk profiles. "In the industry fund you are looking at a single big container, which is surely going to be too conservative at the start."
Bolgiani sees opportunities outside the pensions market. "We expect the demand for the institutional clients will be wider than pension funds." The fall in interest rates should mean that Italian banks and insurance companies will move to alternatives to government bonds, particularly into international investments. Another manager says:"We are seeing some insurance company money come into the market place for external professional asset management. There are too existing assets to be managed, such as the established pension funds. Charities and foundations have been a feature of the market for a long time."
Intersec's Booher is not convinced about how strong the Italian market is for outsourcing. "In our study of outsourcing two years ago, Italy came fairly low in terms of asset managers, mutual funds and insurance companies outsourcing. I do not think the situation has changed." But Russo says: "Things have been moving very fast over the past 12 months and we are seeing more institutional ap-proaches than in the past."
Many of the substantial existing pension funds belong in fact to banks, and presumably will be managed by their affiliated asset management arm, as is the case with San Paolo's recently formed institutional asset management operation. This has a staff of around five professionals, including two fund managers, one a specialist in insurance funds, and a risk manager. At the end of last year assets under management were $34.8bn, of which a substantial portion would have been in-house. But the aim is to win third-party mandates, particularly in the pensions area. "We look after money for the San Paolo pension fund here and for other funds outside the group, and we manage assets for international groups," says Andrea Ferrante.
Existing pension funds have been very much managed "in the money markets", he adds. "We aim to bring a new culture to the management of pension funds, which means convincing our clients to increase their equity investment, not just the Italian market, but world markets."
Major insurer Winterthur manages some $30m for some existing pension funds under collective schemes comprising 90% domestic bond and 10% equities.
The concentration of asset management to one focused operation in or-ganisations is a trend Intersec has pick-ed up. Booher sums it up neatly: "What used to be different operations, aimed at different clients, housed at different addresses, under different names, with different personnel and different investment strategies are now consolidating into one asset management operation per group." He adds: "People are asking: 'Why are we operating in five units, when we could be running one investment process, with one senior investment officer and with a co-ordinated approach to various marketplaces, involving cross-selling'."
Charities and more particularly foundations are also a potential source of business, says Walter Onnelonghe, chief investment officer of Mediolanum. "The foundations are entities which still have or used to have control of many of the newly privatised banks, such as the savings banks." The foundations could be controlled by a range of bodies, such as local government, chambers of commerce, the church and so on. In their charters they have to use any profits for non-profit purposes." Their main assets were the control of these banks, which are now privatised or merged with other institutions, with the consequence that the foundations have become cash-rich, with funds that need to be invested in the financial markets. These foundations' assets could be managed by the in-house bank group managers. "But in time they should diversify," he says. He adds that this is an area of the institutional market that deserves more attention than it receives.
Where there has been great outsourcing in the Italian investment market has been in the way that non- domestic players have come into the market and are working with local groups. One firm, which claims it has established a leadership position within the cohort of foreign groups operating, is UK group Flemings, which has been there since 1993. "We are in Italy to meet the need of institutional clients," says Manfredi Catella in Milan.
Like most other foreign groups, it does not operate directly in the retail market. "For retail distribution, we have more than 35 agreements in place with other institutions, and we also works with the SIMs, asset management firms." The group provides its range of funds to aid diversification, as well as segregated accounts and the creation of dedicated products, often as the brand of the local institution. While the first couple of years were slow, there has been a real boom since the end of 1996, carrying over into this year, he says.
The structure of the Italian market, with the distribution dominated by the banks, makes it essential to work through them or the investment specialists. "It is a market of strategic agreements, rather than a standard market, where you might evaluate managers' performance against others and change managers on this basis," he adds.
Romito of Ducatone puts his finger on it from an Italian perspective: "The problem in Italy for foreign managers is distribution. It does not matter how prestigious you are and how good a service you offer, it is very difficult to penetrate our market - the question is distribution and the strongest distribution is the banks'."
However Romito does not see this lasting forever, but it does give the Italian groups a breathing space in which to become more competitive.
So the name of the game has been co-operation agreements and joint ventures between outside groups. Some have been successful in a short time, like US manager Putnam, which has a joint venture with Cisalpino Gestioni, one of the fastest-growing mutual fund companies, and is distributing its products through a number of banks and SIMs to both the retail and institutional markets. Kevin Rowell of Putnam, says: "With our joint venture at year-end we had $1bn under management, by last month this had increased to $2bn." It will be entering the pensions market, but he adds that though it had a pitch for the Fonchim business, such mandates are unlikely to be attainable unless "you are a substantial entity".
On the other hand Mediolanum's agreement and joint venture with State Street Global Advisors, is purely to develop the pensions business. Onnelonghe says: "We wanted to work with someone who has been in the institutional market for sometime."
The trade for most Italian groups is the international expertise that foreign groups can bring, as Eptafund wants from its tie with Alliance Capital. Bolgiani says there will be an increasing demand for international expertise from clients, a trend that will be hastened by the euro. ""