Strategically Speaking: Generali Investments
A year into Generali’s ambitious growth plan, it looks set to meet its promises. The three-year strategic plan, branded Generali 2021, aims to allow Generali to reclaim its leadership in the European insurance market. The insurer had already completed a financial turnaround after being hit by the 2008 financial crisis.
Financially, the plan consists of growing earnings per share by 6-8%, to raise dividend levels by between 55% and 65%, and to deliver a return on equity of 11.5% over three years. Based on August’s interim results, it was on track to reach those goals.
Generali’s overall strategy matters because it plans to significantly grow its third-party assets under management. The Italian insurer’s asset management business lags Germany’s Allianz and France’s Axa. According to IPE’s Top 400 Asset Managers rankings, Generali’s non-captive AUM was just shy of €19bn at the end of 2018. This compares with Axa Investment Managers’ €252bn and Allianz Global Investors’ €319bn.
As part of its plan to build a “focused, global asset management platform”, Generali has overhauled the structure of its asset management business. The Generali Investments brand consists of two asset management companies: Generali Investment Partners (GIP) and Generali Insurance Asset Management (GIAM). GIP focuses on unconstrained strategies, including equity and fixed income as well as alternatives, while GIAM provides expertise in liability-driven investment (LDI) solutions. Generali Investment Holdings (GIH) provides support for both businesses.
The company is also growing the breadth of its asset management platform. It has opted for a multi-boutique approach to enrich its offering and attract third parties. The company has bought a stake in US-based Aperture Investors, a provider of unconstrained multi-asset strategies. It has also invested in Lumyna, a liquid-alternatives platform formerly owned by Merrill Lynch, and Sycomore, a ESG-focused boutique manager. In April, the company invested €1bn in ThreeSixty Investments, a provider of multi-asset strategies.
Francesco Martorana, CEO of GIAM, says the goal is to grow Generali Investment’s net income to €400m in 2021, double the 2017 level. The share of revenues from third-party assets is to grow from 6% to 35% over the same period. He adds that the group is focusing on profitability and revenues from third-party assets, rather than setting an AUM target.
The multi-boutique approach is key. Martorana explains: “The philosophy underpinning the multi-boutique approach is to provide our clients with a differentiated view of the market. Each investment team from the different boutiques has a strong degree of autonomy and specialises on specific asset classes or strategies, where they have a deep and proven expertise.”
The insurer also aims to grow the third-party assets managed by its property investment unit. Generali Real Estate is about to launch nine cross-border funds. It is diversifying its office and residential-focused portfolio into shopping centres, logistics and real estate debt. This strategy also consists of building or acquiring boutique investment managers.
“The benefit of having a multi-boutique approach is it allows us to maintain an entrepreneurial focus,” he says. “When we acquire stakes in asset management businesses, we let existing managers retain autonomy and ownership in their respective companies. This is to align their interests to those of their clients. We are emphasising our commitment to share risk with our clients.”
Martorana’s LDI-focused business, GIAM, is a case in point. The company can leverage decades of experience with asset-liability management on behalf of the Generali and its subsidiaries. This means that GIAM also has expertise of European insurance regulations, which gives it an edge when building LDI portfolios.
GIAM’s familiarity with Solvency II and other regulatory regimes means it can build asset allocation models according to clients’ needs. These capabilities can be applied to pensions. Martorana says: “We see a generalised trend of pension funds thinking like insurers. For instance, Italian pension funds are mostly defined contribution and have no legal obligations to guarantee specific return levels. However, they are interested in running their portfolios from an ALM perspective, thinking about their members’ long-term’ needs.”
Like insurers, European pension funds are becoming buyers in private markets, and Generali can cater for demand for real estate and infrastructure debt assets.
However, fixed income remains Generali’s area of expertise. Martorana says: “We have a large fixed-income team that focuses on different areas, from government bonds and investment-grade credit to less liquid asset classes such as high-yield bonds, emerging market debt and asset-backed securities. We are working to develop dedicated strategies for those less liquid asset classes.”
The company also has teams for equities, derivatives and quantitative investing. As such, Generali can offer solutions to control volatility. These can range from multi-asset, hedging and low-volatility strategies.
Martorana says that as asset management becomes polarised, with cheap beta providers on one side and alpha generators on the other,
Generali will occupy the latter space. But with one caveat. “We believe in active management and the added value that bottom-up fundamental research can bring. Client alpha is what really matters. At the same time, we can provide solutions for those who need to control costs as well as volatility. If clients are not interested in expensive high-conviction, high-turnover strategies, we can provide actively managed but risk-controlled portfolios.”
A high degree of engagement with investee companies is a sign of good-quality active management. Generali Investments has a dedicated proxy voting and engagement team that participated in 1,200 company meetings last year and voted on 15,000 resolutions.
On the green front, it is also active, having launched several green-label products as well as a programme to invest in €4.5bn of green bonds by 2021. The company is also moving from an exclusion-based approach to a best-in-class one. “We think ESG is a lever to obtain higher risk-adjusted returns,” says Martorana.
Three years is not a long time but Generali’s strategy seems on track. The company has already staged an impressive turnaround, so it could well provide further positive surprises on its path to become a focused third-party asset manager