Italy: Fare la differenza
PensPlan takes its responsibilities seriously as an investor in local companies, as well as supporting the wider Italian economy after the crisis, writes Rachel Fixsen
As a pension fund group rooted firmly in a single region of Italy, it is hardly surprising that PensPlan has taken an interest in local investment.
What may be unusual, however, is the determination the group has shown to make its local investment efforts work. Not satisfied simply with the assets just being deployed, PensPlan has been working on a new plan to ensure the money is actually getting through to where it is needed.
PensPlan is an operator of regional public pension schemes in the Trentino South Tyrol region of northern Italy.
Established just 12 years ago, it groups several local authority pension schemes together, managing investments collectively through its asset management arm PensPlan Invest.
Armin Weissenegger is director of investment in Bolzano. In common with other investors, he sees a greater challenge in the bond markets than the equity markets, where he still sees some potential for gains.
“On the fixed income side we only invest in euro-denominated bonds, so we are not exposed to the UK and the US,” he says. “For us as an Italian investor, we maintain an overweight position in Italian paper, concentrating on maturities of up to 10 years.”
Overall, PensPlan holds short durations in bonds, taking the view that the yield in core European markets will rise gradually until Bund yields reach 1.8% to 2% at the end of the year.
Besides government bonds, PensPlan Invest also holds debt issuance from supranationals, as well as corporate bonds issued by blue-chips in order to increase the average yield of its fixed-income portfolio.
“The low interest rate is a bit less of a challenge for us than for some other pension funds in Europe because we are DC and so don’t have any specific yield targets to achieve.
“Also, Italian paper does offer slightly more yield, so we can cope with lower yields in France and Germany,” he says.
“We would prefer to invest at 5% or 6% because that would help us to beat inflation, but we do still have some room for manoeuvre,” he says.
However, local investment has become a major area of focus for PensPlan and he says the debt of small and medium-sized enterprises (SMEs) in the region offers the opportunity to secure this level of yield for a small part of the portfolio. “One of the main threats and challenges facing Italy relates to the funding of the real economy by banks and pension funds,” Weissenegger says.
Statistics show that SMEs in Italy pay 4% more in interest on their borrowing than their counterparts in Germany, he says.
“Of course this places a big burden on the competitive situation,” Weissenegger adds.
“There is a credit crunch in Italy, so companies do not get the volume of financing they want, and certainly not with the conditions they need. On the other hand, pension funds have a lot of liquidity but generally invest in government bonds, so there is no funding coming from their side,” he observes.
Two years ago, PensPlan came up with a way to channel some of its investment directly to the local businesses that needed it. It set the ball rolling at the height of the credit crisis at the end of September 2011.
“This was a time when Italian government bonds were yielding 8% for one year. Since there was no public issuance from local companies, we directed the money to the local banks, thinking they would in turn lend it to the local companies,” he recalls.
To this end, PensPlan Invest set up up a Luxembourg-based open-ended UCITs-compliant SICAV fund, one of the sub-funds of which is called the Local Investment fund.
That vehicle aims to provide investors with capital growth through a portfolio of fixed and floating-rate euro-denominated government and corporate debt securities, and a smaller amount of equity-related securities.
Hard on the heels of this initiative came a huge wave of funding from the European Central Bank (ECB) in the form of the long-term refinancing operation (LTRO). These measures were intended to offer banks cheap money in order to allow them to extend loans to the hard-pressed smaller corporates.
“But the ECB recognised almost immediately – and so did we – that money was then being invested in government bonds,” Weissenegger tells. “So we started to think about a new way of channelling the money directly to the companies,” he says.
Last July came a change in Italian law on the fiscal treatment of loans issued by SMEs, both on the side of the issuer and for the investors, he says. This had the effect of making it more attractive both for companies to issue bonds and for investors to buy them.
“Because of this, we created a fund called Euregio Minibond, the aim of which is to invest up to 100% of its assets in the bond issues of companies in our region. It is constructed in such a way that it is also an eligible investment for the local pension funds,” he says.
As opposed to the Local Investment fund, the new bond fund is closed-ended, and holds illiquid bonds in which there will be no trading.
Weissenegger is proud of the fact that PensPlan is the first pension fund to be meeting this need in the economy.
“We are a pioneer in Italy in doing this,” he says. “We are now in the process of contacting the companies, presenting them with the data, telling them they can issue bonds, that there is a market and that we will be delighted to buy these bonds and so on.”
Together with a local private bank, PensPlan is busy getting in touch with companies in the region that have a turnover of more than €50m a year and a positive net result over the last couple of years. So far they have shown they are interested in evaluating this new form of financing, he says.
The fund is €100m in size, and will be up and running once it has collected €50m. “We think we will be able to include around 40 bonds in the fund; we think it will be a success and could also represent an attractive investment,” Weissenegger adds.
Trentino South Tyrol is seen as the most creditworthy of all Italian regions. So far this year, only 38 local companies have defaulted in an area home to around 58,000 businesses.
“This is a very low rate compared to Italy as a whole, where approximately 7,000 have defaulted so far this year,” he continues.
The low-risk local environment does mean correspondingly lower bond yield though, he points out. “We think we can buy bonds with return of 5-6%,” Weissenegger says.
“We know there are a couple of other funds doing something similar, but we are the first regional fund.
“We are not interested in buying mini bonds from other areas within Italy – we want to remain it this region. We realised we had to go one step further in order to increase the effectiveness,” Weissenegger concludes.