Italy was a late starter in the mutual funds business and conservatism still rules in asset allocation. David Hunt reports

Italy was a late convert to the idea of mutual funds. Although legislation had been discussed from the early 1960s it wasn't until 1983 that any was actually passed.

Once up and running, the mutual fund industry boomed on the back of rising stock markets and favourable regulatory and fiscal treatment. Much of the early activity was in equity and balanced funds, which were invested almost entirely in the domestic market (managers were restricted as to how much they could invest abroad). This changed fairly dramatically, however, when first the Italian stockmarket boom ended in 1986 and then world markets crashed in 1987.

From 1987-90, the industry experienced net outflows. When it took off again in mid-1990, much of the new action was in bonds and money market funds, boosted by the prevailing high interest rates. The bulk of sales of mutual funds since the turn of the decade has been in these sectors.

Part of this change stemmed from the fact that investors had got their fingers burned in equities, but it also reflected the popularity of the conto fondo, the new bank chequing account linked to fund investments, which swept surplus deposits into money market funds. More recently, new legislation has introduced closed-ended funds specifically for institutions and high net-worth individuals. The fondo comune di investimento mobiliare chiuso is still a relatively new vehicle and has yet to make any real mark.

The bank distribution network dominates in Italy, and while substantial specialist sales agency networks exist, they basically sell the funds of just one provider. This may change with the development of the SIM (Societa d'Intermediazione Mobiliare) legislation, which opens up the market to foreign funds and a more independent marketing process.

With the current enthusiasm for bank-linked bond and money market instruments, however, the liberalisation of the market could take some time.

Despite the recent outperformance of Italian equities compared to fixed interest vehicles, much of the growth in fund sizes so far this year continues to be attributable to bond and money market funds. Commentators have come to refer to one group of investors as the Bot" people, after the abbreviation for short-term Italian treasury bills.

As the performance tables show, however, while this aversion to equities may have paid off over the three years to April this year, bond funds and short-term fixed interest funds were not the place to be invested over the past 12 months. The average Italian equity fund, which gained only 6% in the three years to 1 April 1997 has put on nearly 17% in the last year. By comparison bond funds - both mixed and pure Italian bonds - which had gained around 20% over the three-year period, managed only a 4% increase over the past year.

A similar picture is shown by the short-term bond (effectively money market) funds, while the specialist equity funds - consisting mainly of the increasingly popular fund of funds, investing in a range of equity vehicles - have done even better.

Offshore funds investing in Italy have tended to outperform on average in both bonds and equities, although the limited number of offshore funds obviously distorts the average.

The exception to this is the longer-term performance of offshore Italian equity funds, where the 21% gain by San Paolo Ecu Actions Italie stands in marked contrast to some dismal performances.

Institutions play a very small part in the Italian fund market although there are someindications that this might change with the passage of the new private pension fund law.

David Hunt is a freelance journalist"