The institutional asset management industry in Italy is growing. Falling interest rates have boosted the mutual fund market during the last three years and the new legislation regulating pension funds is further increasing opportunities for asset management houses.
The law on pension funds which had been under discussion since 1993, came into force last year allowing the creation of supplementary pension schemes. The new pension funds, all following a defined contribution (DC) model, have increased the role of the Italian-based asset manager, although the market continues to be very small.
“The new law has opened the door to complementary pension schemes but the problem is that after one year only a few pension funds are operating,” says Simone Bini Smagui, deputy director general at Milan-based asset management firm Arca. “Only six or eight pension funds have been able to select their money managers, and just two or three of them have started investing. The big take off of the market is still to come.”
According to a survey by US-based firm, Greenwich Associates, the number of assets under management by institutions in Italy will grow from E25bn in 1998 to E54bn by 2001.
“The most important thing for us is that at least the institutional asset management business in Italy has started,” says Carlo Benetti, executive director for institutional clients at ING Investment Management in Milan. “Now the new fiscal rules have been approved, the regulatory framework for the institutional asset management industry has been set up and now we know how we have to operate, but things are growing slowly.”
This view is very much shared by Italian-based asset managers, both domestic and foreign. “We are still at the very beginning of both the institutional and the pension fund markets,” says Laurent Huck, chief executive officer at Invesco in Milan. “The pension fund market is still very young but the creation of new schemes is bringing more opportunities for us.”
Under the new law, two types of pension funds were regulated: the closed-end pension funds, or negotiated plans, and the open-ended pension funds. The closed-end pension funds are restricted to members of a particular industry under a contract between employees and employers.
“Our strategy on pension funds is to get a significant market share on these negotiated pension fund mandates,” says Huck. However, Invesco is also planning to launch an open-ended fund which will be mainly distributed through its clients.
Around 100 open-ended pension funds, which are available to individuals, have been set up since the law was published, but the assets they have under management are still very poor and the number of participants is still very small, according to managers.
The main issue which is holding the market back from really getting off the ground is taxation. The subject of how pension funds should be taxed was one of the most discussed issues during the several revisions that the law had before being approved. The Italian government has recently announced a reduction on the taxation on annual gains for pension funds, from 12.5% to 11%.
“This is an improvement, but the point is that every year the gains of these pension funds are going to be taxed, just like mutual funds,” says Carol Groeschel, director of institutional clients at Schroders in Milan. “Pension fund gains should be taxed when people go into retirement and take their money out and not on an annual basis,” she says.
The government has also increased the limit for deductible annual contribution from 6% to 12% of salary. “Both decisions could be good incentives for people to contribute to a pension fund but it will take some time before we see the results,” she says.
The reality is that Italian companies and trade unions still haven’t been able to get most people, especially young workers, to sign up for a pension fund. One of the solutions that the government came up with was to transform the structure of the TFR – a lump sum that workers receive when leaving a company representing a month salary per year of service – and use this money as a contribution for the pension fund. “Young people know that this sum will be given to them in cash if they leave their job and go somewhere else, and they don’t want to invest it into a pension fund because it’s seeing as a quitting bonus,” she says. “But they are making the wrong choice because here the labour mobility is very low, therefore they never quit, and that money remains in the company instead of going into their pension fund.”
Even though Italian people seem less interested in their supplementary pensions than the government and the asset managers wish them to be, the fact is that a number of pension funds are already operating and their money is starting to be managed.
When the pension fund law was ready, a number of pension funds rushed to set up their schemes. Fonchim, for the chemical workers, Cometa, for the metal industry and Fondenergia, for the energy and oil sectors, were the first ones. These pension funds decided to (see page 30) set themselves up as single compartment schemes where all the assets would be managed the same way without taking into account the age of the members. “At that moment, they knew that this was not the best way to start a pension fund but they just wanted to get it started as soon as possible and get people and their money in,” Groeschel says.
Because these funds have to satisfy the young and the older employee, the asset allocation has to be based on balanced portfolios with a heavy weight in bonds and cash. “Pension fund sponsors have to give the participants a reason to trust them and the simplest way to do it is preserving the capital and provide some return,” she says.
Another issue to take into account is that under the new law, anyone who is in a closed-end pension scheme has to remain there for five years. Then they have the freedom to move to an open-ended pension fund, which will probably have more compartments covering the whole range of asset classes, thus putting negotiated schemes in a difficult position.
This competition within the pension fund industry itself is also visible in the institutional asset managers when trying to get mandates. Some foreign players have found their place in the institutional asset management scene but the possibility of newcomers trying to break into the market is quite unlikely, as the distribution channels remain dominated by Italian banks. “We are still at a very early stage of the market and the fee structure is extremely low,” says Invesco’s Huck. “You really need a local presence and a very long term commitment to be able to gain market share.”
ING’s Benetti says: “The fact that we are managing around 300 institutional clients in Europe gives us a global expertise that we believe is crucial for our Italian clients.” He adds: “At present, we are focused on closed-ended schemes positioning ourselves as a full partner for our clients.”
In terms of investment, there are not big differences between the strategies used by local firms and those used by foreign players and all asset managers are mainly offering balanced mandates. “The law allows pension fund promoters to propose to employees a choice between different investment strategies, but does not allow employees to split their contributon between different compartments. Therefore, creating a series of risk profiles, each of them balanced investment choices for participants,” says Huck.
Although the approaches continue to be very Italian, investor exposure to investments outside Italy is increasing. “Most investors in Italy are looking at the Euro-zone area as their domestic market,” says Paolo Ranuzzi at Banca Intesa in Milan. The survey by Greenwich Associates predicted that institutions in Italy would reduce their Italian equity investments from 10% in 1998 to 4% in 2001 and foreign exposure to rise from 2 to 6%. Their international bond exposure is expected to grow from 13% to 28% during the same period.
“Also, alternative investments are very promising and the interest in these products will increase once more after multi-compartment schemes are set up” Ranuzzi says.
“I think the institutional asset management industry will be a pioneer in the use of alternative investments in Italy due to the need of using more none co-related asset classes, and also the need for excess returns,” says Davide Tinelli, manager of institutional asset management at Sanpaolo IMI asset management.
The possibility of including hedge funds and private equity investments in institutional portfolios is gaining interest. “In the future, alternative investments such as hedge funds will play a very important role due to a greater need for diversification,” says Guido Guzzetti, responsible for institutional asset management at Prime Investment Management.
But the approach to real estate investing is not quite the same. Even though the Greenwich’s survey forecasted that the percentage of real estate assets in Italian institutional portfolios was going to increase significantly – from 9% in 1998 to 14% in 2001 – the new regulatory framework seems to have altered the prospects for real estate.
“Typically the idea people have when thinking of the asset allocation of institutional portfolios in Italy is cash and real estate investments, but this is not always true,” says Sanpaolo’s Tinelli. “There might be an increasing interest in real estate, promoted mainly for asset managers offering this type of funds, but some of our clients are only now starting to get rid of these type of assets and they don’t want to come back to them.”
Managing foundations’ money is indeed offering great opportunities for asset managers. Since last year, and under a new law, Italian foundations have to sell their local saving banks over the next four years. Some of them have already done this and now they want that money to be re-invested. In some cases they sold their savings bank to another bank for a combination of cash and shares, so now, even though they might have a proper asset allocation between asset classes, 70% to 80% in equity and 30% to 20% in cash or bonds, the equity proportion, quite often, is invested in only one stock, with the consequent diversification risk. One of the major aims of the foundations is the preservation of capital – but also to obtain capital gain returns in order to finance the community programmes they run which need to be funded on an annual basis. This means a lot of work for asset managers and indeed, while they wait for the pension fund market to take off, foundations are keeping them very busy. Henk Ruitenberg, managing director at Antoveneta ABN Amro says: “Foundations are one of our most important clients. In general, I think they are taking a more aactive approach in investment management risks and becoming much more global in terms of asset allocation.” Ruitenberg believes that as a joint venture between a local player and a foreign firm is giving them what they need to gain marketshare. “On the one hand we are a local Italian asset management organisation, aware of the need that investment solutions should be adapted to the local reality, but on the other hand, we fully understand that a number of institutional investors are looking for international expertise, and I think this is the way to go.”
“Italian investors are a bit suspicious when it comes to letting others manage their money and you really have to hard to build up trust with your clients,” Ruitenberg says. This could be one of the reasons why online trading, where there is no need for intermediaries, is becoming so popular among Italian investors. “Every new trend brings threats and opportunities, but I don’t think that in the short term this is going to much effect he institutional portfolio managed business,” he says.
However, for some, the internet represents one of the main concerns: “For a bank like ours, with around 3,500 branches, internet distribution is a big problem,” says Intesa’s Ranuzzi. “Asset management products used to be sold through bank branches and now they are going to be sold online. The only way to deal with that is to create our own e-bank business and this is what we are working on.” From this new platform Intesa plans to provide all kinds of asset management products to institutional and retail clients from Sicavs to fund of funds and also private banking.
With all the changes brought by new laws and technology, the Italian asset management industry is ready to expand itself. New investment options will become increasingly important offering further opportunities for business growth. But only a more favourable fiscal framework to encourage people participation in supplementary pension schemes will give mangers what they really need: more money to be managed and new mandates to be won.