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Magazine Issues » September 2010

ITALY: seeking a bigger pizza the action

Pizza_sliceRome seeks to separate Italian fund managers from banking parents to shake them out of complacency, increase  third-party assets, and become more competitive internationally. 

Angele Spiteri Paris reports:
Bank of Italy governor Mario Draghi wants Italy to be able to compete with other European fund management hubs and has introduced changes to force bank-owned investment firms to become autonomous. But some critics say the difference these rules have made in the structure of the Italian asset management market is infinitesimal and symbolises only a very small step towards achieving Draghi’s goal.

Although as a result of these regulations Italian asset managers may have achieved legal independence, their distribution is still almost completely dependent on their banking parents. And some say this dependency has led to complacency, and this has to change if the industry has any hope of competing effectively at an international level.

At least 80% of the assets under management in Italy are captive to the banking network and there are few very small independent houses.

In October last year, the Bank of Italy issued regulations calling for bank-owned asset management businesses to become legally autonomous. Financial institutions had to comply by the end of June 2010.

Asset managers are now required to have independent control of their human, technological and financial resources and to conduct independent valuations of group financial products before offering them to clients. They had to improve governance and transparency with more independent non-executive directors on their boards and disclosure of potential conflicts of interest with their parent companies.

The regulatory push to have the bank-owned asset managers garner independence from their parent is a step in the right direction, but some feel that a truly independent and open asset management industry in Italy still has some way to go.

Marcello Messori, the former chairman of Assogestioni, the Italian asset management association, and now a professor at Tor Vergata, University of Rome, says: “The issue of autonomy is not about the independence of investment decisions. Rather, it’s about the distribution issue.”

In fact, the bank-owned asset managers are indeed autonomous and completely separate from the bank when it comes to taking investment decisions.

Tiziano Bellemo, head of communication and institutional affairs at Eurizon Capital, the asset management arm of Intesa Sanpaolo, says: “Although the placing of our products takes place predominantly through the distribution networks of the Intesa Sanpaolo Group, we are independent when it comes to product development, investment strategy, marketing campaigns and voting policy. Moreover, we have a specific policy with regard to conflicts of interest. Lastly, we have an independent depository bank.”

But in spite of this independence on the investment side, the asset management industry in Italy, on a more general scale, seems to have taken a back seat.

Asset management helped line the Italian banks’ pockets when they were struggling in the 1990s. But now that the banks are back on track, asset management is simply there to serve their product needs.

As a result, the Italian asset management industry is in danger of stagnating, and according to some, it already has.

Poor relation
Mirko Butti, Emea director at Russell Investments, says: “The Italian asset managers lost their competitive edge. This loss became very clear over the last couple of years as banks were forced to improve their Tier 1 status and began pushing to sell bank bonds instead of asset management products. This was not good for the asset management industry.”

Messori says: “It became more convenient for banks to sell bank bonds instead of asset management products, not just because of the crisis, but mainly because the sellers’ rates of return were higher in the case of bank bonds.”

Although the asset management side of the Italian financial groups did suffer as the banks sought to improve their capital status and failed to market asset management products, the asset managers could hardly complain about this to their parents very comfortably.

Gabriele Miodini, head of financial institutions for Europe at Aviva Investors, says: “In relative terms, Italian banks were in a much better position than banks in other parts of Europe. So although the asset management business may have been sidelined as a result of the crisis, they didn’t have much to say against their banking parents.”

But one cannot help but wonder why the asset management professionals themselves don’t seek or crave independence. Especially considering that the products they offer have almost become the poor relation of the banks’ financial instruments.

Messori says: “It’s difficult to push the industry in that direction. There is a small minority of smart, independent people in the Italian asset management world, but these are not enough. We have some interesting niches but to build a whole industry you need the big players.”

Butti, of Russell, says: “Asset management in Italy never grew as much as in other countries because the asset managers simply serviced the banking industry and were not pushed to be innovative and to look for clients.

“The asset managers still need to transform and become more than just product providers to the banks’ distribution network.”

Messori says: “It’s true that Italian asset managers were not pushed to innovate. They had no incentive to do this.”

As Bellemo at Eurizon says, the placing of the asset manager’s products takes place predominantly through the distribution networks of the parent company.

But Miodini, of Aviva Investors, says this is not necessarily a limitation. “I don’t agree that Italian asset managers have lost their competitive edge. It’s true the speed of the industry is slower, but having foreign players active in the market has pushed the Italian asset managers to work hard. I don’t believe in innovating for the sake of innovation.”

He adds that Italian players are stronger in certain sectors such as property and fixed income. “There are some small boutique firms that are doing some very good things. These are more flexible than the bigger players and also are more free from the constraints of their mother company,” Miodini says.

But Butti adds: “Yes, Italian asset managers can be dynamic and reactive in certain sectors but that doesn’t mean that they have a solid investment house. Some Italian players have good ideas, but sometimes they’re good at implementing them and sometimes they’re not. On the whole, they’re good at doing cash, balanced funds, fixed income, and government bonds. They’re not that good at thematic plays, alternatives or non-domestic equity.”

He says that being so closely tied to their banking parents is part of the reason for this: “Because they’re still captive of banks they cannot travel, interact internationally, so they lose ground on being more innovative.”

The dependency on the bank for distribution is not just a negative, as one expert says: “On one hand, you have the bank that is offering to buy your products, which is a good thing. But on the other hand, you are dependent on one very large client and this can have repercussions.” The expert, who wished to remain unnamed, says that the fact that the single large client is the asset manager’s parent company is irrelevant.

Solution question
So how can the Italian industry make its way out of this maze? Experts agree that Draghi’s regulation is a step in the right direction, but its going to take more than rules to get the lumbering Italian machine moving.

Messori says: “It’s difficult to achieve true independence solely through regulation. There has to be a change in the organisation of the market for this to come about.”

In fact, a survey by service provider RBC Dexia reveals the industry is not ready for the change, even the relatively small changes these new rules would bring about.

When polled between March and April 2010, only a quarter of respondents, 26% to be exact, said they were fully prepared to meet the new BOI rules. Despite the fact that the implementation date was looming, 42% said they had only just begun to assess the impact of the new guidelines.

Since then, the asset managers ought to have adhered to the new regulations.

But beyond meeting regulatory deadlines, one player in the market suggests Italian asset managers need to invest more on the equity side of their business. Yet part of the problem is that, more often than not, they don’t have the capital available to them to do so.

Messori says: “Asset managers had little money to invest into their business, because a large part of their revenues were given back to the bank’s distribution channel.”

Some banks have tried to offload their asset management arms. According to reports, Unicredit has been trying to sell Pioneer for a while now and Intesa Sanpaolo also put its asset management business on the market, for a reported €3bn.

As yet, nothing has come of these offers of sale, although there are indications that French players BNP Paribas and Natixis may be interested in a deal with Pioneer.

But not only have many banks not succeeded in selling off their asset managers, experts say that the sales would not solve the problem of independence.

Miodini, of Aviva Investors, says: “No-one wants to buy these asset managers for the prices the banks are asking and, also, it wouldn’t change anything. Any potential buyer would want guaranteed access to the bank’s distribution network.”

And therefore, the asset management business would remain completely captive.

According to Messori, consolidation among bank-owned asset managers can help break open the industry. He says: “If two bank-controlled asset managers merge, then the banks will both be owners of the resulting entity and this would be a step towards opening the distribution channel.”

His logic is that the asset management products will be in competition with one another and therefore cannot remain captive to a single bank network.

There has been an attempt at creating an entity such as the one Messori describes. Banca Monte dei Paschi di Siena and Banca Popolare di Milano, together with the private equity firm Clessidra, agreed to develop a strategic asset management alliance.

This initiative would effectively merge Prima Sgr (società di gestione del risparmio – asset management company) and Anima Sgr – the asset management arms of each of the banks. If the integration were carried out to the nth degree, then the resulting entity would represent the largest independent asset manager in Italy.

But as yet, this has not happened. An expert says: “If the merger goes through, then Banca Montepaschi and Banca Popolare will both have minority stakes in the overarching company. But the problem is that the asset management business will continue to sell their products to the separate bank networks.”

The only way that this merger will succeed in setting up Italy’s largest truly independent asset manager is by merging the banks’ distribution channels and allowing them to compete with each other.

It has been said that the orchestrators of this deal are trying to model the resulting business on Italy’s only true independent asset manager – Azimut. But the size of the resulting entity can be a problem.

“Azimut only has a few billion of assets under management. Trying to replicate this model on such a large scale would be very difficult,” says Miodini, of Aviva Investors.

Another way to achieve independence is for the bank-owned asset management businesses to make a concerted effort to increase their third-party assets under management.

This would not be easy, but some are trying. Noises in the market claim that certain Italian asset managers have a number of initiatives in the works to try and increase their portion of third-party assets. Exactly what shape or form these will take has still not been made public.

©2010 funds europe