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Magazine Issues » March 2016

ASSET MANAGEMENT IN ITALY: The Italian renaissance

TuscanyItaly is now a hot market for asset managers. David Stevenson looks at how distribution works there and what type of investments Italians favour.

Italy is famous for its cultural offerings, from fine art masterpieces to Verdi operas. But in recent years, an altogether different kind of stimulus has attracted asset managers there. 

With Italy leading fund flows in Europe – according to Lipper, Italians invested €47 billion into various fund products in 2015 – the country has become a key European destination for firms. 

Figures from industry association Assogestioni show Italy’s assets under management now total about €1.8 trillion, compared to €842 billion in 2012. But while the Italian asset management industry has grown, it is not an easy place to make money.

The market is split into three categories, the largest and most profitable being retail. Another is wholesale, while institutional is really just for established domestic players, according to some of the professionals Funds Europe spoke with.  

Italy can be categorised as having captive asset managers who are inextricably linked to the big banks. Matthieu David, head of Italy for Franco-Belgian firm Candriam, acknowledges this “banking-centric system”. He says Candriam, which is not bank-owned and operates its Italian business from Milan, targets financial advisers rather than selling direct to retail banks, who would be less likely to sell the firm’s funds. 

While financial advisers are also linked to the banks in Italy, due to a system of open architecture, advisers are free to sell third-party funds.

Italian retail investors have been forced to move away from their deeply conservative investment preferences of government bonds and real estate if they hope to maintain decent returns.

According to Lorenzo Alfieri, country head for JP Morgan Asset Management (JPMAM), Italians have really changed how they invest over the past four years and are now interested in flexible funds, including balanced and multi-asset products. However, there has not been a strong diversification towards equity, he says, suggesting a level of caution is still present for Italian investors.

JPMAM has been present in Italy for 22 years, so has a strong foothold in the market. According to Alfieri, the firm’s bestselling funds are Global Income, Global Macro Opportunities and Global Bond Opportunities. Noticeably, all three are in the flexible fund category.

Foreign players in the Italian market do have something that investors want, namely cross-border non-Italian domiciled funds. Of the €850 billion in mutual funds in the Italian market, only 28% are domiciled in Italy, the rest originating from foreign domiciles. Competition is fierce and the economies of scale that large international fund management players offer, in addition to a variety of products, makes them attractive.

But domestic firms such as Eurizon Capital are able to offer the best of both worlds. Eurizon is a captive manager, being part of the Intesa Sanpaolo Group, although according to Gabriele Miodini, head of sales and client management at the firm, Eurizon is transitioning to become a global non-captive asset manager. He says his firm’s bestselling funds are domiciled in Ireland or Luxembourg.

Eurizon has €372 billion in assets under management, of which €100 billion is in Luxembourg; between 90-100 funds are domiciled in the Grand Duchy. However, the bulk of the firm’s assets come from its Italian captive network funds. Miodini estimates that there about 22,000 financial advisers directly linked to banks. For example, Generali Investments is tied to Banca Generali.

“The market is open, but you must be ready to play hard,” says Sergio Trezzi, a regional head of distribution at Invesco, referring to the advantages that Italy’s captive managers have over foreign firms.  He says that these days, fund distribution is characterised
more by guided architecture than open architecture. 

“The number of slots that the distributors give is limited. You have companies saying they want to work with ten players, not 200 players,” he says, adding that Invesco’s last win was due to a distribution bank pushing out another firm in favour of Invesco. 

Banks wanting to work with fewer fund houses may reduce the number of third-party funds offered to investors. However, Andrea Argenti, head of Italy for Lombard Odier Investment Managers, says that Italy is the largest open-architecture market in Europe along with Switzerland. 

He says that more than €20 billion in funds last year came through open architecture. The majority of assets went into cross-border funds through existing distribution channels, whereas domestic players raised €50 billion. Large domestic firms such as Eurizon have their own Luxembourg subsidiaries to offer cross-border funds.

Some managers will say that low profit margins make institutional work unprofitable and not worth the effort, but Pioneer Investments, a firm owned by Italy’s UniCredit, is comfortable in this marketplace.

Francesca Ciceri, head of wholesale and institutional distribution at the firm, says Pioneer covers both public and private pension schemes, which is a large market. However, the large amount of assets held by Italian pension funds means they have the power when it comes to setting fees, she adds.

According to OECD figures, the total invested in Italian pension funds was $129 billion (€118 billion) last year.

The type of assets in which pension funds can invest is governed by statute – for instance, the notorious law 706 from 1996, which put restrictions on which assets could be held by pensions funds. Derivatives could not be used and high-yield bonds couldn’t be owned. The law has recently been replaced by law 166, which has opened up derivatives and high yield, although Ciceri says only a few pension schemes are ready for this, while most are still adapting their asset allocation to include these new asset classes.

“If you want higher yield, you need to access those asset classes [emerging market and high yield, for example],” she says. Pension funds have also started taking an interest in smart beta exchange-traded funds (ETFs) in their continued search for yield.

The introduction of high yield means the institutional market is becoming more attractive to international asset managers, says David at Candriam. This is because “there’s more margin when you’re managing a pure high-yield product”. 

However, Trezzi of Invesco says that the institutional market is totally dominated by Italian and passive players who have “squeezed the price to a level where there is no interest from anyone”.

Ciceri says there is no bias towards Italian managers – in fact, sometimes the opposite is true. She recalls a time when preferential tax treatment benefited foreign funds over Italian ones – a peculiarity of the Italian market, as most other jurisdictions would have rules favouring their own funds, not putting them at a disadvantage. This untypical tax treatment meant investors were not taxed for switching between foreign-domiciled funds, although investors were taxed on Italian funds even if they did not switch. This is no longer the case, but might go some way to explaining the attractiveness of Italy to global asset managers.

There is a wide consensus that if a firm operates in the Italian market, it’s vital to be present there, especially if its trying to access the retail market.

“A lot of the space has been occupied in the last few years,” says JPMAM’s Alfieri. “It’s not possible to be in this market without a local presence, as Italy is a complicated market. It is difficult to cover Italy from abroad – you need to adopt a service model that requires your presence.”

Eurizon’s Miodini sounds a note of caution for firms flocking to Italy, attracted by the healthy reported fund flows. He remembers the last time the market was hot. The country attracted an influx of international players, until a sudden downturn. Firms such as Aviva Investors decided to scale down operations – though this was in 2011, at the time of the sovereign debt crisis, so is an extreme example. 

Argenti at Lombard Odier says: “If you exit the market, clients will exit the products.”

In 2014, Franklin Templeton opened offices in Rome, Florence and Padua, adding to its original Milan office, which opened in 1994. Another US powerhouse, 

T Rowe Price, opened its first Italian office in Milan last year.

A draw for asset managers to focus on Italy is the regulatory opportunity encapsulated in Basel III and Solvency II, which will result in banks and insurers putting more of their clients into funds. While these banks and insurers may have their captive asset managers, the Markets in Financial Instruments Directive II, due in 2018, is expected to limit retrocessions paid to fund selectors and possibly broaden the funds offering in Italy.

“Italians have saved a lot of money, so it is an attractive market,” says Pioneer Investments’ Ciceri, adding that Italian banks are “not quick to open up new relationships”.

For firms offering balanced products with fairly benign risk profiles, the Italian market is perfect. While global equity markets have been tumbling since the start of the year, according to Morningstar’s Italian fund flow data for January, JPAM’s Global Macro Opportunities Fund enjoyed inflows of €644 million.

©2016 funds europe