Italy’s asset management industry hit record AUM of €1.632trn in January 2015. Still, the country’s economy struggles to take off again.
Italy’s GDP went negative in November 2014, when it decreased by 0.1%. This marked the 13th month in a row of negative performance.
At the end of the year, the economy did not look much healthier and fourth quarter GDP not only remained unchanged compared to the third quarter, but it dropped by 0.5% year-on-year.
At the same time, the Italian asset management industry was booming.
At the end of 2014, total AUM for the industry came to €1.585trn thanks to total net sales of €134bn throughout the year – €32bn of which came in the last quarter – for an average of more than €10bn total net inflows per month.
Talking to local players, the main reasons that get pointed at as an explanation for such a gap between the real economy and inflows into asset management products include the downturn of traditional asset classes for Italian investors, such as government bonds (BTP), and property.
Giordano Lombardo, president of industry association Assogestioni, says that Italian investors were forced to look elsewhere for returns as yields are currently extremely low.
“Very low yields and the end of the real estate market cycle have eroded two strongholds of Italian families’ savings like property and BTP. On top of that, Italian banks have started to recommend mutual funds to their clients,” Lombardo says.
Rather than coming from a real growth in investors’ wealth, the increasing success of asset management products in Italy came from other characteristics.
First of all, they hedge market volatility quite well, which comes in handy in times of recovery; second, they are simple and fairly democratic products; and finally distribution networks have become broader than before.
“Investors do not need high capital or financial education levels to invest in mutual funds. Moreover, the distribution channel does no longer stop at the banks or at financial adviser networks, but it is also expanded by the Internet,” Lombardo adds.
There are also those who look at the broader picture and call into question Italian government policies to justify the lack of real growth in the country despite the high levels of AUM in the asset management industry.
Matteo Astolfi, Italy country head for M&G Investments, says money remains parked in mutual funds and is not channelled into the real economy as investors wait to see more concrete reforms from current prime minister Matteo Renzi’s government.
“Foreign investors are waiting to see how the implementation of labour and justice reforms will bring about more flexibility in the country. Moreover, Assogestioni’s data show us that inflows, although increasingly higher, have come from the usual suspects more than from new investors,” Astolfi explains.
Philip Kalus, managing partner at accelerando associates, takes a bigger leap and argues that the Italian trends won’t be sustainable in the long run.
“I expect a significant slowdown in Italian flows going forward. The country’s AM industry has experienced an impressive run from record to record and I doubt the sustainability of this trend. My recommendation to clients is: if you’re not there already, don’t go there now,” Kalus says.
Moreover, Kalus believes that the Italian markets is predominantly a commission based wealth management market which makes it particularly expensive from an operational point of view.
“All in all, Italy is a very expensive market to trade in and at the end of the day, I personally don’t think that the record net inflows into the asset management industry tell us anything at all about the country’s recovery or the improvement of investor confidence,” he adds.
The selector angle
Fabio Bariletti, general director at Kairos, agrees with Assogestioni’s Lombardo on the reasons for the recent success of asset management products in Italy.
“Italian investors are forced to turn to asset management products in search for returns as yields on government bonds are close to zero and property prices keep falling while tax keeps rising. And those reasons are completely unrelated to the real economy performance.”
Looking for solutions to start channelling the money back into the real economy, Bariletti points at the creation of a regulatory and tax framework that encourages both local and foreign investors to invest in the country.
“The present government is heading in the right direction and if we combined its action with the current monetary environment, there is a good chance that foreign investors will start to return to Italy for structural, long term investments soon.”
David Karni, head of fund selection and advisory at Bcc Risparmio & Previdenza SGR, says it is going to be challenging to try and channel money held by asset managers back into the real economy.
“A good attempt was done by the industry with the launch of the ‘mini bond’ and mini bond funds to widen access to credit for local SMEs, which however have not been particularly successful as such products are still perceived as high risk tools. The only way to make the real economy benefit from the asset management industry’s success would be to thoroughly revolutionise the traditional funding system in Europe and have the banks open up to the market, like it happens in the US,” he says.
Regardless of speculation, Assogestioni’s Lombardo foresees another positive year for the industry as yields remain low and the euro weakens.
“The asset management industry could play a key role in supporting the real economy through solutions for SMEs and infrastructure. The industry will continue to provide investment solutions and adequate returns to savers.”
The issue of high flows into the asset management industry against the struggle of the real economy in Italy will be discussed at Assogestioni’s Salone del Risparmio on 25-27 March.