Eurizon Capital riding out the perfect storm

In addition to the financial crisis, which proved tough for most fund houses in Europe, Eurizon Capital, the heavyweight Intesa Sanpaolo banking group’s Italian asset management arm, had to brave a merger too last year, while having to operate in the market which suffered one of the heaviest fund haemorrhages in Europe – around €142bn fund outflows just in 2008. The largest fund house in Italy, with E146bn of assets under management, closed another chapter of its rather complex recent history when in April last year it emerged from the integration of Eurizon, previously SanPaolo Asset Management, with Nextra, previously Banca Intesa’s asset management arm. Nextra itself had been sold to Crédit Agricole in 2005, and offloaded back to Intesa within the agreements relative to the merger between Intesa and SanPaolo, which took place in 2007. Eurizon Capital had been part of Eurizon Financial Group, also including insurance company Eurizon Vita and Fideuram Bank, which was Sanpaolo IMI Group’s unsuccessful attempt to establish an independent, comprehensive asset management pole. Recent developments drove CEO Francis Candylaftis to step down in October, amidst rumours of a sale of operations or share-sale, accompanied by expectations of further company restructuring, which will reportedly lead to staff cuts. Mr Candylaftis was replaced by Mauro Micillo, previously chief financial officer at Gruppo Banca Popolare di Vicenza. Despite the latest challenges, Eurizon Capital has put in place a number of initiatives aimed at getting closer to its distribution networks, improving financial education and drawing more interest from distributors by offering a streamlined, enhanced product range. These new plans are indeed providing some signs of hope. “We felt the approaching storm and we have reacted,” says Andrea Cecchini, head of distribution at Eurizon Capital. The storm certainly materialised in a drop of €30.7bn in mutual fund assets during 2008. In the second half of the year, after the merger, the firm made a clear effort to get closer to its captive network; a small team of investment managers had 400 meetings in a few months in an attempt to reach the 6,500 Intesa Sanpaolo branches. Financial education is often scarce in banks, and that can supposedly explain the large fund redemptions in the banking distribution channel; the promotori or advisers-based networks instead, benefiting from a more experienced and sophisticated sales force who are closer to investors, have held up much better throughout the crisis. This financial education initiative was then institutionalised with the creation earlier this year of a new team of 44 investment specialists, who aim at bridging any gap between the asset manager and distribution. “The specialists are the megaphones on the territory for our in-house views,” he says. “We realised that the product knowledge in branches was not adequate. The advisers who work in branches have many products to sell, and funds are just one of them. For funds, the sale starts when the product is sold, but for other products, such as insurance products, after-sale is rather limited,” explains Mr Cecchini. Continued decline The long-standing decline of the Italian fund industry, which deepened during the crisis, has been often attributed to a growing disconnection between asset management and distribution and to the short-term mentality of bankers, keen to push to their clients more remunerative solutions such as structured products. Under the new MiFid regulation, which calls for a level playing field between all investment products, and with the collapse of Lehman Brothers, structured products have come to a halt, says Mr Cecchini. “Structured products have been severely hit in Italy,” he believes, “while funds, which have been always considered the Cinderella in the investment arena, have kept their promise of diversification, liquidity and transparency, which are now much appreciated.” At Eurizon the first three months of this year saw continued outflows of €2.5bn, but since the founding of this new team in April, outflows decreased to €500m over the six months to the end of September. How much is due to improved market conditions or the work of the specialists is open to debate, but Mr Cecchini believes there is a positive correlation. Eurizon is proud of its recently launched training programme, branded Eurizon Academy, which is organised for advisers, both for their captive and third-party distribution channels. The product offering also had to undergo a major review process. “The two firms (Eurizon Capital and Nextra) had very rich product ranges, and last year we reduced the number of our funds from 140 to 60.” Within this, a more limited range of 21 funds has then been elected as the focus range for retail distribution. The Italian firm, which distributes the large majority of its assets (84 per cent) through its own captive banking network, identified in absolute return funds and profile funds the answer to investors’ need for advice-embedded products. Profile funds are balanced flexible funds and are managed using a risk budget that reflects different client risk profiles. More recently the firm has launched tactical products that take advantage of market opportunities, such as formula funds or fixed maturity fixed income bonds, and further launches are expected in the coming months. The trend is towards a further reduction of products to be made available to delegating retail investors, with model portfolios which include asset allocation options, he says. Innovation has also taken place in the firm’s product range in Luxembourg, where 40 per cent of Eurizon’s total assets are managed. A Luxembourg fund range enables the firm to offer to sophisticated investors in Italy solutions that, as they not incur in the much criticised penalising taxation on Italian funds – now expected to be reviewed next year – can compete with the product offering from foreign asset managers. Cross border distribution, instead, is still “marginal” for Eurizon. “Our priority today is to promote the brand,” says Mr Cecchini “and then formulate future development strategies.” Specifically dedicated to the private banking world, the firm launched a new umbrella fund called Stars which uses its best internal expertise. “Enhancing the product range is always important, as you have the opportunity to meet the distribution networks, and take that opportunity to also propose other solutions,” he says. Currently, around seven per cent of Eurizon’s total assets are sourced from Intesa Sampado private bank. The Italian fund house also manages around €2bn on behalf of distributors external to the group. making inroads Mr Cecchini hopes to make more inroads in the private banking space. “We have created this Luxembourg range to offer our best expertise. Distributors within the group are opening up to the competitors and we also want to target external distributors.” On the other hand, third-party funds are used to complement the in-house product offering, mainly in the now simplified range of GPFs (Italian discretionary portfolios) and funds of funds. The firm gains access to the best external managers and funds through its €4.5bn multi-management operation. “We use third-party products if our product is more expensive or its performance or quality is not as good; the most important thing for us is the performance for the client,” maintains Mr Cecchini. The split of the investment division in two different segments, one called Alpha Core, which manages asset classes and securities, and the other called Investment Solutions, aimed at building solutions for clients, was indeed made to avoid, as much as possible, conflict of interest within the firm, he says. “It is very important that we treat our captive distributors as clients and we anticipate their need, before they think they should contact third-party managers,” he says. Mr Cecchini believes that the crisis has finally shifted the balance in favour of Italian asset managers, as foreign managers as a category has emerged from the crisis clearly more beaten. “Domestic asset managers were traditionally considered not sufficiently advanced or sophisticated or accused of not being capable of active management,” he explains. “In truth, we are an active manager when we want to, but what is important, we have not had any problems. Clients got closer to us,” says Mr Cecchini. “Some foreign firms perhaps are more opportunistic, they come to Italy and stay here for 2-3 years to make money and then they leave, but we are fully aware that we manage our clients’ savings and that we need to give them a strong service.”

Andrea Cecchini: “Our priority today is to promote the brand, and then formulate future development strategies”