Italian fund industry continues to struggle

The main responsibility for the long-standing difficulties of the Italian fund industry, which saw a continuation of its negative trend �registering net outflows of ?6.5bn �during the month of September alone, has to be accredited to the wrong asset allocation in clients’ portfolios in the past few years, due to the inability of the distribution networks to advise their clients and their poor integration or communication with the asset �management arm. The inadequate quality of the �average Italian asset management industry, too much benchmark �orientation and the banks’ commercial policy biased towards less transparent and more profitable �products, such as certificates and structured bonds, also played a key role. This was the stark picture painted by Pietro Giuliani, president of �independent asset manager Azimut, at the recent PWM conference in Milan. Only 26 per cent of the total savings managed by fund houses for Italian investors is currently invested in �equities – just a few percentage points more than in 2003 after the market downturn of 2000 to 2002, said Mr Giuliani. The large majority of investors’ portfolios is still invested in bonds and monetary products. Given that between January 2003 and June 2007 the MSCI world has delivered 50 per cent returns, while the monetary products following the MTS benchmark during the same period have delivered 10 per cent, and the bond products benchmarked against the JPM global Euro had negative returns of -3.8 per cent, it is clear that today’s asset allocation is not efficient.

Giuliani: Bonds remain popular

“The asset allocation of the industry is substantially the same as it was five years ago,” said Mr Giuliani. “When interest rates started rising at the beginning of 2006, the industry �definitely destroyed value.” Investors have received 2-to-3 per cent gross on �government bonds per year versus a stock market delivering annually between 10 and 20 per cent. Taking into account the net weighted average performance �calculated after taxes and costs, in the past year the industry has �delivered the same returns as the � risk-free rate represented by Italian government bonds. In the past three years, the Italian asset management industry has returned 4 percentage points above the risk-free rate versus 40 per cent by the equity market. The main problem is not the cost or the management fees, but the asset allocation, reiterated Mr Giuliani, who boasted that at the beginning of 2006 Azimut’s clients had only 10 per cent of their assets invested in pure bond products. “The first thing that an adviser must gain when talking with clients is time,” he said. “Splitting the client’s portfolio in different time �horizons according to functions of client needs is key,” he said. Mario Cuccia, general director at Allianz SpA, while acknowledging that the fund industry is going through a “difficult period” stressed that today’s investors are descended from a �generation of people relying solely on government bonds that give high returns and low volatility, while the �Italian equity market has systematically been characterised by high volatility and low returns. If banks have committed mistakes, it is also true that distributors have had to put up with risk-adverse clients, he said. “Certain asset �allocations are ingrained in our clients’ DNA,” he said. He also added that the current crisis is physiological and that the situation in the Italian industry is improving. Mr Cuccia hopes there will be a frank, open discussion between the industry players and the Italian �regulatory authority during the �implementation stage of the new �European financial directive – MiFID. “It is important that we propose �operational models to the authority, so that we can get to an efficient MiFID-compliant solution,” said Mr Cuccia.

Castelli: Building a Chinese wall

“What is worrying is that in the past few weeks everybody has rushed to offer advisory services to all clients,” said Mr Cuccia. The risk is that of an abuse of the concept, which will lead to confusion and will be to the �prejudice of clients’ �interests. “Instead of having the best execution and the appropriateness test if the clients ask for a service, we are facing the risk of generalised advice, which is worrying.” Allianz will look for the most efficient organisational solution, said Mr Cuccia, aiming at not passing on any cost increases to the clients. “Clients have been the weak component in this �difficult economic accounts equation,” said Mr Cuccia. Running the risk that the managed savings industry shuts down because excessive costs are passed on to clients is something that should be avoided, he said. Giorgio Girelli, chief executive officer of Banca Generali, introduced the �concept of the importance of enforcing the new MiFID legislation. “MiFID is an epoch-making legislation,” said Mr Girelli, “because it is going to impact the fundamental variables of the mutual fund distribution industry.” Making reference to the concept that it will be possible to retrocede �management fees only when the investor is given a value-added service, Mr Girelli explained that whether MiFID will be seen as a simple form to fill in, or a revolutionary change that will affect the relationship between �manufacturer, distributor and final client, will depend on how strong the enforcement of the law is going to be. “This law will imply a very strong responsibility from the supervisory authority. Unless the supervision on how the legislation is applied will be strong and homogenous, there will be a competitive disparity.” This is just a hope, said Mr Girelli, who recalled that the Italian government allowed 15 years to pass before �sanctioning �drivers for not respecting compulsory car seat belt laws. The other hope is that MiFID, whose effects Mr Girelli predicts will take at least a couple of years to bite, will not lead to an internalisation of all �products. He expressed fears that �Italian banks may be minded to bring outsourced products used in GPFs �(Italian fund of funds-style private banking products) back in-house. � Contacts he has had in �working groups with other distributors �discussing the directive have fuelled these fears. “This effect would be against the spirit of MiFID. It would be a big step back for the Italian market,” said Mr Girelli, remarking that Generali bank, instead, has made open �architecture its distinctive mark.