Asset Management In Italy: A Snapshot In An Evolutive Context

Asset management in Italy:a snapshot in an evolutive contextMay 2017

ContentsInvesting in Italy: history in a nutshell1Executive summary41. Asset Management in Italy72. Distribution in Italy223. The Italian investors264. Regulatory Challenges ahead325. Digital (r)evolution in Asset Management and Fund Distribution37

Investing in Italyhistory in a nutshell

Investing in Italy:history in a nutshellAfter the difficulties experienced during theGreat Recession, the Italian asset managementindustry has recently seen an unprecedentedgrowth triggered by the macroeconomicscenario, reaching at the end of 2016 111%of GDP in terms of assets under management.Nowadays, the plethora of innovation broughtby technology and the increasing regulatoryrequirements are transforming the industry,creating room for new players and hamperingtraditional business models. Before undertakinga deeper analysis of the trends and events thatare currently shaping the industry, we find itworthwhile to dwell on the most relevantstages of its historical evolution, therebyframing the social and economic backgroundwhich underpins the Italian investmentscenario.1In the aftermath of the Second World War inItaly the progressive welfare growth led to anincrease in households’ savings which weremainly allocated in deposits and postal savingsaccounts. In the Seventies, inflation causednegative real returns both on deposits and ongovernment bonds, shifting investors’ attentiontowards alternative solutions among which realestate dominated. The average Italian was andstill is a virtuous saver, with a saving rate thatin those years was equal to 24% of income,compared with the 12% average of other mainEuropean countries, but was never as virtuousin the vest of investor.

At the beginning of the Eighties the desire forsecure products was still the foremost driverof investors’ choices, but a tendency towardsa greater equilibrium between risk and returnsappeared. To meet this need, the long awaitedrecognition of mutual funds within the Italianjurisdiction was brought by the well-known law77/1983 in March 1983.Since their first introduction, Italian-basedfunds had achieved resounding success amonginvestors, marking an important turning pointfor the industry which, until then dominated bybank deposits and public bonds, saw the rise ofnew investment products. In 1983, the ItalianSecurities and Exchange Commission CONSOBwas given new supervisory competencies overthe Italian asset management market and, oneyear later, Assogestioni was created with theaim to coordinate the newly appeared assetmanagement companies.The development of investment managementmarked one of the most important changes forthe Italian financial system and,more generally, for all the industrializedcountries.It has modified the role of markets andfinancial intermediaries in the process ofresource allocation, it induced changes in thecompetitive structure of the industry anddetermined an enlargement of the range ofproducts offered. Yet, despite all thesenumerous developments, there are still fewconstants that have always characterized theItalian asset management industry: risk-averseinvestors consistently drawn towards fixedincome and (apparently) safer products; anoften unfitted regulatory framework and thedominance of banking institutions in thedistribution setting.Evidence of the first constant can be foundalready in 1984 when regulatory restrictions onforeign funds were partially lifted while, a yearlater, the stock market reached new peaks;as a result the industry registered an importantincrease in equity fund inflows. However, theenthusiasm for riskier investments proved tobe only temporary as a few years later, in1987, a negative performance of the equitymarket caused investor to sail away from theirstock allocations towards short term CD,government bonds and bank deposits; theaverage Italian investor was still seeking riskfree returns.In the same years, banks were able to leveragetheir strong presence on the territory bydeveloping economies of scale, which put themin an advantaged position, compared to otherdistributors. When new products came out,they always managed to exploit their positionand capture big portions of the market mostlymade of medium income, limitedly financiallyeducated investors.After many years of growth, in 1990, with thestock market slump, many investors decided todirect their money in short-term securities,such as BOT, or in bank deposits.The funds, which had just been establishedwith great success a few years before, werealready facing serious difficulties.Among other pivotal events in the history ofItalian Asset Management, we must point atthe advent of SIM (Società di IntermediazioneMobiliare), a legal entity specifically thought forfinancial investments introduced in 1991, alongwith the introduction of SGR (Società diGestione del Risparmio) and private pensionfunds in 1998. These indicate how relativelynew the Italian context is when compared toother European countries with a much longerfinancial history, as the United Kingdom.Following the introduction of the mentionedlegal entities, a remarkable growth wasregistered from 1996 to 1998, when the size ofassets under management more than doubled.The driving factors for this boom werenumerous. Among them, the drop of interestrates imposed by the incoming third phase ofthe European Monetary Union brought extraresources away from public debt investmentstowards the asset management industry.Furthermore, the significant weakening of thepublic pension system gradually broughtcitizens to search for alternative ways toensure economic flows, once they reachedretirement age. Finally, Italian banks startedlooking for new solutions, in this case fundplacement, that would generate fee-basedincome on top of the revenues coming from thetraditional core banking business.2

The first part of 2000s was characterised by astrong growth of market dimensions, with AuMthat went from 880 billion in 2003 to 1,131 billion in 2007. This growth was alsofavored by the introduction of new investmentproducts, such as Hedge Funds (1999)and Exchange-Traded Funds (2002).The global financial crisis of 2008 caused areversion of the trend with a severe contractionof the market, that caused the AuM to fall to 841 billion in only one year, due to the massiveoutflows from the industry and to the loss invalue of securities held in funds and portfolios.The following period was characterised by theintroduction of several regulatory provisionsaimed at increasing transparency of financialmarkets and at preventing a similar crisis inthe future.After few years, the market volume rose againto the pre-crisis level, marking a rebirth of theasset management industry.3As mentioned above, the industry is currentlyfacing challenges brought by regulation andnew tech solutions. Along with challenges,opportunities are always coming up. Althoughonly time can tell who will be doomed by theformer and who will instead take advantage ofthe latter, our research aims to depict bothsides, providing a comprehensive overview ofthe industry and its foremost trends.The entire first part of2000s was characterisedby a strong growth ofmarket dimensions, withAuM that went from 880 billion in 2003 to 1,131 billion in 2007.

Executive SummaryThe Italian asset management industry isexperiencing a long period of growth andis now one of the largest and mostdynamic across Europe.Over the last four years, funds and portfoliomandates have, with very few exceptions,recorded positive monthly flows, marking atruly flourishing period for asset managers anddistributors. Low interest rates have for thefirst time forced Italian savers and institutionsto look beyond the easy returns that in thepast were guaranteed by Government bonds,bringing favourable news to asset managers.Nonetheless, the pace of change hasdramatically intensified, triggering challengesand opportunities for incumbent and newplayers.In this paper, we first provide an overview ofthe Italian asset management market,highlighting the recent evolution of investmentsolutions and the main features of the Italianfund and life insurance distribution. Then, welook at the demand side, i.e. what are thepeculiarities of Italian savers and how they areevolving.Finally, we go through the challenges broughtup by the impending regulatory wave, withMiFID II about to become a reality, and theopportunities fostered by the adoption ofmodern technologies, such as robo-advisory,artificial intelligence, RegTech, Blockchain andsocial media.Market overviewFunds are becoming more and more popularacross investors thanks to the diversificationthat they allow and to the professionalcompetence of financial operators. Multi-assetproducts have overtaken traditional equity andbond funds, with the rise in the most recentyears of balanced and flexible funds.Now, asset managers tend to provide solutionswith a goal-based approach rather than merelyoffer investment instruments. In this context,the recently introduced Piani Individuali diRisparmio (PIR) are gaining momentum and,in addition to foster a new financing wave toItalian companies, are deemed to blow freshair into the industry.Furthermore, after a decade of negative flows,Italian-domiciled funds have regained theirpopularity over the last four years despite theircosts, generally higher than those for theirEuropean counterparts.The current distribution model is dominated bybanks, who are leaders in both fund and lifeinsurance distribution. The relationshipbetween the asset manager and the distributoris mainly captive, but several changes areexpected for the future, triggered by theincoming regulation and by the techinnovations. Costs for compliance as well ascompetition will likely increase, thus triggeringa consolidation wave to remain profitable overthe medium-term.Italians are great savers.Despite their conservativefinancial habits, they havebeen forced to considerother investments thangovernment bonds anddeposits.4

The demand sideRegulatory challengesItalians are great savers. Despite theirconservative financial habits, they have beenforced to consider other investments thangovernment bonds and deposits. It is of crucialimportance to dig deep into their specificinvestment needs: low risk seekers and poorlyfinancially educated, Italians need to have apersonal relationship with their advisor.Baby boomers, who owns the largest share ofthe Italian financial wealth, are the foremosttarget of the industry.In the past few years, regulatory compliancehas constantly been at the top of assetmanager’s agenda. Currently, the mostdebated regulation is the upcoming Market inFinancial Instruments Directive (MiFID II), as itcovers many areas of the industry and bringsrelevant challenges to the table.Finally, the reader will gain insights on theItalian household’s portfolio, deeply affected bythe recent crisis.It is worth to notice that one third of Italians’wealth is still parked in deposits and cash,representing an untapped potential for theasset management industry, that in the futurewill need to move these resources within itsboundaries.5The Directive sets two main objectives: makingthe system more transparent and improvingservice quality.To meet the first goal, along with otherprovisions, regulators have imposed costs andretrocessions disclosure requirements andbanned inducements in case of independentadvisory.To achieve the second objective, theyintroduced standards on product governanceand imposed minimum qualifications to agentsoperating as financial advisors. Most operatorsdeem to be sufficiently ready to implement theaforementioned changes however, this doesnot mean that there will not be unexpectedconsequences ahead for some players,especially for the smallest, who will findhandling compliance somewhat burdensome.