BSIC – Special Report Markets Team

May 2015 www.bsic.it

Asset Management in – A New Era?

Is the Italian asset management industry entering its roaring years? In this report we try to analyze the current situation and to find an answer to this question. First, we focus our attention on the typical financial portfolio of Italian households. We will see how it can be broken down according to different criteria, such as the types of securities inside it, the income of the household and the geographical origin of the household. We then build a bridge between the evolution of the household portfolio in the last decade and the rosy prospects of Italian asset management. In the second part, starting from the current financial environment, we highlight the excellent performance of asset managers in Italy during the last years. The analysis will be developed around two temporal layers. In the short-term, we are going to look at the yield environment and the need for diversification. In the long-term, we deepen our insight into demographics and pensions in Italy and see how this can sustain the growth of asset management. Finally, we look at the positive trend experienced by the industry in the last decade, across different investment categories. In the last part, developing our macro views, we perform a fundamental analysis of some of the major Italian players in asset management. Looking at the quality of their earnings and at their business model, we suggest a trade idea. At the end of our trip, we see a great growth potential for asset management in Italy. When there is growth, it is also time for improving efficiency and increasing market share. Is there any room for consolidation in the industry? We will leave you with our view on this issue.

We restate the educational purpose of this report. To contact the authors of this analysis, please write to: [email protected]

Asset Management in Italy – A New Era?

Italian Household Portfolio In 2012, 93 % of households owned at least one financial asset, up from 91.5 % in 2010. The majority of these households only had a or post office deposit (69 %, up from 64.8 %). Although this value is aligned with other European countries like UK and France, historically have hold a different portfolio from other European citizens. Italian investors have always preferred investing in fixed income, in particular in Italian bonds that have been an attractive investment for years, while at the same time in others areas of , like UK, equities and mutual funds have represented a great share of investors’ portfolio. In the years, and especially after the financial crisis of 2008, the behaviour of Italian investors has started changing, getting closer to the English model. This is clearly shown by the increasing flows of capital in asset management during the last years. On the other hand, we can compare these data with the US, which is a completely different market with respect to the European standards. There, most of the capital is stored in bank accounts or invested rather than hold in currency. Breakdown by Securities Among households that held other financial assets as well as deposits, the largest group (16.9 %) only held shares and private issuers’ bonds, while 3.7 % also held government securities and 3.2 % government securities only. By instrument, 92.8 % of households had bank or post office deposits, 10.4 % held bonds and investment fund units, 6.9 % government securities, 5.6 % post office savings certificates, and 4.4 % Italian shares. As we can see clearly from these data, Italian citizens are still bounded to more traditional ways of investment, as bank, post office deposits and bonds are. Other forms of financial investment involved very few households. Among deposits, the overwhelming majority of households (87.2 %) had current accounts; just 21.6 % had savings accounts. About three quarters of Italian households had bank deposits; almost a third had postal accounts.

Source: www.assogestioni.it

2 Asset Management in Italy – A New Era?

Breakdown by Disposable Income The frequency of ownership of financial assets varies with the household’s disposable income. In lower- income households, post office savings certificates were the most common type of instrument after deposits. Government securities, private bonds and investment funds were more common among middle/upper-income households. For example, in households headed by a blue-collar worker, the most widely held types of financial asset after deposits were post office savings certificates, bonds, and investment fund units. Households headed by a clerical worker, self-employed person or pensioner were more inclined to hold both government securities, bonds and investment funds. Households headed by a manager or businessman opted mainly for bonds and investment funds. These households have more diversified portfolios and also invest frequently in equities or have individually managed portfolios. Breakdown by Geography Portfolio choices also vary geographically. The frequency of deposit holding is lower among households in the South than in the other geographical areas (85.1 % compared with 97.1 % in the North and 95.1 % in the Centre). Rate of ownership of postal savings certificates is about the same in all parts of Italy, whereas households in the South were also less likely to own government securities, bonds and investment fund units. The percentage owning these assets was significantly lower, ranging from about half to less than a quarter of the national average. As in 2010, individually managed portfolios and foreign securities were almost absent among the financial assets of households in the South. Historical and Current Developments of Italian Portfolios Historically, stockownership in Italy has not been widespread. Recently, the main trend that we can observe in the Italian scenario is the growing size of asset management. Various forms of managed portfolios, which have been untouched for decades, are becoming more and present in the current market. The market share of these products has been constantly increasing over time. Although current market shares are well below the levels of others European countries and US, this trend has remained increasing and it seems just a starting point for what concern the Italian asset management’s market. Over the past decade, the portfolio of Italian households has become much more oriented towards risky assets than it has ever been before. A number of factors contribute to explain the observed trends. Some relate to changes in asset return, others to institutional developments that have increased the incentive to invest in the stock market. First, the nominal yield on transaction accounts and on short-term bonds has declined significantly over the nineties, while the return on equities, mutual funds and managed investment accounts has been substantial. Commercial have massively entered the sector increasing competition and reducing entry costs and management fees. Fierce advertising campaigns to acquire market shares have contributed to spreading financial information. in terms of packaging of new financial products has been substantial. By offering diversification opportunities not available before and reducing minimum investment constraints, mutual funds have enhanced Italian households’ willingness to invest in domestic and foreign risky financial assets. The reform of the social security system and the diminished expectations of pension benefits are urging households to rely increasingly on their own savings for retirement. Consequently, private pension funds, traditionally negligible items of households’ portfolios, have started to increase. These developments notwithstanding, the financial portfolio of Italian households retains several features of backwardness. The share of currency and transactions accounts in financial wealth is still relatively high in comparison with other industrialized countries; many financial assets have short maturities. The breadth 3 Asset Management in Italy – A New Era?

of the Italian stock market has not yet reached the standards of other industrialized countries, but things are changing even in the mind of private investors and the way for the future is drawn.

Source: www.bancaditalia.it/pubblicazioni

4 Asset Management in Italy – A New Era?

Asset Management in Italy: A Renaissance A 10-year government bond yield of 1.88%, well below last decade average of above 4% and even lower than the historical levels. In general, an extremely low-yield environment. High accumulated private savings as a % of GDP. A public social expenditure on pensions accounting for 15.8% of GDP, the highest among the OECD countries according to OECD’s November 2014 report. What do these apparently disconnected data imply for Italy? We suggest that this environment represents a potential engine for growth in the asset management industry in the country which was home to Renaissance during the 15th century. 2014 has been a great year for asset managers in Italy. 2015 data point out that more than half of international asset managers are planning to increase their exposure to the Italian market, raising their sales in the country. According to Assogestioni, the Italian association of asset managers, net fund sales in Italy reached a peak of €133.8bn in 2014, up from only €62.5bn in the previous year. Furthermore, as we can see from the following graph, quarterly net inflows have been enjoying a sustained positive trend since the end of 2013.

The Short-Term: Chasing Yield and Diversifying Looking at the current environment, we can find a short-term explanation for these positive results. Italian investors historically loved cash, fixed income government securities and real estate, given a high risk- aversion and a not-well-developed market for equities and other securities. In particular, they privileged both govies, because these enjoyed quite high yields, and real estate, because this was seen as a durable tangible investment. However, in the current low-yield environment, where people scramble to chase yield, bidding up prices of almost any security in the market, Italian investors start looking at other vehicles to channel their huge piles of savings. Furthermore, the Italian real estate market has been heavily damaged by the 2008 crisis and by increased taxation. Therefore, during 2014 and in the first quarter of 2015, we saw increasing quarterly net inflows into asset managers with either investment funds or discretionary mandates in Italy. These provide a great alternative to govies, offering multi-asset solutions to more and more sophisticated investors looking for instruments able to provide them with higher returns on their savings. Moreover, investors are looking for more diversified portfolios in order to hedge against the increasingly

5 Asset Management in Italy – A New Era?

risky geopolitical environment which has emerged in the last year (Ukraine vs Russia, ISIS, Grexit, Brexit, Libya, Iran nuclear deal, emigration…). There is potential for further growth. Asset managers in Italy oversee fewer assets relative to GDP than asset managers in other European countries such as France and UK do. Furthermore, banks are damaged by low interest rates: they are experiencing low net interest margins on loans. Therefore, they try to contrast this by pushing clients into asset management products, which now offer higher commissions. Major players experienced huge improvements in 2014. Among others, , with its investment arms Eurizon Capital and Banca Fideuram, was the second best-selling manager in Europe in 2014, with fund sale of over €16bn. ’s Pioneer Investments, Generali and Anima Holding improved a lot too.

6 Asset Management in Italy – A New Era?

The Long-Term: Demographics and Pensions We analyse the potential of Italian asset management industry in a longer-term perspective, looking at demographics. The Italian population is getting older and older. As we already highlighted, Italian pensions cost a lot to the state, with Italy spending 15.8% of GDP on pensions, the highest figure among OECD countries.

In a situation of higher and higher public debt and more and more elderly, we expect to see a change in the pension system, which might prove to be not sustainable in the long run as it is currently shaped. A good starting point was the shift from a pay to a contributory system. In the old pay system, people retired benefitting from a pension proportional to their last salary. In the new contributory system, people retire enjoying a pension proportional to the amount of taxes they paid all over their own working life. In this way, the system becomes more sustainable. However, considering the huge difference between Italy and other countries for what concerns public expenditure in pensions, we believe that further improvements are needed. In particular, we think that people should be incentivized to take care of a part of their pension by themselves, making use of pension funds. In this way, the state would be eased by a part of pension expenditures and individuals would be freer to pursue their own retirement plan as they wish. The link with asset management is straightforward. In an environment of increasing inflows into pension funds, asset managers are the natural players to manage such funds. We can see from the 2014 report of the European Funds and Asset Management Association that pension funds retained only 7% of total AUM in Italy, with the highest part kept by Insurance companies (75%). The figure for the pension funds in Italy is well below the European average of 32% and actually it is the second lowest among the surveyed countries. Therefore, we think that pension funds will assume a more pivotal role in the future of the asset management industry in Italy.

7 Asset Management in Italy – A New Era?

To sum up, we see a positive trend for asset management in Italy both in the short term, given ultra-low yields and a shift of retail investors towards mutual funds (also incentivized by banks), and in the long term, given the developments in demographics and the need for more inter-temporal trade to address the issue of pensions.

A Decade of Overall Expansion We now analyse the composition of AUM in Italy over the last decade. From the following graph, we spot a decrease in hedge funds and in money market funds. The former trend might be due to increased risk aversion after the 2008 crisis and so lower inflows into funds that are high return - high risk. The latter may be caused by ultra-low yields on money market securities and cash deposits, especially now that the ECB is implementing its Expanded Asset Purchase Programme. On the other hand, the important increase in flexible and balanced funds more than offset the slight decrease of the afore-mentioned categories. Flexible funds allow investors to enter and exit positions with ease and balanced funds are a good compromise between equities and fixed income securities. Therefore, they perfectly suit the new need for diversification and higher yield together with the safety given by bonds, which is so important to the average Italian investor. Equities are also improving from the drop experienced during the 2008 crisis. Finally, as we can see, fixed income securities are pretty stable.

8 Asset Management in Italy – A New Era?

9 Asset Management in Italy – A New Era?

The Italian Asset Gathering Market The Italian market presents four listed player (Fineco, Azimut, Mediolanum and ) and one unlisted player (Fideuram). Here we want to analyse the difference between the player especially regarding the quality of their revenue and at the end we suggest a trade idea.

100.0% Azimut 90.0% Fideuram

80.0% Mediolanum

70.0% Banca Generali 60.0%

50.0%

Fees/ total revenues Fineco 40.0%

30.0% 12 14 16 18 20 Assets per Financial Advisor (€m)

Source: Companies reports, BSIC elaboration  Fideuram: It is the Italian market leader, the business is focalized on high-end customers and it is a quality player with most of the revenue coming from fees. Fideuram is not an active player in the banking market but gives the banking services to its costumer through the Intesa Sanpaolo network. Fideuram is owned by Intesa Sanpaolo Group and it is not currently listed.  Azimut: It is the smallest in the industry for AUM. The firm is focused on asset gathering business and it does not offer banking services to its costumer. The costumers are high-end. Azimut had a double digit growth in the last years also thanks to strategic acquisition in Italy and in the emerging markets.  Banca Generali: It is focused on a mid-tier customer base. It is also a bank and it offers to its costumer banking services. It is the most efficient player in the Italian market with €19m asset per financial advisor. It is owned by Generali insurance group.  Fineco: It is a mass-market player. It is the player that is most geared to banking. Now it is controlled by Unicredit and it can offer to its clients a unique online platform.  Mediolanum: It is the second player in the industry for AUM after Fideuram. It is a mass-market player and its business is geared to banking. In the charts below we want to focalize our attention on the different business model of the players in the industry. Fideuram and Azimut do not have the banking business and based their business model on the distribution and the creation of asset management products. Fineco, Mediolanum and Banca Generali instead have also the banking business. Fineco is the leader in the online , thanks to a superior banking platform. Mediolanum owns also an online bank (Che Banca!) and Banca Generali offers to its clients traditional banking services.

10 Asset Management in Italy – A New Era?

NII to total revenues 60

50

40

(%) 30

20

10

0 Fineco Banca Generali Mediolanum Fideuram Azimut

Fees income to revenues 100 90 80 70 60

(%) 50 40 30 20 10 0 Azimut Fideuram Mediolanum Banca Generali Fineco

Cost Income ratio 70

60

50

40 (%) 30

20

10

0 Mediolanum Fineco Banca Generali Fideuram Azimut

Source: Companies reports, BSIC elaboration

11 Asset Management in Italy – A New Era?

The cost to income of Italian asset gatherers (47%) is below the Italian banks average (53%). This is mainly due to the fact that the asset gatherers players have a branch network that is more flexible. Italian asset gatherers often rely on carry trades and performance fees to boost short-term profitability. Azimut appears to have the worst revenue quality: it based its business on performance fees and they capitalized some cost, in particular some bonuses given to the financial advisor. Banca Generali and Mediolanum use performance fees too, even if to a lesser extent with respect to Azimut. Moreover, they have access to the ECB programs, such as TLTRO and LTRO, and can make some carry-trade on government bonds due to their banking nature. Fineco remains considerably exposed to Unicredit, given the financial relationship between the two. The total financial exposure is €13.5bn (75% of the total asset), of which around €8.6bn is invested in Unicredit bonds with most of the maturities between 2017 and 2021. In addition, Fineco has an outstanding €1.5bn repo agreement, €1.1bn of deposit and a crossed obligation involving bonds totalling €2.3bn which should be reduced over time. In conclusion, Banca Generali and Mediolanum appear to have the best earnings quality, while Azimut the worst one.

100

90

80

70

60 (%) 50

40

30

20

10

0 Azimut Fineco Mediolanum Banca Generali

Performance fees Costs not on P&L Carry trades Recurent earnings

Source: Companies reports, BSIC elaboration

12 Asset Management in Italy – A New Era?

Starting from the analysis on the quality of the revenue, we wanted to see if market prices this feature and we tried to arrive to a price target based on the 2016 consensus earnings, which you can find in the table below. €m Net income 16 High quality Low quality Mediolanum 376 64,87% 35,13% Fineco 185 57,16% 42,84% Banca Generali 186 72,83% 27,17% Azimut 232 40,10% 59,90% Source: Bloomberg, BSIC elaboration

We split the earnings in low quality and high quality and we apply two different multiples.

€m High quality earn. Low quality earn. High quality PE Low quality PE Mkt cap Mediolanum 243,9 132,0 29,00 5,00 7.734,07 Fineco 105,7 79,2 29,00 5,00 3.462,87 Banca Generali 135,4 50,5 29,00 5,00 4.181,19 Azimut 93,0 138,9 29,00 5,00 3.392,96 Source: Bloomberg, BSIC elaboration

The PE multiple of 5 applied to the low quality is given by the fact that we consider this kind of earnings as non recurrent in the future. The high quality PE is given by the average of PE16 in the industry.

Current Upside/ Dividend Total €m Mkt cap n share PT 16 price downside yield return

Mediolanum 7.734,07 736,79 10,50 8,025 30,80% 3,00% 33,80% BUY

Fineco 3.462,87 606,274 5,71 6,77 -15,63% 3,22% -12,41% HOLD

Banca Generali 4.181,19 115,538 36,19 32,54 11,21% 5,28% 16,50% HOLD

Azimut 3.392,96 143,254 23,68 28,47 -16,81% 4,50% -12,31% HOLD Source: Bloomberg, BSIC elaboration Our analysis leads to the conclusion that the most undervalued stock in the industry is Mediolanum and we see a potential upside of 30%. According to our model, also Banca Generali presents an upside of 15%. We are more negative on Fineco and Azimut and we think that the market has overvalued these two stocks.

13 Asset Management in Italy – A New Era?

Conclusions Based on our analysis, we see a rosy future for the asset management industry in Italy, both for Italian and for foreign asset managers. On the one hand, short-term factors, such as low yields, a rising need for diversification and the incentive provided by banks, are propelling both optimism and net inflows in the industry. On the other hand, long-term factors, such as a more spread financial culture, demographics and a shift in the pension system, can sustain the growth of the industry. In such an environment, Italian asset managers could exploit the positive momentum. It is true that in 2014 many of them were among the best sellers of fund in Europe. However, if we look at their market share in Europe and at their AUM, we see room for further expansion. In particular, Italian asset managers can count on the positive short- and long-term factors we have already underlined. Therefore, we see this period as a great opportunity to strengthen and increase market share at a European level. We believe that consolidation among different Italian asset managers might be a rising trend in the next years. In particular, Italian asset managers could target renowned European asset managers in mature markets to achieve two results. First, they could diversify away their exposure to the Italian market. Second, they could improve both market share and enlarge their client base. On the other hand, Italian specialized asset managers could become the target of international and larger asset managers. In this way, while retaining their dominant position in the Italian market, they could benefit from economies of scale and from the network provided by the bidder. An example of such consolidation was the deal announced in September 2014 by Unicredit and Santander. The largest Italian bank by book assets and the largest bank in the Eurozone by market value merged their asset management units (Pioneer Global Asset Management for Unicredit and Santander Asset Management for the Spanish bank) to create a European powerhouse with more than €350bn in AUM. If you want to know more about the deal, please read as a reference our article http://www.bsic.it/unicredit- santander-merge-asset-management-units/. We end our journey in the world of Italian asset management with only three words: seize the moment!

14 Asset Management in Italy – A New Era?

Disclaimer All the views expressed are opinions of Bocconi Students Investment Club members and can in no way be associated with Bocconi University. All the financial recommendations offered are for educational purposes only. Bocconi Students Investment Club declines any responsibility for eventual losses you may incur implementing all or part of the ideas contained in this website. The Bocconi Students Investment Club is not authorised to give investment advice. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by Bocconi Students Investment Club and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. Bocconi Students Investment Club does not receive compensation and has no business relationship with any mentioned company.

Copyright © May-15 BSIC | Bocconi Students Investment Club

15