Asset Management in Italy – a New Era?
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BSIC – Special Report Markets Team May 2015 www.bsic.it Asset Management in Italy – 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 bank or post office deposit (69 %, up from 64.8 %). Although this value is aligned with other European countries like UK and France, historically Italians 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 Europe, 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 banks 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. Financial innovation 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