A recent (May 2017) Deloitte white paper discussed asset management in Italy.
The paper begins with the observation that key institutions in Italian finance have a relatively short history: going no further back than the mists of the 1990s. The Società di Intermediazione Mobiliare (SIM) – literally, the phrase means “ Securities Trading Company” – is now the standard vehicle for stock brokerage, and the statute establishing this vehicle is of 1991 vintage. The Società di Gestione del Risparmio (SGR) (an asset management company) is even younger, born in 1998.
Hedge funds entered Italy in 1999.
Forces Driving Growth
Also in the 1990s the third phase of the European Monetary Union made for lowered interest rates which (as Deloitte’s authors put it) “brought extra resources away from public debt investments toward the asset management industry.” Other key facts about the 1990s in Italy: banks were looking for something new they could offer the public that would generate income on top of the traditional banking services – fee-based fund placements suited the bill; meanwhile the general public became concerned about the reliability of the public pension system and started looking for other ways to ensure a post-retirement livelihood.
Given all this, the early years of the new millennium saw a rapid increase in the AuM of private wealth managers (and the introduction of ETFs in 2002 – about which, a few words below). Happy days came to an end with the global financial crisis, through which the industry sustained drastic down-sizing. It has since regained the pre-crisis level, but faces challenges from both regulatory and technological change.
A new instrument, the individual savings plan or Piani Individuali di Risparmio, (PIR) may even now be blowing “fresh air into the industry.”
Banks remain central to the business model of the Italian asset management industry, and the Deloitte white paper describes the relationship between asset managers on the one hand and their bank/distributors on the other as “mostly captive.” This is why, in the wake of the financial crisis, Italian funds suffered from what became a head to head competition with life insurance. The Italian public sees life insurance as a safe investment, and the banks were happy to sell it to them as distributors. Thus, money that otherwise might have ended up in funds was diverted to the insurers.
Italians in general are very conservative as to their family portfolio. Thus, one-third of their wealth continues to be held in deposits and cash. The white paper describes this fact as representing “untapped potential for the asset management industry.”
Regulatory and Technological Challenges
The white paper distinguishes between the regulatory and the technological changes/challenges the industry now faces.
The Market in Financial Instruments Directive (MiFID II) “covers many areas of the industry and brings relevant challenges to the table.” The goals of MiFID II are to make the system transparent and to improve service. Although most operators seem to be “sufficiently ready to implement the [required] changes” to satisfy these goals, there will likely be unexpected consequences, and the smaller players will find compliance burdensome.
On the technological side, the rise of robo-advisors and the increasing sophistication of artificial intelligence create a risk of cannibalization and a downward pressure on fees. JPMorgan’s COIN (“COntract INtelligence”) uses AI to interpret commercial loan agreements. The job this software can do in seconds is equal to 360,000 “hours of work each year by lawyers and loan officers” if done the old-fashioned way.
Fortunately, technology also offers new opportunities. For example, blockchain “will likely improve the back-end thanks to the distributed ledger” which will reduce transaction costs, as well as the costs of data management, while increasing data security.
ETFs in Italy have attracted assets in recent years. The white paper observes that this is “almost entirely due to their relevance among institutional investors rather than among retail savers.”
Institutions want tactical exposures for the short term, with a simple and low-cost operation. ETFs offer them that. They are easier to manage than derivatives and subject to fewer regulatory restraints.
There is a lot of room for growth here. ETFs at present account for only 2.3% or up to 4.8% of investment management (depending on the choice of perimeter). Either way, this is well below the 7% figure for Europe, or the 16-17% figure for the United States.