Asset managers look beyond TFR

“Choose today, think about tomorrow.” With this slogan, Italian citizens were asked in a government information campaign this June to consider the future for their entitlement to the trattamento di fino rapporte (TFR) - the severance pay reserves that companies have historically held for their employees on their balance sheets.

Last year, the reform of the TFR severance pay regime for Italian companies held out the prospect of considerable inflows to pension funds this year. However, a rush to implement the TFR reform, a lack of clear incentives for companies and employees to transfer TFR entitlements to pension funds and a lack of a clear government information campaign until the last minute have all conspired to turn the TFR programme from a one-off chance to boost the retirement savings to something of a damp squib.

In fact, Italians have received very little encouragement to think of this entitlement as part of their long-term pension savings. Employees will also have the right to draw down their entitlements in order to cover redundancy or even to buy a house. So in effect, TFR monies transferred to these guaranteed funds within pension system will be managed as long-term savings, not as classic retirement assets.

So, few players in the asset management industry are now optimistic that the TFR reform will bring significant business, at least in the short term. And certainly not foreign players, who are in any case often more orientated towards either mutual fund distribution deals or business with other types of institutional investor, such as insurance companies or the significant banking foundation sector.

“It is clear that the reform of the regulation was supposed to be the opportunity for these funds to grow but it will not materialise by the end of this month,” says Francis Candylaftis, formerly CEO of CAAM SGR but set to join Eurizon Capital as CEO in July.

Giovanni Chiarelli of Pictet Asset Management in Milan, says he would be surprised to see 25-30% of assets land up in pension funds. Others are more optimistic, hoping for around 40%.

Official statistics, when they are released in the early autumn, are likely to confirm that most money will flow into the new guarantee lines of the open and closed pension funds. These lines largely mirror the traditional inflation protection guarantee that companies have had to provide for TFR - three quarters of inflation and 1.5% per annum.

And mandates to manage the new guaranteed lines of the pension funds have also largely fallen to the domestic insurance industry, or to groups with insurance connections, further dampening the interest for asset managers.

“The name of the game in the first couple of quarters has been the manager selection on the guaranteed accounts,” confirms Paulo Moia, director of investments at Eurizon Capital. “The government has also stated that the pension funds needed to have low-risk compartments that are ideally designed to receive the money. Every pension fund is launching a guaranteed product.”

In general, Moia is holding out for a good increase in assets under management: “But it is still a business in which efficiency is very important,” he warns. “The book of assets, European bonds, European equities will be delegated to asset managers with a commission level that will be lower than that prevailing in the international market.”

Indeed, Mefop data from July 2006 says that the average fees paid by closed pension funds for investment management was just 13 basis points.”The book will remain in European bonds and equities with lower fees and just a small fraction to international equities, corporate bonds, emerging market equities and probably international asset managers will have a bigger share and perhaps higher commissions,” he continues. Roberto Calchi, institutional sales manager at UBS Global Asset Management in Milan, says that his firm originally participated in RFPs for closed pension funds, but decided 18 months ago no longer to participate. “This is a fee driven market,” he notes “we were always selected but at the end the deal was not closed because of fees.”

And given the low fee levels, that is precisely where international houses see their chances. Vittorio Ambrogio, managing director of Morgan Stanley Asset Man

agement in Milan, which has €8bn in Italy but with an emphasis on the retail intermediary area, says: “The institutional space in this country has probably been less attractive than other countries up to today but I think that we are seeing the signs of changes in this space.” Others note that the foundation market and that of cassi di previdenza fund for the self employed are not so fee pressured.

Mellon has €3bn in Italy overall, between institutional and retail distribution business. “We see our market in making satellite products available to pension investors because we are seeing investors going to American houses for US equities, global emerging markets, global bonds, global high yield, hedge funds, GTAA and currency,” says Marco Palacino, general manager of Mellon Global Investments’ Milan branch.

“Insurance companies will be able to buy hedge funds from September and this is a major shift,” points out Ambrogi of Morgan Stanley. “This also sends the signal that banks, insurance companies and corporates are more focused on asset management. We expect more sales in that area in the future.”

One of the trends in recent years has been for institutions such as foundations, insurers and corporates to invest in structured products. Pioneer, for example, manages a European equity strategy within a structured note created by an external investment bank.

“Now we are considering some other structured products in the hedge fund industry because we have a very strong track record with a family of hedge funds called Momentum that has ten years of track record,” says Cinzia Tagliabue, institutional sales manager for Italy at Pioneer Investments.

“We also have a Restructuring fund which was launched on 1 June which is a fund of hedge funds devoted to restructuring strategies and distressed. We are looking at the possibility of creating capital guaranteed notes around that. This a very interesting strategy because it is very close to private equity.”

However, managers also report that interest among investors for structured guaranteed products is now beginning to wane as higher interest rates make them less attractive and the sometimes disadvantageous return structures start to bite. They also often have a high bid-ask spread.

“As long as the interest rate remains at this level at the end of the year it is forecast that the ECB rate will be 4.5% the interest could decrease on structured notes because a good bond strategy can provide for good results in this environment,” says Tagliabue. “Maybe the interest for general less specialised structured notes is diminishing but there is interest in very particular and sophisticated structures like CDOs and CDSs.

Pioneer, which has 50 investment professionals in Milan, also sees interest in cash plus liquidity mandates for foundations, as well as in total return fixed income mandates, for which Pioneer has an analysis team in Dublin.

Calchi sees prospects for UBS Asset Management in the pre-existing pension fund sector for liability driven investment structures and says it will be looking to sell its ALIS LDI product to so called pre-existing pension funds. These corporate funds are often underfunded and their sponsors are frequently looking to close them or convert them to DC - in which case they might opt for LDI for the legacy obligations, UBS AM hopes.

“These funds have the problem that there is under funding because they are

defined benefit schemes,” says Caldi, “In any case they will have to think about the liabilities of these funds.”

Alis, a new UBS Asset Management product developed through the firm’s parent bank, will have five pooled funds of staggered durations and three return-generating portfolios on top of that.

Banking M&A reshapes asset management

A series of banking mergers has precipitated consolidation in the investment management market. Intesa and San Paolo announced their intention last year to merge, and this year looks likely to see a merger between Unicredit and Capitalia. The strength of Unicredit’s Pioneer Investments subsidiary means that Capitalia’s activities will likely be merged into Pioneer.

However, other deals have had more complex - and unintended - consequences.

The merger of Intesa and Sanpaolo, effective from this January, has meant that the Italian entity of Crédit Agricole Asset Management (CAAM) and Intesa - CAAM SGR - will be wound up later this year or by early 2008.

Crédit Agricole was an 18% shareholder in Intesa, and struck a deal in 2005 with the bank that saw CAAM take a 65% holding in Intesa’s investment management division Nextra. The entity was subsequently rebranded CAAM SGR.

However, events soon overtook CAAM SGR. Namely, the merger of Intesa and San Paolo, and Crédit Agricole’s intention to purchase from 645 retail bank branches from Intesa meant that CAAM and Intesa were forced by Italian competition authority AGCM, according to a statement of 20 December last year, to close CAAM SGR.

After initially considering merging the three entities into a new asset management entity, Intesa Sanpaolo and CAAM announced their intention to dissolve CAAM SGR in January.

Francis Candylaftis, former CEO of CAAM SGR in Milan, but who has now moved to the new Eurizon Capital entity of the Intesa Sanpolo group as chief executive, told IPE in mid-June that CAAM will retain some €25bn in assets, which he said is a “conservative estimate”.

“Obviously we have put together the Nextra business and our former CAAM business, which have been together for the last 18 months, so it is difficult to maintain the border lines exactly where they were,” said Candylaftis.

“We are going to more or less divide the existing CAAM SGR along the lines of the former Nextra business and are going to return this piece to Intesa Sanpaulo Group. On the other side we are going to spin off the former CAAM business into a new company that we are creating at the moment.”

The split will be determined by new principles. It is likely that people belonging to Nextra will probably very largely return to Intesa, IPE understands, and those who belonged to the old CAAM SGR will stay with the new CAAM.

If an activity has been developed over the last 18 months, and this activity will follow CAAM then it is probable that associated staff will also follow them. The sticking point is people who were hired in the last 18 months and this is subject to the agreement of the two parties, but to a large extent new people will follow CAAM.

CAAM will start again with a new structure, that may or may not carry the CAAM SGR name. Candylaftis explained that the existing entity would have to give up the CAAM SGR name at exactly the same time as the new one took it over, which may not be possible.

However, despite the obvious setback, Candylaftis concluded that, having entered the joint venture with Nextra with €10bn and to leave with €25bn is a positive result.

Calchi notes that UBS Global Asset Management business is now through institutional funds, institutional umbrella funds, not retail umbrella funds with an institutional segment

The firm’s Milan operation employs three portfolio managers, who invest mainly for balanced managers but who do so using institutional mutual funds rather than dealing directly. Segregated accounts - if requested - would be run from Zurich. The unit also employs middle office fiscal and accounting staff to assist with such issues as withholding tax and legal issues.

Palacino of Mellon Global Investments wants to promote currency and global tactical asset allocation. However, he adds: “I think that consultants are essential for new products, like global tactical asset allocation and currency because they are new concepts. Working with consultants is essential because we can brief them on our expertise in hedge funds, segregated accounts and we can give them information on a risk adjusted basis, even though the funds we are offering may be new.”

One of the ironies of the Italian pensions market is that open and closed occupational pension funds created in the 1990s are subject to greater investment restrictions than older, so-called pre-existing pension funds.

While the source of this anomaly no doubt lies in the best intentions of the Italian legislator to protect employees from speculative investments, it prevents strong diversification away from the relatively homogenous range of investment compartments within open and closed pension funds.

Moia believes that the pre-existing pension funds - those created until 1993 - will slowly come under pressure to professionalise and to converge in terms of investments with the post 1993 occupational pension fund sector.

“I think that the next challenge for the Italian market will be a move of the old pension schemes to Law 124, the law governing new pension funds. They will be more and more incentivised to be compliant with the most recent regulation on the sector,” says Moia.

“In my opinion the new pension funds in Italy are among the safest, most controlled and more compliant investment vehicles in the world. I think there will be incentives for the older pension funds to be more compliant with the more modern regulation. I do not mean that they will be forced to sell all their real estate capital but for example, there will be incentives to more professional management of funds,” he continues.

Others think that the anomaly in investment restrictions will mean that reform - in favour of greater diversification - will come in due course.

“In Ucits III there is a trend towards even greater flexibility so the gap between the legislation for occupational pension funds and the gap between the legislation in the market is becoming wider and wider. We can presume there will be much more flexibility in the occupational pension funds in the future,” concludes Tagliabue.