In Italy all is in the melting pot as the financial services sector reshapes and restructures.

For Paolo Ranuzzi, head of Fondigest in Milan, which is the investment arm of the Cariplo group, the most imminent change is the merger of the group with Ambro Veneto to form the new giant Intesa. The combined investment management operation starts at the beginning of 1999 with assets under management of L115,000bn ($75bn). At present we are the largest, but with IMI and San Paolo joining together, they will then be.”

Currently, mutual funds and public accounts make up 80% of Fondigest’s assets under management. “We see the funds business growing at the rate it has for another year and then slacken. But our strategy is to develop other markets, so we expect to grow at the same rate as we have been for the next two to three years.”

The group has more branches than any other bank in Italy, where distribution is still the key to the market. “Distributing only through branches makes us very competitive since our costs are minimal, as we have only variable costs and few fixed costs.” The second component of sucess is performance, though “this is less important than distribution”. But here the group sees no threats either: “We are famous in Italy for being one of the best performers, if not the best.”

He attributes performance to the group’s top down investment process. “We think asset allocation is the most important part of our process in managing portfolios. Without good allocation, performance would be very random.” The allocation approach is very tightly controlled and done on a disciplined weekly basis, he maintains. “In our asset allocation an important aspect is risk control. We are constantly trying to develop new measures to compute the degree of risk being taken.”

On the equity side, Fondigest’s team has had excellent results in the domestic market. “The Italian market is not that efficient, so you need to be very well informed and close to the market.” The returns obtained have constantly out-performed the index.

Outside Italy, Ranuzzi sees difficulties in out-performing the markets. “On that basis, we are thinking of launching index funds - otherwise it is a waste of time.” But with its strength in Europe, the main concern is elsewhere, so a tie up with “someone strong in other parts of the world” is a possibility. “We are not yet in active discussion, but we are considering the question.”

At home, the business is gaining an institutional tilt and he sees this area growing significantly from its current 15% of business to 50% eventually, with eyes set firmly on a share of the new pension funds business through the group’s new open pension funds and winning closed fund mandates.

Fondigest is acting as investment adviser for its parent Cariplo, which is currently outsourcing external managers for some $4bn of assets. “There is a considerable demand in Italy for the advisory role, but where we are not advisers, we are putting ourselves foward as asset managers. Already we manage for some foundations and insurance companies.”

With almost 15% of the domestic market currently, other European markets are beckoning Fondigest. Already, it is managing assets for Dutch institutions and is keen to push its Luxembourg-based funds, where it has some $2bn is assets. “The euro will mean we will sell in other countries, as we are doing now in Austria.” It is hoping to enter the Swiss market shortly. “What we would like to do is to enter the US market, because it is the most advanced.” Ranuzzi believes this could raise the group’s game to US standards.

He expects the fixed income side to change significantly with the euro, as corporate bonds emerge and the credit risk analysis approach takes hold.

Within the domestic market, Fondigest’s target is to remain number one. Size of assets contribute important economies of scale in investment management, in his view.”To provide good service and performance, you need to be one of the largest.”

But that is not speaking in global terms: “What we want to be is a European player. What the final outcome in Europe will be, no one can tell, with the mergers among banking groups going on so fast. No one can say what the nature of their banking group will be in three years’ time in Europe.” Fennell Betson”