Trying to play a longer game

Two asset managers and a pension fund discuss their priorities with Charles Neilan and explain their views on longer term asset management mandates

Gianluca Bergamaschi, portfolio manager at Generali Investments

Italian pension funds tend to lose their focus on long-term performance, believes Gianluca Bergamaschi of Generali Investments.

A wholly owned subsidiary of insurance giant Assicurazioni Generali, Generali Investments has more than €125bn in AUM. Its investment process combines a top-down approach for asset allocation with a bottom-up process for stock picking. Bergamaschi says it has developed a strong expertise in the European corporate
bond market.

"One problem in Italy today is that fund managers sometimes behave like short-term investors," Bergamaschi says. "They will close positions that are risky in the short term but clearly offer opportunities in the long term. They should keep their long-term horizon in focus. This is why we have tried to educate our clients about the expected levels of volatility."

Bergamaschi also believes that mandates should be longer. Only now are pension schemes starting to award longer mandates. "It's important to build a relationship between the scheme manager and the asset manager that is based on trust, but it is extremely difficult in an environment where mandates are usually not long enough," he says. "There simply isn't enough time in some instances to create that relationship."

This, in addition to the widely documented lack of incentives in the market and pension schemes' limited financial firepower, may be one of reasons why the Italian pension market has failed to truly take off.

Bergamaschi admits politics plays the biggest part in the game and argues that to make the Italian pension sector more dynamic, action is necessary on two main fronts. "From one perspective, the government should promote take-up of new
schemes so that they can reach convenient sizes. This could be achieved through expanding tax incentives. From another perspective, it is necessary to allow managers more flexibility both in terms of what assets they can invest in and in terms of risk management. Asset managers should be allowed to move from the nominal exposure limit system to more dynamic systems like the VAR approach."

Asset managers have to play too. While competition is still mainly on price, Bergamaschi says that the industry is already capable of offering more skills and expertise.

"Regulation seems to be going in our favour, towards more flexibility in management. There's a need to allow funds to invest in diversified assets, from emerging markets to hedge funds and private equity. There's some movement in this direction. Asset managers can encourage clients to diversify. We have to set realistic aims but there should be fewer constraints in active management."

Andrea Girardelli, director at Fonchim

A sharp increase in members means that the chemical workers' pension scheme Fonchim, which has more than €1.9bn under management, is in an enviable position.

The 10-year-old scheme quickly gained a strong foothold in its sector after its launch and in the last year as a result of the TFR reform its membership rose by more than 42,000 to 167,000. The increase came as those chemical workers who had started their career after 1993 were requested to leave 100% of their severance pay, or TFR, with Fonchim.

"This trend of young people coming closer to the scheme means the quality of the assets has improved," says Fonchim director Andrea Girardelli. The trend means assets per member have increased, he adds.

For the time being the structure of the scheme, which has four ‘lines' that offer different risk/reward profiles, will not change, he says, but he does not rule out that the board will diversify the offering even more.

It has not been an easy 10 years for the scheme, with two substantial market crises, first in 2000-03 and a second that started last year. The fund has seen off a lot of volatility and consequently Girardelli does not necessarily believe it should award longer asset management mandates. Fonchim, which is currently searching for new managers for €550m of assets, usually awards four-year mandates. "At the moment four-year mandates don't seem that short to us. You can lose a lot of money in four years."

However, the scheme is generous to its managers when it comes to performance-related fees. "Asset managers in Italy are clever in keeping costs down. However, we reward them with good payouts for out-performance. We can pay as high as 30% of the over performance, provided that the over performance meets certain risk/return requirements."

Girardelli has some strong opinions on governance, a problematic topic in Italy. "The governance issue is a bit of a fairy tale," he says. "As far as Fonchim goes, I have always been left to work in complete freedom whoever was in the driving seat."

Girardelli believes instead that the creation of sector pension schemes based on collective contracts - the so-called ‘negoziali' funds - has given the industry a refreshing shake-up. "The truth is that collective schemes have solved a massive problem. They have set distribution costs at zero by using human resources offices." These act as small ‘bank branches' in every firm, collecting the money and transmitting it to the pension fund. This way a cost-free distribution operation has been created."

He adds the internet has also played an important role for sector pension funds in educating people about their pension plans.

Marco Avonto, head of institutional asset management at Eurizon Capital

Asset management fees are already much lower than the European average and the rise in Italian pension schemes' assets may tempt international companies to step up their operations in the country. But Marco Avonto, head of institutional asset management at Eurizon Capital, welcomes it as a way of lifting the market. "If international asset managers join in, we will be required to make changes to see off the competition and this will only benefit the market," he says

Eurizon, which has €181bn of assets, is the asset management business of Intesa Sanpaolo, the banking heavyweight created last year by a merger of Banca Intesa and Sanpaolo IMI. In July last year, it appointed former Crédit Agricole director Francis Candylaftis as chief executive.

But Avonto says: "The risk that competition will increase exists, but you don't have to see it as a danger."

Eurizon has just gained a mandate from Eurofer, the 32,000-strong railway workers' scheme with €211m under management, and another to manage the fixed-income portfolio for Fonchim, the Italian chemical workers' pension scheme. It is also winning long-term business, having been awarded a 10-year mandate by the Previcooper scheme some time ago.

Avonto sees a positive evolution: "The 31st December comes every year, and Italian pension funds are very wary of losing money at the end of the period, which leads them to take short-term views. However, there's a clear trend to look at the long-term performance and we have been winning longer mandates. It's important to create long-term relationships and show what added value we can bring with ‘intangible' benefits', as well as performance."

Another benefit asset managers can offer but which pension schemes are not fully exploiting is their advisory skills. This is something asset managers "can do and should do", says Avonto. "Conflicts of interests may exist, but that does not mean interests are actually exploited wrongly. The industry also offers integrity."

However, little will change until workers develop a culture of investing for their retirement. "The most pernicious aspect in the Italian market is that people haven't got a clear idea of the need of having a financial plan for when they retire," Avonto  says. "This is a ‘transversal aspect' in the Italian market compared to which all the other issues, such as the need for pension schemes to diversify their investments, are just details. The state has to work on education otherwise all of us will have a big problem in 30 years."