While Rome remains Italy’s political capital, Milan is the financial center of what was once upon a time the Roman Empire. The country’s major economic and industrial activity has traditionally been concentrated in the northern regions of the peninsula, which is irrigated by the Po river. Nowadays, all the largest banks and asset management firms have their headquarters in Milan, which also hosts Italy’s largest stock exchange. So international IROs targeting Italian investors should book their tickets for the fashion capital of the world.
‘Italians are known for their savings mentality,’ explains a consultant at Watson Wyatt in London. ‘There is a culture of putting some money aside to help the children get a flat when they get married.’ Originally, he says, they kept such savings safely under the mattress. Later, they graduated to bank accounts. But today Italians are investing their spare cash in mutual funds, which helps to explain why Italy, with € 520 bn assets under management, is the world’s third largest market for mutual funds. That figure places it behind the US and France but equal with the UK, according to Fabio Galli, general secretary of Assogestioni, the Italian association of fund managers. Life insurance policies are also an important investment vehicle, accounting for some €150 bn of assets.
On the other hand, pension fund investing is still on quite a small scale in Italy, with just E1 bn invested in managed pension funds. ‘Cometa was the first privately managed pension fund and it was set up only a few years ago. And although there are now more companies outsourcing pension funds, the number of mandates is still small compared to the UK, for example,’ explains Dario Brandolini, head of risk management at Ras Asset Management. However, the trend is for companies to outsource their pension funds, so the amount of assets could increase dramatically in the next five to ten years, in the view of the Watson Wyatt analyst. Banking foundations are another source of potential shareholders for companies targeting Italian investors. These are charitable funds promoted by the largest banks in Italy.
Diversification
As for asset allocation, Italy used to be a risk-averse zone but the situation is changing somewhat. ‘Up to the mid-1990s, 77 percent of savings were in government bonds, but the introduction of the euro to the financial markets has gradually increased equity market investment,’ says Brandolini.
Fabio Galli agrees: ‘Asset allocation has changed over the past three years. It’s now 35 percent equities and 65 percent bonds, with strong international diversification in both classes.’ Within that, short-term allocation is influenced by prevailing market conditions. ‘When there’s a sharp downturn,’ notes Galli, ‘investors prefer bond and money market funds. For example, March data revealed Italian investors have overcome their risk aversion caused by September 11 and started investing in equities again.’
All this makes Italy an interesting market for forward-looking international companies seeking investors in continental Europe. This is certainly a good source of capital. But what should investor relations officers know about those Latin-tempered buy and sell-side analysts and fund managers before approaching them?
‘The first thing they should know is exactly who to contact in order to ensure a good encounter,’ recommends Malcom Duncan of MGD & Associates. ‘It’s important they have the right name and the right address and don’t waste time with the wrong person,’ he says.
A local financial marketing and communications agency can certainly help in-house IR teams build up contact databases. Milan-based MGD, for example, has good relationships with analysts, fund managers, stockbrokers and financial journalists. Staff at the agency know the appropriate person for different companies to reach according to their particular needs and the kind of investor they are targeting.
Investor relations officers visiting Milan should also know that in Italy all the major asset management companies are owned by domestic banks.
Moreover, the top three fund management groups account for over half of funds under management in Italy.
According to Assogestioni, the asset management arm of Bank Sanpaolo IMI has the largest market share at 19 percent; Bank IntesaBCI’ s Nextra Investment Management has 18 percent; and Bank Unicredito Italiano’s Pioneer Investment Management has 14 percent. Just behind these three are Arca SGR and Romagest, with 6 percent and 5 percent, respectively. Ras Asset Management, with 2 percent of the market, is the largest fund management firm not owned by a banking institution.
As for international asset managers based in Milan, they have a very small portion of the market, offering very specialized products through domestic asset managers’ networks or participating in the management of institutional mandates.
Family companies
There are still many family-dominated companies in Italy. Traditionally such firms had no need to compete in the market so were reluctant to talk to shareholders about themselves. They considered that buy and sell-side analysts asked questions that amounted to unwarranted prying into a company’s business. ‘Sometimes you would ask something and they would look at you and demand defensively, Why do you want to know that?’ recalls one Milan-based analyst. But even these family companies have now begun to change.
Since the introduction of the euro Italian companies have been facing more competition for capital and have had to adapt to the new European trend towards increased communication and greater accessibility for investors. ‘Otherwise they are going to miss the train,’ warns the analyst.
The problem, however, is that the shareholders in family companies are typically Italians who have been in the business for many years, according to Paola Brunelli, assistant vice president at Credit Suisse Asset Management in Milan. They know the families; they have relationships with the families; and they are generally familiar with the idiosyncrasies of the companies and their managements. All this means they are not as demanding as they should be. And if these companies, for their part, are unwilling to release information, their shareholders will typically tolerate this.
The situation is different with more widely held public companies, however. They are more ready to disclose information and, anyway, the Borsa Italiana incentivizes companies to become more transparent. Two years ago it created Star, a segment of the stock market that includes small and medium-sized companies that agree to release their financial reports in English, at least twice a year, as well as to organize regular conferences for analysts and major shareholders to meet with senior management.
It’s different with foreign firms
Brunelli applauds this initiative on the part of the domestic stock exchange. And she warns, ‘We are more demanding with international companies because we don’t know them that well.’
Her statement is supported by Galli: ‘IROs are expected to provide the same service they provide in all other markets,’ he says. ‘In this respect there is nothing peculiar about the Italian market.’
And Duncan of MGD & Associates is with Galli on this: ‘In the past, companies knew that London and Frankfurt investors were more demanding than Milan investors. But now this has changed and detailed information is very much appreciated here as well.’ Duncan insists that institutions in Milan and across the country are interested not only in numbers but also in future developments, the company’s strategy, the characteristics of the market they are working in, the products, the process by which they intend to increase profits, and their financial structure.
Massimo Morchio, chief investment officer at Ras, explains his approach: ‘We follow a bottom-up investment process and we do fundamental research, which means that we value the quality of the company a lot. Its track record is important and so is its position within its sector. But what we most value is, first, the company’s cash flow generation and, second, its share price. If these two aspects are good we think it’s a good company and we invest in it.’ But he accepts limitations on the information he can expect to be given: ‘We appreciate transparency, but we also understand that there are some things that a company prefers not to say because, for instance, it could damage it in front of its competitors.’
Morchio justifies this position with an example: Porsche, the German sportscar manufacturer. Porsche was threatened by the Deutsche Börse with being ejected from the Mdax index if it failed to present quarterly reports, but the family-owned firm took the risk because it believed its good balance sheet would keep the loyalty of portfolio managers, regardless of how often it released earnings. ‘This is the reality; as long as they are making money consistently and I’m able to see that they are, I don’t mind how often they release financial information. And because Porsche is doing extremely well, I want to invest in it,’ asserts Morchio. ‘Being transparent is helpful but it’s not the key.’
Brunelli at Credit Suisse is more forthright about the value of corporate openness: ‘If a company is transparent, I give it a plus. That’s because you have fewer surprises, and you can follow the trends more closely and save time confirming details. In summary, you can judge a company better if it is more open.’
Italians are not different
As the number of roadshows in Milan has increased in recent years, Italian investors have come to appreciate and make use of the opportunities they offer for getting to know international companies better. But there don’t seem to be enough such opportunities.
‘The good thing about roadshows is that companies can’t lie to you because they are in front of lots of people,’ says Morchio. ‘They have to be honest in what they say. When you are in a one-to-one meeting they can tell you what they want because it’s a closed place with few people.’ If there’s a disagreement, ‘It’s their word against yours.’ But Morchio also warns about a downside to roadshows, which is the potential for too much stage management: ‘They present a summary of the good and positive aspects of the company, in which everything is so well prepared, so well delivered that there’s no room for improvisation. Whereas in a one-to-one meeting, you can ask management more tricky questions.’
Overall, it seems the role of IROs is still in question in Italy. Portfolio managers and analysts believe they are useful for answering general questions, but when talking about the specifics of the company, ‘We try not to talk to IROs but with CEO or CFOs,’ declares Morchio. So targeting Italian investors is similar to targeting any other investors: money managers here want to build up a personal relationship with senior management and to get to know the fundamentals of the company.
A first approach might be to invite them to a one-on-one lunch meeting in a restaurant. While enjoying delicious Italian food, IROs and CEOs can make a basic presentation of their company. This is a good start for helping to build trust and confidence among Italian fund managers.
Visitor information
Where to stay & present
Grand Hotel Et De Milan
29 Via Manzoni
Tel: +39 02 723141
De la Ville Hotel Milan
6 Via Hoepli
Tel: +39 02 867651
Quality Hotel
Atlantic Milan
24 Via Napo Torriani
Tel: +39 02 6692941
Sanpi Hotel Milan
18 Via Lazzaro Pallazzi
Tel: +39 02 20581
Sheraton Hotel Milan
42 Viale Piave
Tel: +39 02 20581
Where to eat
Al Buon Convento
26 Corso Italia
Tel: +39 02 86453546
Al Girarrosto
31 Corso Venezia
Tel: +39 02 76000481
Bagutta
14 Via Bagutta
Tel: +39 02 76002767
Bice
12 Via Borgospesso
Tel: +39 02 76002572
Biffi Scala e Toula
Piazza Scala
Tel: +39 02 866651
Giannino
8 Via Sciesa
Tel: +39 02 55195582
Gocce di mare
4 Via Petrarca
Tel: +39 02 4692487
Major buy-side institutions
Sanpaolo IMI
IntesaBCI
Unicredito Italiano
Arca
Banca di Roma
Monte dei Paschi di Siena
Banca Nazionale del Lavoro
Deutsche Bank
Bipop-Carire
Eptaconsors
Banca Popolare di Milano
Mediolanum
Ras
Credem
Banca Popolare di Verona-SGSP
Le Assicurazioni Generali
Banca Popolare di Lodi
Grupo Azimut
Banca Popolare di Novara
Source: Assogestioni
Small room for foreigners
Italians like to stick to what they know, and when it comes to choosing asset management firms, they’re no different. That means they tend to choose the portfolio management arms of domestic banks. So international asset managers find slim pickings in the Italian market.
Total assets under management by foreign firms in Italy are estimated to be no more than € 32 bn, or 5 percent of the market, according to new information from FERI Fund Market Information, a research company based in London. In Germany, by contrast, foreign market share is 14 percent, equating to € 74 bn. ‘In the current market environment, international portfolio managers are going to have to work hard to maintain position against domestic groups,’ says Rodney Williams, joint managing director of FERI. Nevertheless, as the total market grows, optimistic estimates show foreign market share increasing by over 45 percent to an estimated € 47 bn. Williams says fund management groups with distribution or seeking distribution in Italy need to keep a close eye on changing marketplace dynamics. The Italian market has the propensity to ‘turn on a sixpence’ and slow starters will be left behind. For foreign groups with relationships already in place, investment may be directed towards strengthening distributor support. ‘International firms not yet active in Italy shouldn’t ignore the potential, but they need to study the ground in advance and be prepared to operate on minimum revenue streams until the market advances again,’ advises Williams.
