Austerity takes its toll on fund flows in Italy

Inflows into Italian funds are suffering as austerity measures take hold, on top of other local factors that have proved challenging for local fund providers in the past year.

Marco Palacino, managing director of BNY Mellon Asset Management in Milan, said foreign buying interest helped sustain the market until the summer. But from September, the pace of redemptions picked up, resulting in net redemptions over the past year.

In the local market, asset management firms are finding that investment products are competing with those offered by banks, which need to increase deposits so they are in a better position to lend.Money market funds have been particularly hard hit, and there is also a crisis for fixed income investors in the country, said Palacino. Italian government bonds are providing competition for mutual fund products.

There is still interest in international, rather than Italian bond funds, as domestic investors seek to re-balance their portfolios towards more international holdings.But this does not represent new business, as such transfers between funds are often free.

The Italian government’s budget austerity measures are also hitting fresh investment. From January 1st, capital gains tax on any fund investment is set to rise to 20% from 12.5%. This is still less than the levy exercised by other countries like France, but it has slowed flows to new funds in Italy.

Pensions are exempt, but the new “technical” government is proposing an extra tax on investments, where the investor pays a percentage of the total sum held in equities, bonds, mutual fund or discretionary accounts. This is also likely to bear down on new contributions.

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