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.
So for 2012 Bank of New York Mellon will be focusing onclients looking to invest over the long term – mainly pension funds, insurance funds and family offices.

Palacino said that was not a new focus for the business, so it will not be disruptive to implement.

But the industry will need to address the issues the austerity measures raise: investors have to pay taxes, meet daily consumption needs and then pay into their pensions. Only then can they consider standalone investments. Fixed income products will be especially challenging to sell: “As an investor, if you are paying 20% on capital gains of just 3% there is not a lot of value left,” he notes.

“Deep retail is suffering across Europe because there are more taxes on the investor, and probably something like the Tobin tax on financial transactions for the manager.” New taxes on real estate are also expected.

But the changing market also offers opportunities. Instead of “trading” mutual fund investments within a portfolio, investors will be incentivised to buy and hold.For both clients and asset managers, higher margin products are the future – multi-asset and absolute return funds, as well as emerging market debt as an asset class.

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