BNY Mellon expects economic growth in Italy

The low yield environment may require new strategies to meet investor needs,
but BNY Mellon is also looking ahead to improved economic growth prospects in Italy and elsewhere explains country head Marco Palacino.

Marco Palacino, as country manager, has headed international asset manager BNY Mellon’s Italian office for the past 13 years, since it opened, following previous work at Caboto, BNP Paribas and JP Morgan.

BNY Mellon has been popular there among institutional investors such as pension funds, bank foundations, insurance companies, family offices as
well as religious and charity offices, he says, in particular because of its multiboutique structure. This is viewed as offering an opportunity for diversification, benefitting from various investment strategies as well as from more than one layer of due diligence.

BNY Mellon Investment Management EMEA distributes its funds across Italy through the three following Sicav structures: BNY Mellon Global Funds (the only one to distribute retail classes), Absolute Insight Funds and BNY Mellon Compass Funds.

In Italy the three account for total AUM of some €4bn, distributing more than 40 different funds. Performance has varied, for example, as products specialising in emerging market local currency credit have suffered due to FX
volatility, which has advantaged those investing in hard currency (euro and
dollar) debt.

According to Palacino, Italian institutional investors only played a small role in the much acclaimed ‘great rotation’ of portfolios from bonds to equities. The rotation in Italy was enjoyed by a “happy few” over 2013, while the majority of the market kept pushing bonds.

“Bonds are not dead,” he says, “although the European curve keeps
being privileged.” The Italian market is renowned as traditionally focused on fixed income, and its investors are known to keep a fairly conservative attitude.

However, as Palacino highlights, it is not a bad decision to remain focused on fixed income investments in 2014 for Italian institutional investors.
“These investors are still quite reluctant to invest in the equity market and have just 20% of their portfolio on the asset class. It is both due to cultural factors and to a past when investors reaped interesting returns from government bonds, such as 7% in 2011.

“Of course the situation is different now and we started 2014 with 3.85% returns from bonds,” he says.

In light of such change in returns, institutional investors – especially
insurers – are most worried about how to generate returns of at least 4%. To meet such need, BNY Mellon has launched products that are able to balance volatility while still generating returns, such as its Absolute Return Equity Fund, that uses a long/short equity strategy.

Alternative fixed income products such as debt loan funds, material loans, securities loans and Ucits on the secondary market are also among the
range offered by the company to assist their fixed-income oriented clients in
times of average returns.

Looking ahead through 2014, Palacino says BNY Mellon in Italy has a positive outlook on equity investments, but also on high yield corporate bonds.

“Some of them have had a significant growth thanks to an excess of liquidity in most cases coming from central banks, which however pushed it a little too much. On high income for fixed income markets we are seeing a slow reshaping of price,” he explains.

On emerging markets, Palacino says BNY Mellon is “at the window”, waiting to spot what they believe will be important entry points for them in the regions.

“Government bonds are also an important asset class for us in emerging markets,” he explains.

In Palacino’s opinion, emerging markets remain important to asset allocation activities as they still show pockets of growth. “For instance, although residual, gold remains alive as an asset class in emerging markets.”

Overall, BNY Mellon’s Italy country head is optimistic; “We expect growth,
both in Italy and globally,” he concludes.

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