Focusing on sustainable growth

Only two years have passed since the European asset management businesses of the insurance group Generali underwent a radical restructuring process and were combined under one brand, Generali Investments (GI). Today, the firm is reportedly the tenth largest player in Europe with E286bn of assets under management, mainly sourced from Italy, France and Germany. However, while most of its competitors – names including Allianz Global Investors, ING IM and Axa IM - have succeeded in securing assets from third-parties, albeit through acquisitions, Generali Investments runs the vast bulk of its money on behalf of its parent insurer Assicurazioni Generali. This has been the case for the past 175 years. But just recently, it has entered the fast-growing and challenging business of third party distribution; the assets run for external companies amount to only E3bn today. This side of the business is earmarked for development, but it is going to be a slow and steady process, says Gian Luigi Costanzo, chief executive officer at Generali Investments. In fact, the usual ambitious growth plans of an asset manager that pushes to enter the privileged circle of selected providers of a leading bank, or to win a high profile institutional ‘trophy’ mandate, do not feature in Mr Costanzo’s ideas. “Our primary objective is to do a good job for Generali,” he says, explaining that the parent company has been affected very little by market turbulence, because “it had a correct investment policy, with no exposure to subprime and very marginal exposure to credit. “If we can do that, we are already very satisfied.” Insurance policies, which are de facto financial instruments of the managed savings industry, have attracted investors’ attention in these difficult market conditions, says Mr Costanzo. Also thanks to this, GI’s assets increased by approximately 10 per cent during 2007. “We were substantially captive until 2002-2003, when we gradually started offering our products to third-parties mainly in Italy,” he explains, pointing out that even if the Italian market has been suffering huge redemptions in the past few years, especially in 2008, GI has gathered around E2.5bn from both institutional investors and bank platforms. More recently, GI’s distribution activities have intensified in France and Germany. But a rapid expansion of the business is not yet on the agenda. “Our marketing teams are made up of around 20 people; compared to those asset managers that rely heavily on their distribution activity, ours are really limited numbers. Our priorities are to optimise the performance, investment transparency and the information activities related to it,” he says, explaining that an unsustainable growth of assets would affect strategies’ returns. Long-term strategies While Generali Investments is perceived predominantly as an institutional house, two big private banking distributors, Banca Generali in Italy and BSI in Switzerland, are important contributors to the business, as they employ Generali Investment funds in their open architecture product offerings. Almost 80 per cent of GI’s total assets are invested in fixed income, mainly in the euro area; the remainder is in European equity (14 per cent), as well as real estate and other alternatives. The firm relies on three main regional hubs for its investment management activities. Trieste, in Italy is the competence centre for fixed income; Paris focuses on equity and Cologne on research and strategy. The competence centres manage products and portfolios employing an active, absolute return oriented investment style, explains Mr Costanzo. “The philosophy of a successful institutional asset manager is based on its ability to identify investment strategies that will be valid over the years.” The firm’s objective is to achieve stable returns over time; this approach may mean not taking advantage of the market peaks, but it certainly saves the firm from going through the market’s troughs, he says. This type of philosophy may arguably be embraced by third-party investors and it is in this light that GI has started offering products to external partners. Multi-asset strategies, which combine strategies that exhibit a low level of correlation between them, represent interesting developments in this regard. Generali Investments offers an absolute return interest rate strategy, a Luxembourg Sicav, which employs a number of diversified interest rate and exchange rate strategies, targeting a libor plus return, but with a lower volatility. “All our products originate from internal analysis, not from the desire to gather as many assets as possible,” says Mr Costanzo. For example, the uncertain international market scenario has raised the issue of how to protect investments from the risk of inflation. “Inflation is a bad beast,” says Mr Costanzo, echoing the words of economists such as Einaudi. “Once you have freed it, it is very difficult to tame it again. We have therefore built a Sicav which invests in euro inflation linked bonds, and that strategy can also be interesting for third-parties.” Equally, the recently launched strategy aimed to select stocks in firms with sustainable development criteria, in the environment, biotechnology or demography sectors are expected to achieve growth rates in the medium-long terms higher than the rest of economy, says Mr Costanzo. “We never launch new products just because they are fashionable,” he states. “Pursuing the last fashionable strategy can be very risky, as you run the risk of being always too late.” The secret is to analyse all the strategies in a medium-long term investment horizon. “Credit strategies had a difficult time last year, but that does not mean that investors have to forget about them. On the contrary, this is just the right time to enter these credit strategies, because spreads are very high. They represent a good investment opportunity over a 3-5 year horizon.” What is important is the ability to assemble the strategies correctly in a multi-asset fund or funds of funds, says Mr Costanzo, where beta and alpha are mixed to produce a portfolio that suits the client’s specific risk profile. He explains that lifestyle products, where the exposure to risky assets are gradually reduced with the investor nearing their pension age, will in the future be employed in a broader context than just that of a pension fund where they are commonly employed today. “What we do not make for our clients are indexed products or products delivering returns very close to the benchmark,” says Mr Costanzo explaining that they do deploy Exchange Traded Funds (ETFs) within their diversified portfolios. “I am convinced that, even with almost E300bn in assets under management, we are too small for this activity.” The trend towards alpha and beta separation in clients’ portfolios mirrors the way the industry is evolving. A very small number of companies, of enormous dimensions, will specialise in ETFs or indexed products, as only those are able to offer competitive costs, he explains. Small- to-medium firms will focus on alpha products, while a third category will concentrate on putting together investors’ portfolios. As no firm is the best at everything, open platforms which employ both in-house products and third party products are necessary to offer competitive products to investors. This is the approach taken by Generali Investments, which has set up professional teams dedicated to the selection of external funds, to cover those areas outside the firm’s core expertise, fixed income Europe and equity Europe. The teams are based in Paris, for traditional investments, Lugano in Switzerland for alternatives and Cologne for private equity. This selection activity constitutes an important service on offer to clients, says Mr Costanzo. “For example, in France and Germany we have a large sales network of unit linked policies through our financial agents.” These products, which have a very high financial content, have funds as underlying, but the great majority of them are sourced from third-parties which are selected by Generali Investments. Although the exact percentage of third-party assets in Generali Investments is not made available, the total assets in third-party products that the Generali Group distributes to clients amounts to E61bn, but the large majority of this figure is estimated to include those third-party funds distributed by Banca Generali and group bank BSI to their individual clients. One of Mr Costanzo’s objectives for the future is to increment the importance of high return investment classes, such as corporate and high-yield bonds, hedge funds, private equity and real estate funds. “The exposure to alternative instruments, both single manager funds or funds of funds, will allow for a higher diversification of instruments in an absolute return strategy,” he says.