Massimo Fuggetta

With the Decree of 30 April 2019, the Italian government confirmed the changes made earlier this year to the law on Individual Savings Plans (Piani Individuali di Risparmio, PIR) introduced in 2017. The decree specifies that PIRs opened from 2019 onwards must be invested for at least 3.5% in companies listed on AIM and for at least 3.5% in Venture Capital.

The changes are well in line with the main inspiring goal of the PIR law: provide a fiscal incentive to Italian savers to invest in the capital of Italian small companies, thus facilitating their financing and therefore their growth.

Pending the launch of the amendments, authorized intermediaries had suspended the opening of new PIRs. But it is unlikely, however, that the activity will resume. The reason is that almost all PIRs are invested in PIR funds, many of which are too large to adapt to the new investment thresholds, given the low liquidity of AIM stocks and the even more acute illiquidity of Venture Capital investment vehicles. The managers of PIR funds therefore objected to the changes, and the intermediaries that sell these funds to their customers said they were unable to revive the activity.

This is wrong. If the law is right and the tools are inadequate, these need to be changed, not the norm. Before the changes, PIR funds had to be invested for at least 21% in securities of companies not included in the MIB index. But given their size, non-MIB investments were limited to the most liquid securities, i.e. larger companies that don’t actually need the support of Italian savers. The real small and medium-sized enterprises (SMEs), those that find it more difficult to attract capital, are a small fraction of most of current PIR funds. It is therefore right to increase their required quota in order to benefit from the sizeable tax advantage granted by the law.

It looks like an incurable impasse, but in reality the solution is simple. All one needs is to clarify the confusion between PIR accounts and PIR funds.

Starting an Individual Savings Plan requires opening an appropriate investment account with an authorized intermediary. The account segregation is required by the different tax treatment of the investments made within it. If the composition of the security portfolio complies with the constraints of the law, withdrawals of money from the account after five years from the transfer are exempt from capital gain tax. The intermediary is required to control the limits and the account holder is obliged to resolve the breaches within 90 days, on pain of forfeiture of the tax exemption.

However, at the time of the passing of the law in 2017, most intermediaries – banks in primis – declared themselves unprepared for the control of constraints. Hence, pending the adaptation of their IT systems, they devised a temporary alternative: insert in PIR accounts a single investment – a so called PIR-compliant fund – in which the constraints are checked and adhered to at source by the fund management company, typically owned by the same intermediary. This is the origin of the erroneous identification of PIR accounts and PIR funds. Then, as often happens in Italy, the temporary solution became permanent, so that to this day, after more than two years, intermediaries remain unprepared and PIR accounts are still almost exclusively invested in PIR-compliant funds. But it is essential to clarify that the legal constraints refer only to the former and not to the latter.

There are very few intermediaries at the moment that offer the opening of accounts in accordance with the PIR law. The most advanced is Directa Sim. The holder of a PIR account in Directa can compose his portfolio within the account as he pleases, by investing in both funds and directly in securities, provided that he remains within the legal limits. The SIM monitors compliance by aggregating the various positions in funds and securities, and if it detects a deviation it warns the account holder, who has 90 days to fall within the limits.

If other intermediaries were equipped with similar systems – and ordinary if not trivial IT development – the PIR impasse would disappear. Integrated with AIM and Venture Capital securities or funds until the new thresholds are reached, the new PIR accounts could also continue to be invested in the current PIR funds.

To this end, the legislator could condition the opening of new PIR accounts to the development of adequate control systems, which at that point could be extended to pre-existing PIR accounts, forcing them to also respect the new investment constraints.

In addition to facilitating compliance with the constraints, placing controls at the level of PIR accounts would allow account holders to access a wider range of investment choices than the PIR funds connected to his intermediary. For example, as already happens in Directa, a saver could, following the original spirit of the law and in compliance with its limits, invest assets in a portfolio of SMEs, or in funds dedicated to them.

However, while the transfer of controls to the account would suffice to allow direct investment in securities, any investment in funds would encounter further obstacles. The restrictions imposed on Italian savers to the purchase of investment funds are old and well known, and put them at a disadvantage compared to other European savers. Contrary to security investments, where savers have access to extensive, diverse and autonomous acquisition modes in most world markets, investments in funds are subject to the existence of a preliminary ‘distribution agreement’ between the intermediary and the management company, without which access is denied. The reasons given for the refusal regularly refer to the need to precede fund investment by an advisory activity directing savers towards the funds that are most appropriate to their financial needs and risk profiles. But in reality the distribution agreement is merely a cost imposed by the intermediary to the fund management company for gaining access to its customers – a cost that ultimately is passed on to the customers themselves through management fees that are increased by the substantial share (typically 50% and beyond) that the management company is obliged to return to the intermediary based on the agreement.

A saver who therefore wanted to invest his PIR in a fund dedicated to Italian SMEs or in a Venture Capital fund – even if only marginally, in order to adjust his account to the new investment thresholds – would find impossible to do so in the absence of a distribution agreement between his intermediary and the fund management company. Therefore, paradoxically, while controls at the account level would allow the adjustment via direct investments in securities, more diversified and therefore less risky investments, in funds managed by regulated companies and approved by Consob, would be excluded.

A second desirable intervention by the legislator would therefore be to oblige intermediaries to open PIR accounts to investments in appropriate funds, without the need for distribution agreements.

Investing in funds without paying the distribution agreement duty is already possible in Italy for more than a hundred funds which have an investment class listed on the Italian Stock Exchange on the ATFund market. In theory, therefore, a saver can ask his intermediary to buy these funds in his securities dossier just as he can buy a share, a bond or an ETF. In practice, however, only Directa and very few other intermediaries are open to trading listed funds. The technical motivation typically given by the others in order to justify their denial is specious and easily surmountable. The reality is that intermediaries find it convenient to confine trading to the funds on which a distribution agreement allows them to retain part of the management fee, rather than to extend it to listed funds, where the commission, which is lower and therefore more convenient for the client, cannot be retroceded.

Recently, Borsa Italiana has added to the ATFund market the MIV market, also dedicated to Private Equity and Venture Capital funds and to ELTIFs. Funds appropriately structured and listed on this platform could be directly used to satisfy the new PIR constraints.

Savers’ access to listed fund markets would not only facilitate the management of PIR accounts, but also more generally the growth of the business – new in Italy but already well established in the rest of Europe – of Independent Financial Advisors, who, being paid directly by their clients without distribution deals, have every incentive to minimize the impact of operating costs.

A further benefit would be to encourage the creation and growth of funds, like our Made in Italy Fund, fully dedicated to SMEs, as well as of funds dedicated to Venture Capital. Through listed classes these funds they could gain direct access to savers and IFAs without going through the bottleneck – clogged and dominated by large management companies – of distribution agreements.

A greater number of dedicated funds is necessary so that access of Italian SMEs to savings is not limited to the primary market via IPOs but continues on to the secondary market in conditions of adequate liquidity. Due to their size and structure, the current PIR-compliant funds are inadequate to this purpose, and simply forcing them to be filled with unmanageable quantities of PMIs would make the problem worse. Greater liquidity can only arise from an increase in the presence of smaller and more focused funds. But for this to happen it is necessary to facilitate their access to the market.

A third desirable legislative intervention would therefore be to oblige intermediaries to open up to trading of listed funds.

In conclusion, the new rules on PIRs, introduced this year, go in the right direction of channelling a greater proportion of Italian savings towards smaller companies, which are the ones who find it most difficult to raise capital.

In order for the changes to become truly effective, we have suggested that the legislator accompanies them with three others, obliging intermediaries to

Place the control of investment limits at the level of PIR accounts.
Open PIR accounts to investments in funds dedicated to SMEs and Venture Capital, without the need of distribution agreements.
Open trading to funds listed on the ATFund and MIV platforms.

It is known in finance as the equity home bias puzzle: investors’ preference for domestic equities and their consequent portfolio overweight compared to the precepts of standard theory.

Not in Italy. While laden with domestic government bonds, Italian investors have no penchant for domestic equities. They don’t think of equities as domestic vs. foreign: Italian equities are just a slice of their European equity portfolios, or an even thinner slice of their global equity exposure.

This has little to do with adherence to diversification principles. It is the result of 150 years of underdevelopment – well documented in this volume (in Italian) by the head of Consob Research Department, Giovanni Siciliano, as well as in his earlier book.

Italians’ long-standing misgivings about their equity market have had a huge inertial impact on its growth, which is still being felt today despite decisive progress in laws, rules and regulations over the last two decades. The Italian stock market is still very small compared to the size of the Italian economy. There are only about 300 quoted companies – less than half of the quoted companies in France and Germany and less than a quarter of those in the UK.

Why so few? The standard answer points towards company owners’ reluctance to share control and to submit to public scrutiny. But this is wide of the mark. The problem is not lack of supply. There are hundreds of Italian companies that would be happy to seek quotation and gain access to such an important source of finance and recognition. The problem is lack of demand. In France and Germany, and again doubly so in the UK, there are dozens of fund management firms whose main focus and expertise is the domestic equity market. So a company that comes to the market knows it can rely on a natural interest. If its value proposition is sound, there will be domestic demand for its stock.

Not in Italy, where such domestic focus is noticeably lacking. With few exceptions, Italy-centred funds are managed around the index, which is heavily concentrated in financials and utilities. Add ENI, Luxottica and a few other consumers and you have most of the Italian market – about 50 to 60 stocks in all, leaving little space for the other 250 companies, which are therefore absent in most funds, or may have a token presence in the larger ones, confined to a few decimal points.

Take El.En., a Florence-based producer of medical and industrial laser systems. It has a market value of around 300 million euro and it is 48% owned by its founders and managers. This leaves more than 150 million of free float. Who owns those shares? In a country focused on its domestic equities, one would expect to see a good number of Italian funds among the top shareholders. Not so. The largest shareholder is Dutch, the second is American, the third Swiss, the fourth Belgian, and so on. There is only one Italian fund among the top ten, and that’s the exception rather than the rule.

Let’s compare it to Store Electronic Systems, a French company that sells shelf labelling systems. Same industry – Electronic equipment – same size (270m market cap) and same 52% free float. The difference is that, among the first ten external shareholders, eight are French. And that’s the rule rather than the exception. Similar situation in Germany, where the average level of free float is comparable to Italy; and it is more pronounced in the UK, where the free float is more than double and virtually all major shareholders of smaller companies are local fund managers.

So what have the Italy funds missed by ignoring El.En.? Here is the answer:

Source: Factset

And this is not just the case for El.En., but for dozens of other companies, many of which belong to the STAR segment of the Italian Stock Exchange, where companies are required to submit to stricter standards of corporate governance, transparency and communication. Here is what the STAR segment looks like since inception, relative to the main market index:

Source: Factset

Take a good look at the graph: it says that the value of the Italian market has halved since 2002. It is no wonder, therefore, that the number of Italy funds has also more than halved over the period – so much for the equity home bias. At the same time, however, the STAR index has gone up 2.5 times – a stellar performance which, apart from company insiders, has largely benefited foreign rather than domestic investors.

Low trust, hence no home bias, hence low demand, hence fewer funds, hence few quotations. To invert this vicious circle, it is wrong to start from the end, confusing cause and effect. In economics it is demand that creates supply, not the other way around.

Today there is an ample base for trust. The Italian institutional framework regarding investors’ protection is second to none. This of course doesn’t mean that it’s faultless and problem-free. But issues are similar to those encountered in other markets, and incomparable, in frequency and magnitude, to the shambles of the 20^th century.

The next step is to encourage investors’ interest in their home market. But this can only be done by highlighting its strengths, not by reiterating the status quo. Small and medium companies are the core of the Italian economy. So they should be the core of investment funds aiming to revive investors’ latent demand for domestic equities. Only a natural demand for their shares can induce a decisive leap in private companies’ motivation to go public, thus reducing and ultimately filling the gap between the Italian stock market and its neighbours.

The Made in Italy Fund is overtly home-biased – in fact, all it owns is Italian companies. It does so in what we think is the most sensible way: disregarding the general index and focusing on stocks with a market value below one billion euro. It is a universe currently comprising about 250 companies, which are about 80% of the quoted names but represent only 9% of total market value.

Many of the stocks included in the fund belong to the STAR segment, but this is not a requirement. Also, by drawing the line above one billion, we leave out about ten of the largest stocks in the STAR index – successful companies such as Brembo (3.3bn market cap), IMA (2.2bn) and Interpump (1.7bn), which represent more than 50% of the value of the index.

Our goal is to select the success stories of tomorrow. As they grow, the Made in Italy Fund will grow with them, to the benefit of its unit holders. Hopefully, other funds will follow us over time, creating more demand for domestic equities and setting the ground for more companies to come to the market, to the ultimate benefit of the entire Italian economy.

Three proposals to relaunch PIRs

Why so few?

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