Types of asset management companies: a brief overview

For Italians, saving is fundamental – we talked about it in a previous post – which is why it is important to know to whom to entrust your assets. The institutions responsible for this are asset management companies. But how many types of asset management companies are there? What are their functions and what they can do with clients’ savings? In this post, we’ll provide a brief overview to help clarify each of these areas.

What is meant by asset management? What are the main types of asset management companies on the market?

These basic concepts are necessary for consumers to understand, especially considering the historical moment we are currently living in. As we will see, savings is a fundamental component of the Italian financial scenario, and, for this reason, knowing how to best manage it is essential.

This is also because there isn’t just a single way to manage savings or a single financial player that you can turn to. In fact, there are many players on the market, each with its own specialization and characteristics that consumers will need to evaluate based on their financial situation and goals.

 

Italy, the home of savings

Let’s start with a brief note about Italians (and their money).

Savings is a fundamental activity for many Italians. From the latest surveys, it seems that Italians are leaders in Europe when it comes to private savings. This is confirmed by the seventh edition of the European Consumer Payment Report for 2019, which shows that 84% of Italians set aside a percentage of their salary every month, compared to a European average of 75%.

The main reasons are for “unexpected expenses” or pessimism about the future, especially when in the context of aging and pensions. This pessimism has grown due to the recent health crisis caused by Covid-19.

 

The pandemic is good for savings and bad for the economy

Not surprisingly, the Covid-19 has made its effects felt in the financial sector and, in particular, in the private savings sector.

If before, as we said, the inclination to save was sparked by a general feeling of uncertainty about the future, now the pandemic has provided an additional reason to set aside ever larger sums of money.

It is no coincidence that just after the lockdown, there was a peak in the propensity to save, which rose, on average in the US and in EU countries, from 12.7% to 17%, the highest figure since 1999. Italy, of course, is no exception, since bank deposits have increased disproportionately (ilsecoloxix.it). Suffice it to say that in May, Italian savers set aside €16.8 billion, compared with a monthly average of €3.4 billion. The numbers are similar for their French counterparts, with savings of €20 billion, Spanish, with €10 billion, and the British, with record deposits of €13.1 billion. This data has alarmed the main financial institutions, since an excess of savings inevitably affects consumption, which at the moment is essential to be able to reactivate the economy and get out of the current state of crisis.

Net of these final considerations, what is important to note is that, at this moment, more than ever, savings have an absolute importance for families and individuals. This is all the more so if we consider that this trend is proving to be transversal, since it affects not only adults or the elderly, but also the younger sections of the population. In fact, it has been noted that most Italian millennials are “serial savers” who also employ the use of piggy bank applications to set aside their money (money.it).

 

Savings: the facts

However, the health emergency of the past several months has shown how Italian savings, although widespread and consistent, cannot guarantee sustenance for everyone.

Although many Italians aim to save during the year, the rate of savings — which is the percentage of total annual disposable income not consumed and, consequently, set aside — has gradually thinned over the years. In 1995, this figure was 16% (OECD data), compared to 2018, where it reached 2.5%. In light of this, it is not surprising that many Italians have stated that they are in a difficult situation in terms of liquidity (espresso.repubblica.it). For this reason, and based on what we’ve written above about the importance of savings and the current economic situation, it becomes essential to understand the reference market and all the operators that move within it, i.e. asset management companies.

However, before we go deeper into the subject, it is necessary to ask a preliminary question. What is meant by the expression “asset management”?

Asset management is a form of investment with which the saver, through a mandate, entrusts the management of his assets to a person authorized to operate on his behalf (soldionline.it). 

Within the framework outlined by this mandate, the intermediary decides autonomously how to invest the client’s capital, in a manner consistent with the terms and conditions that have been contractually established by the parties. In this way, a certain degree of autonomy is maintained for the professional who can manage the resources entrusted to him as he sees fit, but remaining within the context of operations and investments already authorized by the saver.

 

The main types of asset management services

To analyze the types of services that this authorized person can perform, we can distinguish two main types (dadamoney.com).

The first type is Gestione Patrimoniale Mobiliare (GPM), where the operators, on behalf of the client, buy single shares and/or bonds. In the context of GPM, customers can usually decide between different lines — bond, balanced, and equity — but to access them, they have to pay a considerable amount of money to allow the operator to invest in different markets, including international ones, in order to reduce the investment risk. By their very nature, GPMs also require medium-to-long term investments in order to obtain maximum profit.

The second type is Gestione Patrimoniale Fondi (GPF), where customers’ money is invested in mutual funds and in Sicav, in order to diversify by focusing on different products. Unlike the GPM, GPFs are usually addressed to savers with a rather reduced economic availability. Precisely for this reason it is essential that each saver is carefully profiled, so that once the most suitable risk profile is identified, the customer can indicate the “right” investment line for them, whether more or less aggressive.

In addition, there are two types of asset management for funds: the so-called multi managers, which allow to diversify on different funds and non-multi managers, which does not allow for diversification.

 

Who can provide asset management services? The two types of asset management companies

The parties authorized to carry out this type of activity are mainly divided into two groups: Asset Management Companies (Società di Gestione del Risparmio or SGR in Italian) and stock brokerage companies (Società di Intermediazione Mobiliare or SIM in Italian), to which are added the banking players specifically authorized to provide this service.

In both cases, the relationship between the institution and the client is fiduciary, which means that the client entrusts its savings to the player with the aim of building up a portfolio of investments, giving only general indications, guidelines that must be followed by the intermediary also consistent with the type of client. In this sense, the client “trusts” the institution to make investments on its behalf.

 

The Asset Management Company

Specifically, let’s analyze the first of the two groups mentioned, which is absolutely relevant for the asset management market.

The AMC is a financial intermediation institution and the only legal entity under Italian law that is authorized to provide the service of collective asset management.

Savings management companies (also known by the acronym AMC) are divided into two types, based on some specific characteristics.

The first is that of the sponsoring asset management company, for the promotion, establishment, and organization of mutual funds and administration of the relationship with participants. The second type is that of the asset management company manager, which occurs in the case of management of the assets of OICR, of its own or other institutions, through the investment of financial instruments, credits, or other movable or immovable assets.

Both types of AMC, when performing their functions, must comply with certain limitations. This includes not only those indicated in the fiduciary mandate received from the client, but also those established by the regulations, which identify the details and their scope of action.

 

What can an asset management company do?

The main activity of asset management companies is to create a portfolio through which to use the funds raised for each client (money.it).

Secondly, an asset management company can provide and manage a pension fund for its clients in addition to the pension provision already provided for by law. Another possibility for AMCs is to carry out related or instrumental activities established by the Bank of Italy after consulting CONSOB. 

This type of activity is considered connected when it is strictly related to the main activity of the Company, which can thus promote and develop it; on the contrary, it is considered instrumental if the authorized activities are ancillary to the main activity carried out (such as, for example, analysis and market research on economic and financial matters or the communication of economic and financial data and information, as well as the management and provision of IT services).

A further activity with respect to the main activity usually carried out by AMCs is investment consulting, which can be provided to private individuals. Obviously, in carrying out this type of activity, it is even more important for companies to respect due diligence, fairness, and transparency, which, among other things, is already provided for the performance of its ordinary services (tidona.com).

Finally, another decidedly interesting activity that savings management companies can perform concerns the activity of intermediation. AMCs can autonomously entrust some specific investment choices to qualified intermediaries so that they can manage the assets, obviously within the limits of the savings allocation criteria that have been defined by the manager.

 

Stock brokerage companies (Società di Intermediazione Mobiliare or SIM)

The second operator that can provide asset management services Stock brokerage companies (i.e. SIMs – Società di Intermediazione Mobiliare).

As mentioned above, these are companies that can provide personalized asset management services, provided they are authorized by CONSOB. In addition, the regulations state that to operate they must be joint-stock companies and their headquarters and management must be located in Italy.

Together with savings management, which is undoubtedly the main activity, the Stock brokerage companies can also carry out other activities, for example:

  1. the placement of securities with or without guarantee, dealing with advertising, the collection of subscriptions, and any other functional fulfillment of this activity with investors;
  2. consulting, which is always subject to the authorization of the Bank of Italy and CONSOB, in matters of financial investments. As already mentioned, this type of service must be provided bearing in mind the type of client, in terms of risk propensity, financial situation, investment objectives, financial horizon of reference, and knowledge of the subject;
  3. trading, on its own account or on behalf of third parties. In the first case, the portfolio that is managed is owned by the company and, therefore, it is subject to market risk; in the second case, the SIM buys and sells financial instruments on regulated markets on behalf of others; for this reason, it only faces an operational or reputation risk.