It comes as no big surprise to say that there is quite a lot for asset managers to be worried about in the world outside their office doors. Apart from the fact that public demonstrations against bankers and politicians are on the rise, there is a quiet wave of protectionism on the move that could well threaten the ability of fund groups to bounce back when investor sentiment starts to improve.
Austerity measures in most European countries, but particularly in the peripheral markets, mean tax. At one level increased tax demands deplete household wealth that might otherwise be saved in funds, but at another level there are signs that fiscal policy is being used to support bank structures at the expense of long-term investments.
Italy is the most obvious case in point; among the austerity measures recently approved by the Italian government was a simplification of the taxes on financial gains. From January 1, 2012, the Italian government will apply a flat 20 per cent tax rate on all income derived from financial transactions.
This all sounds perfectly reasonable except that the new regime amounts to a 7 percentage point tax cut on deposits and a 7.5 point increase on investments in long-term savings instruments, such as funds. There are some notable exemptions to the long-term savings category – Italian government bonds and bonds issued by other European Union member states, and so-called “long-term saving plans”. The government has not confirmed exactly what this last category will include but its decision will be critical for the future fortunes of the fund industry.
Importantly, under the new regime capital gains will operate retroactively with all accrued gains being taxed at the point of redemption. This means that when investors redeem, they will be taxed on all the gains that have rolled up in their funds for the entire period that the funds have been held, not just for gains accumulated in the latest fiscal year.
The introduction of this penal new regime has effectively created a favourable landscape for government bonds and bank deposits, at a time when both are screaming for cash. Investment funds, unless they are in some way included within the savings scheme exemption, will be penalised, not only in terms of future business prospects but, critically, by a big sell-off before the tax is implemented.
Investors have been forewarned and those that are sitting on profits will undoubtedly sell their holdings before 31 December. Italian groups will suffer further pain but they, at least the large bank entities, have been in the dumps for a decade so the headline sales data will simply show continuance of a secular trend.
The biggest casualties will be cross-border groups that have enjoyed a fantastically successful period since the financial crisis. According to Lipper FMI data, combined with our own analysis, the foreign market share of Italian fund assets rose from around 9 per cent in 2005 to 21 per cent by the end of the decade. This equates to just under €100bn ($141bn) of assets and net inflows of around €25bn in 2010.
Italy has been an important success story for foreign groups, beating even Germany for asset gathering potential in recent years. The pressure is on for Prime Minister Silvio Berlusconi to ramp up austerity measures so there is little doubt that the tax reforms will go through. Cross-border groups with a strong presence in Italy may therefore need to focus their attentions on other countries to ease the pain.
Tax changes are also expected in Spain where foreign groups have managed to hold their own against a barrage of attractive deposit offers from cash-hungry banks. The banks are now issuing an array of bonds to capture what remains in the wallets of retail savers.
But, for the rich, the Socialist government in its pre-dissolution session, introduced a new wealth tax that will hit Spaniards with a net worth (excluding main residence) of €700,000. The tax will apply for a period of two years and will hit precisely the investors that have favoured the products of cross-border groups. Of course, November’s election could return the conservative Popular party, in which case the tax could be withdrawn. However, the budget deficit remains and one way or another austerity taxes coupled with bank indebtedness will continue to suck money out of long-term savings vehicles.
These are two examples of a trend that could gather momentum in the coming months. And to top it off, Europe is proposing a financial transaction tax to pay for the bank bail-out. All this is likely to weigh heavily on investors and therefore on the fortunes of asset managers as 2011 turns into 2012.
Diana Mackay is chief executive of MackayWilliams LLP and publisher of Fund-Radar