The extent of the persistence of Manichaeism in our current culture is clear when it comes to PIR: opinions are clearly divided. There are those who consider Individual Savings Plans as evil children of the greed of the financial industry, and those who instead praise them, presenting them as the new miraculous product that makes investors rich and helps the Italian economy.
Good and evil. Black and white. Jedi vs. Sith. A boolean world.
It's a pity that in the case of PIRs a net partition is not very appropriate. There is a lot of gray. And it is good to take this into account, if you intend to make a credible assessment of this product. So let's analyze together the main nodes of discord – don't worry, in a synthetic way.
Tax benefit: it is an undoubted, solid point in favor of PIRs. Indeed, provided certain conditions are met, the PIRs grant total exemption from taxes on income generated by the investment (and from inheritance tax, in the event of the unfortunate death of the subscriber). Also, in a family of N there can be as many PIRs (if desired, also registered to underage children), multiplying N times the effect of the tax benefit. It is no small thing, always assuming that there are capital gains to be taxed.
Performance: well, nothing to say, the performance of the PIRs has been excellent up to now, at least gross of management fees and company. Indeed, 2017 was an excellent year on the stock exchange, and the Italian one stood out positively (even if long-term performances remain disheartening). This is probably also thanks to the support for the demand for securities deriving from the launch of the PIRs: in 2017 over 7,5 billion euros were raised in PIRs, money used to purchase Italian shares and bonds, positively influencing their price. A casual glance at the following graph is enough to understand that, like it or not, there was a bit of a "PIR effect" on performance, and how:
The most sensitive index of all is the FTSE Italia STAR, which collects companies with capitalization between 40 million and 1 billion euros, "smaller" and more sensitive to the purchasing flows associated with the PIR phenomenology. This is followed by the FTSE Italia Mid Cap, with the top 60 companies by capitalization not belonging to the FTSE MIB index, which are also attractive for PIRs. Then comes the FTSE AIM Italia, an index of shares listed on the AIM, the Borsa Italiana market for SMEs with high growth potential. The FTSE MIB, index follows, detached large cap of the top 40 Italian companies, in line with the Euro Stoxx 50, the Eurozone index.
Italy risk: one thing that many (we at AdviseOnly (in primis)) they said over and over again is that the PIRs are a concentration of Italian risk. That's right. So, in order not to compromise portfolio diversification, it is best not to exaggerate the portfolio weight of these exquisite products Made in Italy:. There's no rain on this point: diversifying risks is the ABC of the portfolio. However, one can argue about what "don't overdo it" means. So I, for quantitative-statistical (de)training, tried to get an idea. I created an “optimum” global stock portfolio by minimizing the downside risk (making the most of diversification), with the main ones asset classes equity, including Italy. Hypothesis: it is not clear which market will have the best performance over the next 5 years, so the focus is on minimizing risk. I'll spare you the technical details, which you can read briefly in the note1, and I leap to conclusions: Italy's average weight in this “well” diversified global equity portfolio is around 3%. I speak only of equities, because I don't have enough data to repeat the exercise with Italian corporate bonds; however, it is difficult to think that the optimal quota of corporate bonds Italians is larger, given their marginality on the international scene. So, thinking of a balanced PIR, I think a defensible share of Italy is between 2% and 5%. Of course, Italy's weight can increase if one has the precise idea that the Italian shareholding has greater potential than other asset classes. For example, if we continue the exercise assuming that Italy has the potential to yield on average 1% per year more than the other asset classes shares, well, the average weight rises to 3,60%. The probability distribution of the optimal weight is shown in the following graph – it is clear that going beyond 10% of Italy risks becoming an act of faith rather than a choice of asset allocation.
Cost: if we talk about costs, we are talking about commissions. Management, subscription, performance fees. Now, the commissions of the PIRs are heterogeneous, even if on average high. Accustomed to observing sharks underwater in their environment, I have recognized in the savings industry the typical efficiency of the apical aquatic predator: thanks to hypertrophic commissions, many operators have cleverly taken possession of the tax benefit that the legislator has attributed to the saver. They've gobbled up a tidbit of tax relief. The intermediaries have made the most of the information asymmetry and all the biascognitive abilities of Italian savers to carry out the predation. But there is a big but: it is not true for all operators and all products. In fact, some PIRs have "human" commissions and maintain a good margin of convenience for those who invest, search and you will find. And, in any case, it's simple: just read the information documentation, rationally evaluate the product in front of you and don't get fooled.
Ratings: “Italy is expensive, it's on the bubble”. "There is value in Italy, the margins of ascent are high". Bah. Look at the following graph. Bring back the report Price/Book, traditional and extremely solid fundamental valuation measure, for the most representative index in the PIR world, the FTSE Italia STAR, comparing it with a broad European index, the Stoxx 600, and a very broad global index, including Emerging Countries, i.e. the index MSCI WorldAC. The higher the ratio Price/Book, the more expensive the market is. The graph speaks for itself: the valuations are in line with those of the world stock exchanges. So investing in Italy is certainly not convenient (the stock exchanges are a little over their "equilibrium value"), but neither is it crazy.
Effects on the real economy: The torrent of rhetoric expended to underscore the PIR effect on the economy makes Niagara Falls look like a country creek. Equally strong was the acid current against it. In reality, one year after their launch, it is too early to tell whether or not the PIRs affect the Italian production structure, characterized by an excessive number of SMEs which are struggling to grow in size. Only the first effects can be noticed: for example, the change in the number of IPOs. We are therefore talking about companies that are listed on the Stock Exchange driven by the good reception hitherto reserved for securities eligible for PIRs. I resumed this analysis by including some new IPOs and comparing the Italian data with those of the Eurozone, before and after 2017. Something can be seen…
In essence, there has been a significant increase in the number of IPOs in Italy: in 2017 it went from a monthly average of 1 IPO to a monthly average of 2,5. Data still low compared to the rest of the Eurozone, if looked at in absolute terms, but very high if one looks at the percentage change: in Italy IPOs have increased by 150%, while in the Eurozone by 8%. Analyzed with any statistical test and instrument (Wilcoxon test, estimates with bootstrapmade in absolute, or on the differences in values, whatever you want), this is a super-significant improvement. That is: since the beginning of 2017, the number of IPOs on the Italian Stock Exchange has increased sharply and significantly compared to the past, and this increase is far greater than that which occurred in the Eurozone. Therefore it is not a mere effect deriving from the improvement of the economy on the European continent. Difficult to say if it is a "PIR effect". The suspicion is there, honestly.
Financial education: the PIR impose (to enjoy the tax benefits) to invest for at least five years in asset medium risk (Italian corporate bonds) or high risk (Italian equities), or medium-high risk (balanced/flexible products). That is: PIRs encourage investors to take risks over a reasonable time horizon – a novelty for the average Italian saver (I emphasize “average”), creature of documented beastly financial ignorance, little use to correctly relate risk, return and time horizon. This “gentle nudge” can only do the average saver good. Sorry for the brutal paternalism, but so be it.
actual feasibility: in theory, anyone who has investments in financial instruments (stocks, bonds, ETFs) that they are PIR-compliant and PIR funds or policies, would have the right to compose a portfolio at will and enjoy the tax benefits provided for by the legislation on PIRs. However, theory and practice are far apart, and the matter is not that simple. Some intermediaries have actually launched accounts dedicated to "do-it-yourself" PIRs, thanks to which customers can create their portfolio independently, buying shares, bonds and ETFs, benefiting from preferential taxation, in compliance with regulatory requirements. But they cost. So, pragmatically, if you don't have the soul and the instincts of the bricoleur financially, the easiest way to reap the benefits of PIRs is to invest in a PIR product. For example a mutual fund. With all due respect to the abstract inspiring principles of the legislation.
One year of PIR
The balance of this first year of PIR? Everyone draws his own conclusions, but to me it doesn't seem black or white: I'd say it's more of a gray leopard.
SOURCE: ADVISE ONLY
