Outflows from PIRs hit small cap Eps estimates

The outlook for the earnings of Italian mid-and small-cap companies has dimmed after a start to the year that has already seen this segment lagging far behind the main list.

This is the finding of Intermonte in its latest monthly update on the segment, in which forecasts for mid/small cap earnings per share (EPS) for 2023 and 2024 have been filed down by 0.2 and 1.6 percent, respectively, “with a more pronounced reduction” for small-cap companies.

Mid-caps and small caps: lagging performance since the beginning of the year

The gap with forecasts for the earnings performance of the Italian stock market as a whole is clear: since the beginning of the year, Intermonte has revised up its 2023 EPS estimates by 7.8 percent but has done so only to the extent of 0.7 percent when narrowing the field to mid and small caps.

The balance of stock market performance since the beginning of the year and over the past month, for that matter, reflects this adjustment in outlook. Small caps have underperformed the benchmark index by 13.5 percent since the beginning of the year and by 4.6 percent in the last month. For the Ftse Italy mid-cap, on the other hand, the previous month was broadly in line with the Italian market (-2.3%), but a 4.7% lag remains since the beginning of the year.

Outflows from PIRs mean liquidity problems for small caps

While banking stocks, which account for the bulk of the Ftse Mib, were able to present record profits to shareholders thanks to improved interest margins, Italian small caps faced liquidity problems “, especially concerning significant outflows from Pir funds, which, on average, account for about 10 percent of the free float in this segment.”

The underlying objective that had motivated the launch of the Pir funds was directing household savings to small and medium-sized Italian companies in exchange for tax benefits for those who kept the investment in their portfolio for at least five years. The arrival of the first window for tax-advantaged profit-taking for those who had invested at the launch of Pir in 2017 would have motivated the outflow of capital from these instruments observed last year. According to updated data from Assogestioni, in 2022, Pir’s net outflow of money was 773 million euros, with a 368 million red in the fourth quarter alone. At the end of 2017, 17.5 billion euros were invested in Pir and 1.4 billion in Pir alternatives.

“Among the positive notes,” Intermonte analysts said, “we point out that the Italian government has devoted significant attention aimed at facilitating access by SMEs to financing through the capital market. We hope some initiatives can help improve the segment’s momentum after reduced flows and lack of listings.”

According to Intermonte, Pir could recover ground this year and see positive net inflows again. A “more optimistic view on 2023 than 2022” motivated by “overall positive market performance since the beginning of the year” that could “push retail investors to resume equity investments in products such as Pirs. Secondly, Intermonte added, the effect of profit-taking for those who had invested in 2017 (“a year marked by a boom in inflows”) could diminish this year-assuming that investors intent on exiting at the first fiscally favorable opportunity had already done so last year.

“In the long term, our assumptions are based on the expectation that interest in this product will remain quite high due to the tax benefit and, from the distributor’s point of view, the fact that they can count on a long-term commitment from the investor,” they added from Intermonte.

In detail, Sim expects gross inflows of new Pir subscribers to be 500 million euros this year, with the amount of capital that will be withdrawn by investors who decide to exit the fund before the end of five years (for any reason) will be “equal to 3.5 percent of assets under management in 2023 and beyond.”