According to data that Equita Sim advanced to We Wealth, from the beginning of the year to July 25 Pir equity funds are down an average of 19 percent, balanced funds 11.5 percent, and bonds 10 percent. Performance since 2017, the year of launch, remains upbeat and, in most cases, in double digits
“The funds or ETFs that cover the segment have not done very well compared to the rest of the market,” Consultique co-founder Luca Mainò told We Wealth, “the atavistic problem of the poor performance of the Italian stock market remains.”
They are often featured in asset managers’ communications, are conveniently taxed, and were created to direct household savings to Italian companies. Their business card Pir, at least on the surface, is very inviting. But like any investment, the fundamental question remains: how much do they yield?
What are Pir, and how much have they yielded
The first Individual Savings Plans (Pir) came on the market in 2017, and those who bought them that year may now decide to liquidate them while being able to take advantage of the maximum tax advantage offered by this product: exemption from paying the 26 percent tax on capital gains, provided they have held the fund for at least five years without interruption.
The outflows observed since the beginning of the year, amounting to 74 million, have had several causes, Luigi de Bellis, co-head of Equita’s Research Team, explained to We Wealth, Luigi de Bellis, among them are the uncertainties on the macroeconomic framework and, for the first subscribers of Pir, the possibility of cashing in the tax benefit.
“Although the funds’ performance since the beginning of the year is negative (average equity funds -19 percent as of July 25, balanced -11.5 percent, bonds -10 percent), those since 2017 remain positive, and this may have prompted some subscribers to take profits,” said De Bellis noting more outflows from Pir Etfs. “We believe macro and political uncertainty over Italy will continue to weigh on net inflows for the coming months before a recovery that we expect in the latter part of the year/early 2023. Italian mid-caps are currently trading at a P/E 2022-23E ratio of 13.4x-11.8x.”
According to Equita’s calculations, Pir returns since 2017 have primarily remained in double digits. Indeed, those who would sell now accept that they are discounting the sharp drop in the first part of 2022, thus reducing the likelihood of having a substantial capital gain to claim the tax benefit.
The performance also experienced good moments before the current juncture. At the end of the first quarter, Equita had calculated that “the weighted average performance of Italy’s equity Pir funds was above 20 percent over the past three years” and above 30 percent since 2017.
Since that analysis, from early April to July 25, however, the Ftse Mib has lost more than 18 percent.
Pir, what they invest in
What are Pir funds invested in? From the latest report conducted in June by Equita Sim, it can be seen that at the end of 2021, the 21.2 billion invested in Pir was destined for 50 percent in Italian equities (10.6 billion), almost equally divided between those with medium and large capitalization; 29 percent in Italian corporate bonds (6.1 billion); and finally a 21 percent in Italian and foreign liquidity/public bonds (4.6 billion).
Consistent with the legislature’s objectives and the constraints placed on managers, the Pir is a portfolio with a strong tricolor connotation. “To be compliant with the rules, the Pir imposes some renunciation in terms of diversification; therefore, the inclusion of ‘specific risks’ (both in equities and bonds) can cause returns (and volatility) to deviate from traditional global and diversified exposures,” Consultique Scf co-founder Luca Mainò told We Wealth
Pir performance, a look back
What about performance? “The funds or ETFs that cover the segment have not done very well compared to the rest of the market; on the contrary,” said the consultant, “the atavistic problem of the poor performance of the Italian stock market remains” even in the incentivized Pir framework. “In essence, any tax benefit you get for investing in a Pir is at serious risk of being compromised by the fact that you earn less than in other more developed and efficient markets.”
To support this point, Mainò showed the performance of the S&P 500 over the period from December 2017 to July 2022 (green line), the Ftse mib, and three different Pir funds. The total return of the S&P 500, including dividends, exceeded 86 percent, outperforming Ftse Mib’s returns (10.6 percent) and those of the Pir funds considered.
“The Pir instrument was somewhat snubbed by our clients who also asked for elucidation on the instrument,” said the independent financial advisor, “however, investors realized that the proposals coming from intermediaries were not very feasible or were characterized by high costs and, therefore inefficiencies compared to the market. In addition,” Mainò added, “the holding timeframes” for accessing the tax benefit “did not speak in favor of the instrument, given the significant time constraints.
Beyond past returns, which cannot be considered a reliable indication of the future, it is worth questioning whether current economic conditions depose in favor of an investment focused on medium-to-large Italian companies. Fears of a recession are growing, and Italy, in the context of conflict with Russia, risks one of the worst setbacks in terms of GDP, the International Monetary Fund said. Could this scenario significantly impact the companies that constitute the privileged basin of the Pir? “Yes, and it is something we have already seen in the first months of this year,” replied the Consultique co-founder, “Small Italian caps had greater drawdowns than the higher capitalizations because they were trading on higher multiples and because, in many cases, they belonged to the tech segments, disadvantaged by the market environment. The rise in rates, therefore, ended up disadvantaging these stocks more than others.”
