Long-term social investment, Milan style

Italy boasts relatively few institutional investors, but the Milan-based Fondazione Cariplo shows that new investing standards can still be set in the home of the renaissance. The €7-billion ($9.3-billion) foundation’s most coveted investment work is its pioneering Italian funds in social housing – an asset area that has been touted in larger markets as an alternative for the future. Chief financial officer Francesco Lorenzetti reflects that “the Italian social housing market was non-existent” before Cariplo took its first steps into it via a subsidiary set up by its fund manager Polaris in 2007.

Pioneering enthusiasm can be detected in the foundation as it tries to fulfill a promise of reliable long-term yields and a match to Cariplo’s charitable aims. Lorenzetti nonetheless explains that the foundation’s effort has been a laborious task. “The impact investment field, including social housing, has been sexy in the last few years but the Italian real estate industry is very complicated for many reasons,” Lorenzetti says. “Huge inefficiencies” in local real estate would make it difficult for international investors to allocate to Italian social housing.

The foundation has aimed to provide housing below the market rate that can generate inflation plus 2 per cent, in line with the benchmark return for its entire mission-connected alternatives portfolio. “The tools and mechanisms that we have developed as part of the social housing industry could be exported, I think,” says Lorenzetti.

Should Cariplo’s style of social housing funds indeed be emulated in other lands, Lorenzetti will be pleased to have given something back to the international investing community. He confesses to be constantly looking to the United States and Northern Europe for inspiration in Cariplo’s asset management. “We would like to learn from more experienced international investors,” explains Lorenzetti. “Since 1998 we have been working on having and improving a long-term social investment approach, which is now common to the more established international investors.” He cites recently published OECD principals on long-term investing as a further influence. “A proper approach to long-term risk seems to be an environmental and socially sound one, and that is what we aim for,” he says.

Diversificazione

There has been one overriding ambition behind the foundation’s investment strategy as it works on a long-term approach in line with its major overseas peers – diversification. The 7 per cent of the portfolio ($660 million) in mission-connected alternatives is clear testament to that. Italian private equity, infrastructure and venture capital find a place there along with the social housing forays. Microfinance investments meanwhile provide an international dimension to this alternatives segment.

If everything goes according to plan, seed capital investments will follow soon too, with the worthy aim of better monetising Italy’s famous cultural riches. “We would like to see if it is possible to promote new companies in sectors like culture and agriculture, neglected until now in Italy, despite being important in the past,” Lorenzetti explains.

The mission-connected alternatives play an integral part in the Cariplo Foundation’s funding activities due to an administrative difference to many of its international peers. While many US foundations make impact investments with grants, for instance, Cariplo has mainly deployed its alternative assets for the purpose, as its grants are exclusively intended for non-profit groups.

Flexible platform

Lorenzetti explains that on top of the mission-connected alternatives, the foundation is currently 60 per cent invested in fixed income and has a 33 per cent equity holding (with a benchmark of 53 per cent global fixed income, 40 per cent global equity and 7 per cent mission-connected investments).

Close to half of the equity holdings consist of a single stake in the Intensa Sanpaolo bank. This arrived through the Fondazione Cariplo’s founding as a way to continue an Italian legacy of investing banking profits for the social good. The foundation was actually 100-per-cent invested in another bank until 1998, when a de-merger allowed it to swap this for its current stake, plus the grand sum of 9 trillion lira ($6 billion). The foundation intends to maintain its Intesa Sanpaolo share for the foreseeable future, says Lorenzetti.

Apart from the single bank stake and the mission-related alternative investments, the whole of the portfolio has been entrusted to asset manager platform Polaris. Lorenzetti recounts that the link-up came as “we were looking for a transparent and cost-effective multi-management platform as well as the social housing arm.” Creating a platform that has a lot of freedom for Polaris to invest within benchmark and risk-budget constraints was important, he stresses. “Our platform can, in fact, very rapidly create new pools used by multi-management funds to explore several different investment approaches and also invest in alternatives,” Lorenzetti explains.

Tax headache

Years of fine-tuning a balanced diversified portfolio could have been threatened with a dilemma recently thrust upon Fondazione Cariplo by a change in Italian tax law.

It had been aiming for annual returns of 7 per cent (with an 8.5 per cent volatility) to cover a 2.5 to 3 per cent grant target and 0.2 per cent running costs plus taxes and inflation. Returns have only averaged 3.5 per cent (versus a benchmark of 4 per cent) between 1998 and 2012 though, largely because of the financial crisis, with the Intesa Sanpaolo stake suffering greatly along with the Italian banking sector.

An increase in investment tax from 12.5 per cent to 20 per cent of returns at the start of 2013 suddenly disrupted its investment target. Increasing the equity holdings to around 55 per cent would have been needed to try to meet this new obligation, Lorenzetti argues. Ramping up the risk of the portfolio in a period of low interest rates was not a move the foundation was comfortable with, however, so grant payout targets are to be reduced over the next six years instead.

Lorenzetti bemoans having to do this. “If you look at foundations across Europe and the US, they do not pay tax, so this is a major negative element here in Italy,” he says.

Assets are to be further diversified too, as Cariplo maintains its current benchmark despite the enhanced tax bill. It is to swap an equity benchmark that was previously half based in the eurozone to instructing Polaris to invest in a FTSE All World Local Currency benchmark. That will bring added global and emerging market exposure, which the foundation is also bringing into its fixed income investments.

Lorenzetti is confident that Fondazione Cariplo will then look even more of a part of the elite club of sophisticated international investors. Only its tax bill will look different.