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Driving diversification – a profile of David Karni

There are three certainties about Italians: they eat pasta, they revere their mothers, and they invest in bonds. As Italian government debt of roughly €2.7trn is the highest in Europe in nominal terms, there is no shortage of the last of these.


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Considering bond prices have increased steadily over the past 30 years, the Italian love affair with bonds is understandable. But Italian 10-year government bonds now yield as little as 1.34%, suggesting problems are on the horizon.

Something needs to be done, says David Karni, head of fund selection for BCC Risparmio & Previdenza, a co-operative made up of a nationwide network of regional Italian banks. He sees it as the task of his bank to help clients to diversify away from fixed income, taking into account that these clients are usually risk-averse.

“We want to cultivate our clients, who often have 100% of their investments in fixed income,” he says. 

Change in mood

When it comes to his diversification drive, Karni has been moving into the absolute return category. 

 “I buy more balanced [absolute return] products now. We have increased our allocation to absolute return funds to an average of 30% to 35% of the portfolios, depending on the risk profile. About 30 of our banks, mainly in the north of Italy, work with us on this, following continuous client demand,” he explains. 

Karni’s clients are not exceptional when it comes to increased appetite for absolute return. In the first two months of 2015 alone, Italian investors chipped in a net €3.8bn into these types of funds. 

The increased allocation to absolute return funds comes almost exclusively from bonds.
“I cannot invest in directional government bonds anymore, and I am trying to change into something more flexible,” Karni says. “In the second half of last year, we left all corporate investment grade bonds, and right now we do not have any short-duration bonds either.”

Rapid response

Despite the changes he has been able to put through in the past year, he would like to be able to respond more quickly to the changing investment environment. “The problem we have is that we are constrained in making changes to the portfolios because all clients need to personally agree and have to be informed by their adviser. One adviser sees hundreds of clients, so you can imagine that takes some time,” Karni explains. 
Many of his bank’s 6 million clients own a stake in the bank, which they can acquire for as little as €200. A large part of the bank’s stakeholders are small entrepreneurs, who form the backbone of Italy’s economy.  “Besides shares in the cooperative, corporate and government bonds are our clients’ main investments,” Karni says.
He would like his clients to have more diversified portfolios though. This diversification push has been yielding mixed results so far.
“Each of the 378 banks which are part of the cooperative, with a total of 3,000 branches across Italy, are completely autonomous and can even decide not to offer any mutual funds. This is mainly the case in the south of Italy. Clients in Lombardy and Veneto are more proficient, and they like our model portfolios,” Karni says.

Best combination

But Italian investors wanting to put money into one of Karni’s model portfolios should be advised they are not buying into a collection of the best investment ideas. 
“When I build a portfolio, I am not buying the best ideas, but instead I want to find the best combination of ideas. My job is not to pick the funds that will perform best but to build portfolios which perform better than average,” he says. 
For Karni, asset allocation is at the heart of his building process. “You have to be well-diversified, and put your toes in many different shoes.”