In 2019, investment activity developed in a context marked by the gradual deterioration of the macroeconomic scenario. This deterioration was most acute in the first half of the year and continued in the third quarter, albeit to a lesser extent. The last two months saw a relative stabilisation, particularly in the United States. Economists reduced their GDP growth and inflation estimates in response to the slowdown. The euro area was hit hardest, as it was more affected by the high levels of uncertainty surrounding the outcome of the trade negotiations between the US and China. The decline in macroeconomic indicators and confidence indices prompted the central banks to shift their monetary policy stance, which once again became accommodative.
Against this backdrop of economic slowdown, political uncertainty and accommodative central bank behaviour, government bond yields fell almost continuously until the end of August, when they reached new record lows for several euro area issuers, while in the US they dropped to the lowest levels in the period before making a partial recovery in the following months. This environment, favourable to interest rates, also benefited corporate bonds. The equity market, aided by the shift in the stance of the central banks, also offered double-digit returns.
Overall, exposure to domestic securities remained unchanged during the year compared with the previous year, primarily affecting the distribution of maturities with an extension of the average duration of portfolios, particularly in the first part of the year, in line with the duration of the relevant liabilities. A similar approach was taken to the non-Italian component of government bonds, with profit-taking on the bonds of the core countries at the time of the very strong yield compression during the summer season.
In the first few months of the year, corporate yields were attractive in terms of risk-return, and exposure was increased as a result. As with government rates, strong spread narrowing made investment in the corporate sector less attractive, also in light of the not particularly positive macroeconomic environment, and in the second half of the year exposure was reduced, especially to issuers with lower credit quality. In addition, positions that had suffered a sharp deterioration in their ESG (environmental, social and governance) ratings were divested.
The equity sector was partially reduced at the beginning of the year, then purchased in the middle of the first half, with a particular interest in those stocks capable of supporting the Group's profitability thanks to dividends. The increase in equity exposure was mitigated through the use of hedging instruments. The positions purchased were progressively reduced in the second half of the year.
Investment in alternative investments also continued. Specifically, commitments were made in funds linked to strategies focused on infrastructure activities and projects, private equity and direct business lending. The majority of investments were made in Europe, thereby contributing to the strategy of overall portfolio diversification and maintaining adequate levels of profitability. Given the increasing significance of alternative investments within the Group’s portfolio, Cattolica has decided to specialise certain resources to oversee these investments exclusively and has created a dedicated team of professionals within the Investment Department.
In the first half of 2020, operations took place against a background of high volatility due to the impact of Covid on the markets. The situation improved substantially due to the swift action taken by the central banks and the shared commitment of the European states to provide support through fiscal policies. There was a sharp downward revision in global growth forecasts in the spring months. The impact and duration of the economic contraction is still not entirely clear. Economists agree that there will likely be a steep decline in 2020, followed by a strong recovery in 2021. However, this does not take into account any resurgence of the virus that could again hit global socio-economic systems.
In this context, the central banks have been strongly supporting the markets by injecting liquidity into the system. National governments have responded with employee subsidies and help for businesses and, in Europe, are working together on a substantial fiscal policy programme to support the economy. As a result, after falling sharply in the first quarter, the markets showed strong growth in the second three months of the year.
Exposure to domestic bonds was substantially reduced during the half-year, while the duration extension undertaken in 2019 continued, including on the foreign component. The non-Italian component was marginally reduced, with profit-taking at the time of the very strong yield compression at the start of the pandemic.
The corporate component, very volatile in the spring months, was manoeuvred to reduce the positions most sensitive to the deterioration of the macroeconomic scenario due to Covid. Accordingly, securities most exposed to cyclical economic sectors were sold and issuers considered more counter-cyclical were purchased. Investment-grade issues were preferred to provide more stability to the portfolios. After the strong shock in the middle of the half-year, credit spreads performed very strongly. In fact, helped by central bank purchases which gave stability to the market, the price collapse in March and April was rapidly reversed in May and June.
Equity activity was mostly tactical, with a slight increase in the first quarter and a general reduction in the second; in any case, a high level of hedging was maintained. The more defensive sectors were favoured and geographical diversification increased, with positions added on the US market.
Alternative investments, and particularly infrastructure investments (with a new fund subscription), continued to grow. A long-short equity fund with an ESG strategy was also subscribed.
The portfolio is denominated almost exclusively in euro, with marginal exposures in the US dollar and pound sterling. Issuers are predominantly located in Europe and, to a lesser extent, in the US. Many issuers, however, have operating environments that are highly diversified in geographical terms, in order to reduce recession-related risks as much as possible.
Real estate investments
The Cattolica Group currently has total real estate assets of approximately €1.5 billion (equity paid at historical cost). Approximately 70% of this amount is invested in income property, for the purpose of periodic dividend distribution for both the Non-Life and Life lines of business, with very little leverage. Assets are diversified by tenant, geographic location and sector and also directed at less traditional asset classes (such as hospitality, healthcare and supermarket retail). Since 2012, Cattolica has also invested in renewable energy through an exclusive real estate fund dedicated to solar power.
Some major operations were finalised in 2019/2020, including:
- the creation of a new core fund for office properties, which to date has acquired two administrative buildings in Milan Bicocca, leased to tenants of high standing, while the completion of a transaction for an office building in Rome is pending;
- the purchase of two structures for conversion into hotel use in Venice and Turin. The hotel portfolio now has seven structures located in six Italian cities, most of which are operational and will be partly opened to the public during 2021/22;
- ongoing investments in the Fondo Innovazione Salute (Health Innovation Fund), a sector fund dedicated to health and residential care homes for the elderly, launched under a partnership between Cattolica and Coopselios, the leading cooperative operator in residential care homes (RCHs) in Italy, for additional equity of approximately €6 million. The commitment to the Fondo Innovazione Salute strengthens Cattolica's presence in the health real estate sector, where it has been present since 2008 with the acquisition of three RCHs;
- ongoing investments in the Mercury real estate fund, a joint venture with the CONAD Group;
- entry into foreign funds, diversified by sector and European country;
- the acquisition of a new photovoltaic system in Piedmont;
- the inauguration in September 2020 of the European-calibre innovative digital cluster in the province of Treviso, called H-Campus, which is located in the Ca' Tron Agricultural Estate and is intended for digital training and related businesses. Cattolica is the main investor in the project, with 60% of the equity, with Cassa Depositi e Prestiti as its partner.
Cattolica’s agricultural estate in the province of Treviso now covers well over 2,000 hectares. As well as hosting several crop-growing activities, it is undergoing a process of real estate and infrastructure enhancement, creating connections and value for the region in which it is located, which includes the campus mentioned above.
From the outset, the ethical dimension of Cattolica’s business has been central to its entrepreneurial vision and its concept of how it relates to the economic system and its social partners. The company’s adherence to the UN PRI (Principles for Responsible Investment) on 25 June 2019 was a natural consequence of this approach, further strengthening its focus on social responsibility by confirming its commitment to acting transparently vis-à-vis its stakeholders and being a responsible member of the institutional investor community.
The incorporation of ESG principles into the investment decision-making mechanisms is based on awareness that these factors are an excellent risk management tool supporting medium/long-term sustainability.
The Group has adopted a system that can incorporate ESG issues into the analysis of its investments and the relevant decision-making processes. In 2020, specific guidelines were established for this activity, which was already integrated within investment policies.
In order to implement the guidelines and exercise a positive influence on the conduct of issuers, the Group has identified certain types and modes of action:
- Exclusions (black lists) and monitoring (watch lists)
- ESG ratings - scores
- Thematic investing/impact investing
- Environmental protection
The Group is fully aware of the important role it can play in the environmental, social and governance area. Criteria have therefore been identified, based on the most widespread international practices and expressed in international conventions issued by universally recognised bodies, which are designed to take the following issues into account: respect for human rights; respect for workers' rights and adequate working conditions; the ban on controversial armaments; the prevention of all forms of corruption and conflicts of interest; and respect for and protection of the environment.
These areas are important financially, as well as in terms of values, and, if properly considered by businesses, help to create a more stable and sustainable economic system.
In accordance with and in compliance with the Group's distinctive values, and with the principle of corporate social responsibility as an integral part of its business vision, the Cattolica Group approved an environmental policy relating to the Ca' Tron Agricultural Estate and a Group Environmental Policy, in 2019 and 2020 respectively. The latter identifies the approach with which the companies, in accordance with the values and ideals that they share with the Cattolica Group to which they belong, intend to manage environmental risks and the resulting opportunities.
As a demonstration of the importance of environmental issues, Cattolica not only includes serious environmental harm among its exclusion criteria, but has also adopted an ex post monitoring system to periodically check on the presence of investments in sectors identified as carbon intensive and to track the carbon footprints of corporate issuers in the portfolio.
The Group's active commitment is also evidenced by its desire to promote thematic investments, intended to improve sustainability through the selection of products that identify macro-trends that will guide future socio-economic developments. In particular, in recent years there has been increasing interest in commitments in the environmental sector, through participation in specialised funds, real estate funds and closed-end funds, or through the subscription of bonds to support specific projects (the so-called Green Bonds, Social Bonds and Sustainability Awareness Bonds).
The recent subscription to a fund specialising in active and sustainable forest management is particularly noteworthy, as are the following real estate investments:
- Perseide, which is wholly owned by Group companies and is dedicated to renewable energy, with a portfolio of plants in various Italian regions;
- Fondo Innovazione Salute, which is focused on residential care homes for the elderly and properties for more general healthcare use. The fund is approximately 78% controlled by the Cattolica Group and is the main dedicated platform for this type of acquisition. It has also opened up its capital to third-party institutional investors.