Asset management in the Baltic states is a mixed scene, ranging from investment funds and private pensions in Estonia and Latvia to negligible retail activity in Lithuania. In Lithuania, tax complications have so far prevented the establishment of local investment funds. Meanwhile the private pensions market will only start operating in 2004, at the earliest.
While some insurers already sell foreign funds in Lithuania, locally registered funds are expected to launch shortly following the removal of the tax obstacles at the end of 2002. Estonia’s Hansabank, the largest banking group in the Baltics, took control of LTB (Lithuanian Savings Bank), the country’s second largest bank, in 2001. It plans to launch Lithuanian investment funds in 2003 once it completes the integration with its local subsidiary and establishes retail market share. “In Latvia the business started with money market funds which were used by corporates to manage their liquidity, and Lithuanian funds will probably start this way,” predicts Mikhel Oim, manager at Hansa Investment Funds in Tallinn.
In Estonia investment funds have already been through a number of economic cycles, including the local equity market crash in 1997 and the Russian crisis the following year. The equity funds have since languished while money markets have rocketed. Oim reports that Hansa’s grew by 75% in 2001 and an estimated 50% in 2002. According to data collected by Suprema Evli Group in Tallinn from market sources, as of mid-November 2002 money market and fixed rate funds had EEK4.2bn (E270m) of assets, equity and mixed funds EEK400m. Since Estonia does not run state budget deficits except for extraordinary items, the fixed rate funds include corporate bonds, OECD government bonds and Estonia’s only Eurobond.
Third pillar pension funds had EEK45m of assets under management and second pillar funds, which only started collecting contributions in 2002, EEK190m. Private portfolios account for a further EEK1.5bn, institutional assets EEK1.2bn–1.5bn. In terms of market share of asset management, Hansabank had a 56% market share followed by Uhispank with 32% and Sampo with 8%.
In Latvia there are four private third pillar funds, with assets of Lats 12.8m (E21.3m) as of the end of the third quarter of 2002, of which First Closed Pension Fund, an occupational schemes for the employees of the telephone company Lattelekom and electricity company Latvenergo, is by far the largest. The second pillar programme was initially managed by the state treasury, but investors can transfer management to one of the 10-odd privately managed funds in 2003. However, as Ilja Kuznecovs, marketing and sales deputy director of Parex Asset Management in Riga points outs, Latvia’s population of only two million limits this market’s size.
In the investment funds business, there were nine registered funds with a portfolio of Lats 11.2m as of September 2002, of which 69% was invested in government debt, 28% in corporate debt and a tiny 0.4% in equities. There is also extensive third party distribution. At Parex, Latvia’s largest bank, the asset management arm distributes around 250 funds catering for a wide range of risk appetites, of which the most popular are the Franklin Templeton Mutual European and Mutual Beacon. It also offers standardised structured portfolios for larger clients, at a minimum $50,000 investment, ranging from the more conservatively oriented fixed income products in Lats, euros and US dollars, through a global equity product biased towards the US to a Russian equity portfolio, the most aggressive of its structures. At the other end of the spectrum, for smaller retail clients, it provides pooled management or co-investment into one of the foreign funds. According to Kuznecovs, although the bank tries t offer all possible permutations, its focus is on HMWI and it has clients from outside Latvia, including as far afield as the US and Australia.
As elsewhere in the region, asset management in the Baltic states is becoming increasingly the domain of big commercial bank operations. Scandinavian institutions have been the primary investors, with Sweden’s SEB controlling Vilniaus Bankas, the largest in Lithuania, and Unibanka and Uhispank, respectively the second largest banks in Latvia and Estonia, while fellow Swede Swedbank is the majority owner of Hansabank. Finland Sampo is also a major player. The Scandinavian dominance is particularly intense in Estonia. “While there are opportunities in Latvia and Lithuania, it is becoming increasingly hard for independent operators to compete in Estonia, particularly in the retail client sector,” notes Veikko Maripuu, head of research at Suprema Evli. “The Estonian market is concentrated because it’s small,” adds Hansa Investment Funds’ Mikhel Oim. This has become evident in the second pillar pension funds, where the banks have proved more successful than the insurers, and where within a few months of opening for business, Hansabank had acquired 51% of market share, Uhispank 28% and Sampo 15%.
Suprema, the largest independent in the region, focussing on private and institutional asset management - including First Latvian Closed Pension Fund - was recently taken over by Evli, the Finnish financial group which is expanding its Baltic operations. “This will strengthen our position in the Scandinavia and obtain more scale in asset management, including centralised asset allocation and research,” explains Maripuu.