Hungary setting management trends
Kevin Hall reports on developments in Hungary, Poland and the Czech Republic
Of the three fast-track European Union entrants, Hungary has led the way in pension reform during the 1990s. The early start of restructuring has meant that the Budapest-based pension asset management market remains the most vibrant in the region, despite the relatively small population compared with, say, Poland.
Pension fund investment amounts to some E800m in assets, as at June last year, with some 80% of that held in government securities. Domestic equities account for a further 10%, with the remainder evenly divided between cash and corporate bonds.
Zsolt Salamon, of William M Mercer in Budapest, says equity holdings are down from some 17% of all assets in 1997, following the disappointing performance of domestic stocks over the past 24 months. He believes, however, that an improved performance from the Budapest exchange (BUX) will see investors return to equities in 2000.
The signs of such an improvement are to be found in an analysis of the BUX during the last few months of 1999. Concorde Asset Management’s Boland Vilibok says the BUX has gone up some 20% due to strong buying in the last eight weeks of last year, a remarkable surge which he maintains is not a blip. “The market has been rather flat due to poor macro numbers, but the past two months has seen the government back on track.” He also says asset managers have been active in this turnaround, representing via pension and mutual funds some 55% of total market investment.
Despite the superficial impression of the market, however, there has been no dramatic increase in the total of assets under the control of fund managers, says Budapest-based Gabor Orbaiz, of Europool Investment Fund Management. Europool is one of the oldest established asset management companies, becoming only the second institution to be awarded a licence to trade in 1992.
“The government have finally got some of the macro indicators looking right, after a very anxious year,” Orbaiz says. “The current account deficit is less than expected and GDP growth is higher than the EU average. Despite those worries earlier this year we have seen the BUX leap 2,000 points in just one month, and solid trade in fixed interest investment, too, lately.”
He believes local investors are finally beginning to understand how the markets work, and this is resulting in growing confidence in investments and a greater understanding of how pension funds actually operate. “One should not underestimate how important the confidence of the individual is in these matters, especially where voluntary funds are concerned,” says Orbaiz. “The money market was the favourite sector last year, and equity holdings and long bonds were lower than expected. There is no question, however, that we are now looking at a return to equities.”
This return will still be gradual, most analysts believe, as managers continue to adopt a safety-first policy. “This means that managers will continue to work well within the limitations which statutes place on them,” says Salamon. These include a maximum 40% of Category A stocks quoted on the BUX and 20% of Category B. Although up to 20% of holdings can be in foreign equities, most funds are well below this figure.
Vilibok agrees – while pointing out the speed at which the Hungarian institutional investor market has been growing. Concorde was set up just four years ago, but now manages some HUF10bn (E39m), including half of this sum in pension fund portfolios. “The mutual fund market is worth some E800m, with roughly 20% of that invested in local equities. The pension funds, while controlling a similar amount of assets, err towards caution, with typically between 5 to 7% exposure to domestic equities.” He believes, however, that recent trends indicate this figure will increase again during the next 12 months as the macro climate encourages this type of investment.
Ing Investment Management was licensed in Budapest in 1996 and now looks after assets totalling some HUF140bn. Asset manager Istvan Salgo says many analysts have ignored a major influence on the Hungarian economy when reviewing the past two years: “There is little doubt that the fixed-interest market has been strongly influenced by convergence with the Euro-zone countries as the government strives to meet membership criteria,” he says.“Significantly, the fixed-income market, the corner stone of Hungarian fund investment, has been driven by convergence theory.”
Salgo expects real interest rates to fall soon, with the resultant knock on effect in the equity market. “The BUX has been hit by the events in world markets over the past two years, and while it is still volatile the main indices indicate an improved performance for next year,” he says.
So far as overseas investment is concerned, Salgo says: “The limits on overseas investment for mandatory pension funds are to be loosened over the next three years. This looks encouraging on the surface, but the practicalities are far different. The Bank of Hungary is the sole licensing authority, and such are the problems at the moment that the only way to invest overseas effectively is through a mutual fund.”
Peter Holtzer, of Creditanstalt, agrees that after the conservative approach adopted over the past two years, there may soon be increased interest in domestic equities among asset managers: “The overall impression is that the Hungarian equity market will perform better this year, and I would expect to see most funds shadow one another and probably double their local holdings.”
On foreign investment he concurs with Salgo. “Foreign investment is growing but is still very low, at between 2 and 4%. Increased activity in this area could be interesting, in that it could lead to the appearance of more asset management companies looking to acquire sub-advisory mandates for the foreign markets. The large international companies are not so evident in Hungary at the moment, but there is no doubt that could soon change.”
Nonetheless, the investments tend to remain conservative for the time being, with Holtzer estimating that a typical fund would hold 70% of its assets in bonds and treasury bills. “Real estate does not really feature, and there is no existing real estate fund which would make life easier. Neither is there heavy use of derivatives,” he says. “The Hungarian market is certainly more developed than its neighbours, mainly because it started out on the path of reform first, with third-pillar funds boasting a five-year track record. This may not seem much in Western terms, but among the emerging markets it is a significant period. Nevertheless, the larger countries are catching up fast,” he warned.
Despite its developed status, the Hungarian market has failed to attract many consultants, with William M Mercer perhaps the biggest influence in Budapest. This may about to change – but opinion is divided.
Salamon claims there is a “huge demand” from pension funds for consultancy services. “The financial culture is very young, and knowledge relatively poor, consequently the funds need advice,” he says. He acknowledges, however, that performance measurement is another failure of the current system. “There is a steady increase in interest in resolving the situation,” he says.
Vilibok doubts, however, that consultants are really bringing together funds and asset managers. Orbaiz agrees, saying: “Consultancy does not really play a major role in Hungary. A number of brokerage houses act as consultants, but really operate more as salesmen. In Hungary, pension funds tend to deal directly with asset management companies.”
Salgo agrees: “Pension funds are often reluctant to pay for a consultant, often believing they can choose a good manager themselves.” He shares Salamon’s view on comparison indices. “For example, the mandatory investment funds publish their results once a year in an official government sponsored publication. It is impossible to make any direct comparisons from this document, or draw any useful conclusions. Very little information is provided, and although one particular management company may show a good return, it is often unclear what risk factor is involved in the results.”
Holtzer agrees with the worries about performance measurement, but believes that as the pension market develops, the role of the consultants will increase.
The debate over consultancy inevitably leads to a discussion of fees, which are high on the list of all pension funds’ concerns. “The financial capacity of most funds is limited,” says Salamon, “and this makes fees a most important issue so far as consultancy fees are concerned. Our position is different to the asset managers whose fees are paid out of returns. Consultancy fees form part of on-going costs, and obviously it would be better if they were paid in the same manner as asset management fees.” But even those fees are subject to the market place. “Fees are coming down aggressively,” says Vilibok. “Last year they halved to around 0.4% almost entirely as a result of increased competition.” He expects them to level out at this point.
Orbaiz agrees, while Salgo believes that consolidation and mergers among asset managers are already under way and are inevitable. Holtzer points out the difference between the second and third pillar funds, that is mandatory and voluntary pension schemes. In the former, insurance companies and banks using in-house management charge fees around 1%. In the more competitive environment of third pillar mandates, fees are typically between 30 and 80 basis points he maintains. “There are no new funds coming on stream and so the competition is intense, squeezing fees across the board.”
It seems that, just as Hungary led the way in first fiscal and then pension reform in eastern Europe, it may also be setting a trend in asset management. Mergers and consolidation are spawning a meaner, leaner asset management philosophy, possibly to the advantage of the companies, but certainly to the economic advantage of their clients.