Hungary tilts balance towards equities
The Hungarian asset management industry, the most mature in the region, is undergoing the most dramatic changes. The investment fund industry withstood September's political turmoil, including street riots, following the premier's acknowledgement that his government had lied about the state of the economy prior to its re-election last April.
Assets of publicly offered Hungarian funds grew by 12% in the 12 months to November 2006 to €6.3bn according to data from the Association of Investment Fund and Asset Management Companies in Hungary (BAMOSZ). The big shifts were into balanced, equity and funds of funds. However, the market remains dominated by money market funds, which accounted for 49% of the total, followed by funds of funds (24%), equity funds (18%) and bond funds (17%).
The most important driver was the introduction of interest and capital gains tax, of 20% in September. As the tax was not retrospective, investors piled in prior to its introduction. "We saw a huge transfer, of hundreds of billions of forints in the last few days of August," says Peter Holtzer, chairman of the board of OTP Fund Management, Hungary's biggest investment and pension fund manager. "Between September and November market growth has been either flat or negative."
A large proportion of new money went into real estate funds, which have been growing in popularity in the last two to three years. "Investors believe that they will provide security, although they are not particularly liquid or transparent," adds Holtzer.
Structured products and funds of funds, which are particularly profitable for fund managers, have also increased in popularity, as have foreign funds distributed by third parties. Although the latter now outnumber Hungarian-registered funds in terms of numbers, they still account for less than 10% in asset volume. Meanwhile, hedge and derivative funds made their debut in 2006.
Second pillar pensions, with 2.6m members, had assets of HUF1,366bn (€5bn) at the end of September, up 31% on the year in forint terms. The third pillar, with 1.4m members, has grown by 19% to €2.5bn. In 2006 the government capped the tax advantages offered by third pillar schemes.
"The system has been deteriorating since the government took away the tax advantages," says Péter Heim, regional investment director at Aegon in Budapest. "The money is going into life insurance, mutual funds and bank deposits. It will take a longer period to change client thinking to save more money in order to obtain better pensions. People still expect that the state will provide decent pensions."
One of the government's solutions to the pensions shortfall was the launch last January of the so-called fourth pillar, or individual savings accounts, operated through stockbrokers and commercial banks, with generous tax exemptions. Although superficially similar to the individual savings accounts launched in Poland in 2004, they can, unlike the Polish accounts, be redeemed prior to retirement, which has lessened their value as a pensions products.
At the end of November only 5,000 had been sold. According to Attila Gaál, deputy head of the pension fund supervision department, the strict limit of HUF2,000 (€8) on annual charges makes the business extremely unattractive for providers, and there has been little demand from customers. The fund management industry is trying to persuade the government to consider alternative proposals. "We are trying to get an agreement that promotes long-term investment and waives interest and capital gains tax," adds Holtzer.
There are also limits on other fees. This year asset management fees are being capped at 90 bps, to be reduced to 80 bps in 2008, while operational charges are being limited to around 6%. The regulator argues that the additional costs will soon be offset by the savings achieved from a change in pensions collections. Currently, each employer pays their employees' contributions separately to the funds, forcing the funds to deal with thousands of entities. At the beginning of this year the task was assumed and centralised by the tax collection authority. However, the IT system is not ready, triggering concerns within the fund industry that contributions may get lost or be misdirected during the transfer.
However, the biggest change for Hungarian pension asset managers is that the mandatory programme is changing to the system of offering differently structured portfolios to clients depending on their period to retirement, as is already the case in Slovakia, Estonia and Lithuania. Those with five years to retirement will be assigned to a conservative portfolio, which is invested primarily in bonds and with a 10% equities ceiling. Those with 15 years left will have a dynamic portfolio, with a minimum 40% equity component and with the possibility of up to 5% in speculative derivatives, an unlimited amount of derivatives for hedging and up to 20% in real estate and related investments. Fund managers will also be able to offer balanced portfolios with an intermediate risk profile, and minimum and maximum equity limits of 10% and 40% respectively.
The fund managers have until 2009 to restructure their portfolios, by which time the dynamic funds must have a minimum of 30% in equities and the balanced funds a maximum of 30% in equities.
The new system marks a sea change for the Hungarian pension fund industry, which has remained heavily bond oriented and least diversified in the region. In the third quarter of 2006 bonds accounted for 71%, with 69% in Hungarian government securities, equities accounted for 9% and investment notes, including funds, 13%. "We realised in 2005 that the typical Hungarian portfolio is very conservative; the new system will ensure a higher pension level," explains Gaál.
The reaction of the Hungarian fund industry has been mixed. "This is a very positive fundamental change for Hungarian pensions, but the transition period is too short," says Heim. "This will put a lot of pressure on asset managers and we will need to hire more skilled employees." Aegon has been slowly shifting the equity weighting of its mandatory pensions portfolio to 20% in 2006 from 15%, and aims for a further 5 percentage point share in 2006.
Pension providers are not limited to local equity. "This is positive because it will increase foreign diversification," adds Holtzer. However, the portfolio restructuring will undoubtedly have profound effects on the local stock market prices. Holtzer forecasts that the changes could raise the equity portion of Hungarian pension funds by up to €1m.