Reforms give ‘sleeping giant’ a nudge
For many, Poland is the sleeping giant of eastern Europe. It is distinguished from its competitors such as Hungary and the Czech Republic by the fact that most of its export potential is targeted at western European, and particularly German, consumers. Analysts expect this to help GDP growth of around 5% in 2000 and to help Poland along its path via convergence to European Union membership.
The Russian crisis slowed down the economy which, at the time, was heavily dependent on exports to the east. Now, however, Russia accounts for a mere 5% of total Polish exports. Despite worries about inflation, which – for the first time since 1990 – showed a year-on-year increase last year, this year’s figure is expected to be in the range of 6% to 7%. Nevertheless, high real interest rates have not helped the equity market, which is a prerequisite for a successful asset management industry.
Alongside its economic reforms, the government has also embarked on an overhaul of the pension system and the two moves have helped to develop the asset management industry over the past few years. Marcin Fidecki of Hewitt Associates in Warsaw goes further: “The pension fund reforms have provoked an explosion in asset management in Poland.”
It seems it has also helped consultancy companies, such as Fidecki’s own. Begun in January 1999, the aim the reforms is a stable, transparent pension system based on a western European model. The overhaul is just part of a massive programme to restructure Polish health, education and public administration systems by 2004. “The situation has been complicated by the recent amendments to the law, and although companies are keen to introduce schemes, the government is slowing down the process,” says Fidecki.
He feels that as Poland is at the start of the reform process, there is huge potential for pension consultants to adopt an enhanced role in the process, both advising on the design of schemes as well as on asset management. Even so, he admits that the very newness of the situation does make performance assessment difficult. “We advise clients to take a long term view, but as many of the funds and managers are new it is difficult to assess performance and prospects.”
Tomasz Banowski, at the Association of Investment Fund Managers, gives some idea of how the industry is developing. “Our members have some $0.7bn in assets under management, and offer around 50 investment funds. That is around 1.5% of GDP which, when compared with an average of 18% ratio in western Europe, shows that there is plenty of room for growth in Poland,” he says.
He confirms the development in asset management expertise in Poland, pointing out that many of the association’s members are joint ventures. “International players bring know-how and expertise, and local banks and institutions provide the distribution facilities.”
Funds mainly invest in publicly listed funds, papers and T-bills, although mutual are allowed to invest 5% of their total funds in foreign equities, with a possibility of increasing this to 10%, with the approval of the Stock Exchange regulatory body. “Funds are also obliged to place their records in the public domain, although we accept that performance indices lag behind other countries,” says Bankowski.
Pension funds are regulated in a slightly different way and are obliged to measure themselves against an average investment return.
Martin Mizerak, at ABN-Amro Asset Management in Warsaw, agrees measuring performance is a problem. “Quite simply, there are no accepted standards and what there are, are not always taken seriously. Many asset managers show their results but often hide the risk factors,” he says.
The significant move in the pension fund sector was the launch in January 1999 of the second pillar funds, producing 21 new open-ended pension funds. With around 10m participants represented, this market is highly concentrated – just four operators share 70% of the market, with the remainder all having market shares below 5% “We will inevitably see mergers and takeovers in 2000,” says Bankowski. “The major players are Commercial Union, Ing, Norwich Union and PZU, Poland’s largest insurance company.”
Mizerak points out that as the 21 funds are dealing with second pillar mandatory pensions, there is no outsourcing of management. “At the moment we are managing around $40m worth of discretionary portfolios for Polish institutions, after receiving our licence at the beginning of 1998. Consequently, we do not manage any pension funds at the moment, but the good news is that the third pillar comes on stream next year and we shall certainly be bidding for some of the corporate mandates.”
He says an indication of how successful the new discretionary funds will be is the life assurance policies that Poles are purchasing: “They do not officially form part of the third pillar, but can be seen as de facto voluntary pension funds, and are extremely popular.”
Bankowski believes the development of the third pillar will be “a bit of an education for the investor.” He adds: “The target group is the average salaried person, or perhaps someone on a slightly above-average salary: that is to say, around 25% of the population. The problem at the moment is that the public needs convincing about long-term investment. At the end of the day, the man in the street is still looking for an alternative or substitute for bank savings. That is the problem we face when trying to explain how the pension funds are going to operate.”
Confidence in the expected growth of voluntary pensions is reflected in industry estimates, which suggest that by 2004 pension funds will be managing assets worth more than $25bn. Even the Church is involved in managing a fund.
This increase in assets will inevitably mean an increase in the equities managed. “At the moment, equities make up a small proportion of all funds, although the mandatory pension funds have increased their equity weighting in the past few months, multiplying it threefold. But for holdings to be more in line with the west we need convergence with the euro, and for real interest rates to go down,” says Mizerak.
Bankowski is confident that next year the equity market will benefit from more institutional investment. “At the moment the exposure tends to be to domestic stock because of exchange rate worries but, step-by-step, I am sure we will see increased equity holdings.” The key to this, he says, is more blue chip stock coming to the market via privatisation. “In the past two months we have seen two important IPOs. PKN, the large national oil company and the second tranche of the government’s telecoms holding have boosted the market significantly, and given investors confidence. Even so, the capitalisation of the market should be a far higher proportion of GDP.”
With current fund equity exposure in the 15% to 18% band – low by international standards – Mizerak has an explanation. “Quite simply we have to be prudent in our asset allocation. In the reform calendar we are just getting started, and we have to keep a very watchful eye on our returns, or our investors could get nervous. In fact, current equity holdings are a little more aggressive than we envisaged just one year in, but caution remains the watchword.”
Simon Brimbleton, at Callund Consulting in Maidenhead, has extensive experience of Poland and its pension reforms, and he also expects the new investment funds to be big players in the domestic equity market providing much needed liquidity. He is circumspect about the role of the consultant in Poland. “The second pillar gives individual choice, but there is no great role for the consultant in this area. The third pillar, when it comes on stream may be very different, however, offering opportunities for the whole range of consultancy services.”
Mizerak confirms that consultants are just beginning to make their presence felt in Warsaw in advising on asset managers, but he feels the market is still underdeveloped and questions whether there is a great demand for those services at the moment.
On the question of fees, he points out that pension funds are currently regulated by law and limited to 60 basis points, but adds that asset management fees generally have been squeezed recently.
“Fixed-income funds have suffered due to lack of demand and the increased competition. On the whole, however, fees are probably still high by international standards, especially equity portfolios where a $1m fund can earn a 2% to 2.5% fee. That has come down from 4% to 5% in the early days of 1994-5,” he says.
Wolfgang Bauer, at Poland’s oldest portfolio manager TAIB Investment Bank, says funds boast a broad spectrum of fees, as “little consolidation has taken place so far”. He adds, however, that they have come from the typically high levels of an emerging market to more international levels of between 0.5% to 2.5%. “Some fund sectors, such as the money markets, have even plunged below international levels mainly due to stagnant demand,” he said.
This giant may be stirring, and all eyes will be on the success of the troubled third pillar of pension reform as we go into the next century.