Asset management in the central and east European (CEE) states has been booming as solid growth leads to more disposable income. The eight CEE states set for EU membership in May 2004 – Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia – are all recording growth higher than that in Euroland, ranging from 4% estimated in 2002 for Slovakia and 3.1% for Hungary, to 2.1% in the Czech Republic and 1.6% in Poland. In the Baltic states average growth sets to exceed 5%. Asset management has also thrived as pension reforms have created a new class of institutional investor with a significant presence in local capital markets. “There is a strong correlation between GDP growth and investment in asset products, and we’re predicting growth rates of well above 20% a year for the region until 2006, with the Czech Republic and Slovakia leading the way,” notes Wietse de Vries, managing director of ING Investment Management in The Hague.
Pensions and investment funds provide the bulk of asset management business. “This will be a retail market for the foreseeable future,” predicts Johan de Ryck, regional director, central Europe at KBC Bank. “The projections are high, although you are starting from low absolute numbers.” There are some mutual funds aimed purely at institutional investors. ING’s de Vries describes the Polish funds thus targeted as tax-driven closed-end vehicles incorporated and closed within a year, and used by clients to manage surplus cash. In the Czech Republic it manages some assets for private pension funds.
The asset management business is getting increasingly concentrated, and carved up among the big local commercial banks – most of which have been sold to foreign players who thus acquired the dominant position in investment funds – and some of the international European players that made a strategic decision early in the 1990s to invest in the region. Eventual EU membership was assumed years before Brussels made its historic expansion announcement in October 2002. The smaller boutique operations, meanwhile, have been squeezed out.
Financial groups such as ING-Nationale Nederlanden, with asset management operations in Warsaw, Prague, Budapest, and shortly in Slovakia, have used the synergy of bank and insurance branches; ING now runs the second largest second-pillar pension fund in Poland. Others have invested in the commercial banking operations. Erste Bank of Austria, which owns among others the largest saving bank in the Czech republic and Slovakia, has focused on its immediate neighbours. Raifeissen, also of Austria, has subsidiaries in most of the region. In the Baltics, SEB of Sweden owns the largest bank in Lithuania and the second largest in Estonia and Latvia. Branch networks, and in the case of insurance companies, sales forces, are crucial for success. As ING’s Wietse de Vries explains, other institutions have not been open to acting as third-party distributors.
Foreign takeovers and mergers have also introduced some rationalisation into asset management business. Belgium’s KBC, whose strategic holdings in five of the CEE accession countries probably make it the region’s biggest bank and asset manager, has been merging its asset and fund business. In Poland, where it owns Kredyt Bank and the insurer Warta, it is combining the asset management operations. Under Polish law, each subsidiary’s pension and investment fund can be merged should the regulators’ permit it but must remain separate from the asset management company. In the Czech Republic, through its controlling stakes in CSOB, the country’s largest bank and takeover of Patria, the largest independent asset manager, it acquired two asset management groups, since merged into one, and two fund companies that have been merged, giving it 30-35% of local asset management operations. It likewise owns CSOB in neighbouring Slovakia, the country’s third largest bank, where the asset management operations have stayed part of the bank and are used to distribute investment funds.
In Hungary, KBC has a 60% stake in K&H Bank, the second largest in the country and which was earlier taken over by ABN-Amro, which retains a 40% stake. Here it has merged two asset management and two fund companies into K&H Securities Investment Fund Management, and additionally has a separate pension company. In its latest acquisition, 34% of Nova Ljubljanska Banka, Slovenia’s largest bank, KBC has acquired a small asset management operation focused on discretionary management, the Maxima fund company and Skupna pension fund.
An impact of the foreign players has been to introduce new classes of funds. KBC, a market leader in capital guarantee funds, already distributes these in the Czech Republic, and in October launched this type of structure, for clients whose risk tolerance lies midway between the highly conservative bond funds and more aggressive equity products. Erste Bank has launched a longer-term fixed-income for institutional investors in the Czech Republic with similar advantages to UCITs.
The Czech market is considered the most sophisticated in terms of investment fund availability, and additionally has had the longest-established private pensions market, in operation since 1994, and which had a total net asset value of $1.8bn (E1.8bn) as of mid 2020. The market has had a chequered history. Two waves of mass privatisation in the 1990s created a large number of closed-end funds, many of which then transformed into holding companies to escape legal restrictions, largely at the expense of investors. Subsequent legislation has forced holding companies to transform back into investment funds licensed by the Czech Securities Commission, and closed-end funds to ‘open’. Meanwhile the taint of local funds enabled foreign institutions such as ING successfully to launch Luxembourg-denominated funds as early as 1995.
The market share of closed-end funds has shrunk from 90% in 1997 to 40% as of late 2002, with the remainder due for opening or closure by 2003. The number of fund companies has also contracted dramatically, from 155-odd in 1994–96 to 19, with a considerable number currently in liquidation. According to data from UNIS, the Union of Investment Companies of the Czech Republic, the 78 open ended funds of its members had CzK92.32bn (e3bn) of assets as of the third quarter of 2002, a 44% increase year to date. Money market funds accounted for 48.5% of the market, mixed/balanced funds, which include former privatisation funds, 32.7%, bond funds 16.7%, equity 1.4% and fund of funds 0.7%. By regional standards the focus on money market funds, is distorted by definitions as many also include longer term securities. “Money market funds were the first to be distributed after privatisation funds, and were the first step out of savings books into securities,” adds Wolfgang Traindle, head of Erste Bank Asset Management. “But they are declining as people move into bond and balanced fund products.”
The market leader is Investicni Spolecnost Ceske Sporitelny with 44%, followed by the investment funds of Komercni Bank (28%) and CSOB (17%). According to Petr Schut of Investicni Spolecnost Ceske Sporitelny, money market and bond funds currently account for 95% of all sales. The Czech market was the first to allow the sale of foreign funds such as Luxembourg-registered units, which account for some 20% of all assets. “Czech funds are at a disadvantage compared to foreign funds as all profits are taxed (at 15%),” notes Schut. “It is expected that the tax disadvantage should be removed by 2004, while a new act will be discussed in 2003 in parliament to give the industry EU-comparable rules.”
Czech funds grew further in 2002 as more people switched out of savings books because of changes in taxation, and also took advantage of falling interest rates which are down to historical lows with not much room left for further cuts. “The Czech koruna has also appreciated extensively against the euro in the last two years, which raises the risk of some depreciation,” adds Gunther Mandl, senior manager, central Europe at Erste Bank. “That could lead to increased demand for balanced funds, especially for those with a foreign equity component.”
In neighbouring Slovakia, there was a similar initial history, with mass privatisation vouchers being used to buy shares in closed-end investment funds. Slovakia’s growth has lagged that of the Czech Republic, and the funds industry is by far the smallest in the region. According to data from the Slovakian Association of Asset Management Companies, net asset value of open-ended funds of members totalled SKK6.994bn (e167m) as of the end of the first quarter of 2002, those of closed-end funds SKK1.814bn (e43m). The number of foreign open-ended funds rocketed towards the end of 2000 and totalled 53 against 27 local ones. Erste Bank estimates that bond funds accounted for 34% of fund assets under management, balanced funds 26%, stock 23% (largely due to the stock holdings of one large privatisation fund) and cash 17%.
Tatra Bank, owned by Raiffeisen, is the market leader. Erste’s Wolfgang Traindle states that after a slow start Slovakia has become one of the star performers for mutual fund growth. “We’ve seen tremendous growth in the last 18 months,” he says. “Interest rates have come down sharply, and people are looking for alternatives to term deposits, and trust in mutual funds has improved.” For Erste Slovakia has been particularly successful as it built up the asset management business from scratch after purchasing CSOB bank, to a 16% market share.
In Hungary, disaggregated data is not readily available. According to FI-AD, whose database covers 90% of assets under management, as of the third quarter of 2002 the total assets amounted to HUF2,234bn (E9.2bn), of which 35% was managed for investment funds, 32% for insurance companies, 29% for pension funds and the remainder for institutional investors, companies, local governments and private individuals. On National Bank of Hungary data, investment fund assets totalled HUF860bn, with BAMOSZ, the Association of Investment Fund Managers in Hungary accounting for HUF840bn. Of Hungary’s 30-odd licensed investment fund managers, 21 are BAMOSZ members.
Hungary allows outsourcing of investment and pension fund business – legal changes in 2002 enabled investment fund managers also to manage third-party portfolios – and has a significant group of independent asset managers such as Concorde, Equilor, Eastbrokers and Buda-Cash. However, the asset management market remains dominated by large financial groups, all owned by foreign multinationals except OTP and Postabank, which invariably combine a commercial bank (or in the case of Credit Suisse investment banking), insurance company and asset management company, and also sponsor a pension fund. According to FI-AD, the investment fund market is especially concentrated, with the top five (OTP Investment Fund Management, Budapest Investment Fund Management, K&H Investment Fund Managements, CA-IB Investment Management and Raiffeisen Investment Management) accounting for more than 85% of total assets, while in the pension fund market the top five (OTP Investment Fund Management, ING Investment Management, Aegon Securities, Allianz Hungaria Insurance and Hungarian Foreign Trade Bank) account for 60%.
At OTP Fund Management, which accounts for more than half of investment fund assets under management, CEO Peter Holtzer notes that the significance of smaller boutique operations is decreasing as they lack the distribution capabilities of the large groups, and predicts a further concentration in the market which is not big enough to sustain 30 investment entities. The large groups, meanwhile, largely sell their own products, while third-party distribution remains uncommon because of the pricing structure. “While the commission in Hungary is similar to the international market, distribution fees are low, so there is no sales force motivation,” explains Holtzer. “Hungarian investors are not used to paying a 2–4% front-loading.”
BAMOSZ member investment funds in Hungary grew by 24% year on year in forint terms, and by a further 21% year to date by the end of August 2002. Bond funds accounted for 69% in August, followed by money market (18.9%), international securities (4.4%), equity (3.7%), balanced (1.8%) and property (1.8%). Bond funds – some 90% of which are government securities, although increasing numbers mortgage bonds have recently provided some diversification - grew by a further 17.3% this year, and yielded returns of around 4% above inflation. While this is similar to bank deposits, fund investors have higher expectations of returns, explains Holtzer. However, the biggest growth was in equity funds (54.9%) and property (50.6%). The latter kicked off in 2001,
Amendments to the foreign exchange law freed fund managers to invest in any cross-border security, although funds can still only be sold to the Hungarian public by domestically licensed banks and brokers. The capital markets law, which came into effect in 2002, enabled the launch of fund of funds and index funds, as well as permitting the use of derivates, and allowed for investment funds to manage third-party portfolios.
In Poland assets under management have also rocketed. Investment funds as of end September 2002 grew by 43% year to date in zloty terms to PLN17.34bn (e3.6bn). This followed on from 71% growth in 2001. Assets in second pillar funds increased by 49% year to date as of the end of October to PLN29.22bn. In addition the insurance industry had PLN53.4bn of assets under management as of mid 2002. A further asset branch, for which data is not available, comprises the 180-odd occupational private pension funds. All these funds are managed by separate entities as Polish law does not permit outsourcing, but which is generally considered inefficient.
The introduction in 1999 of the second pillar pension programme, which was compulsory for most citizens, turned the majority of Poles into investors and provided a boost for the investment funds. There was a further impetus in 2001 as the introduction of a 20% capital gains tax on bank accounts and certificates of deposits precipitated a rush into funds, which along with Warsaw Stock Exchange listed equities have been exempted until the end of 2003. In 2002 the funds justified their popularity with superior returns. According to data from the Association of Investment Fund Companies, as of mid 2002 bond funds yielded 6.32% and money market funds 4.9% against 3.43% for bank deposits. Current asset breakdown data is not available, but at the end of 2002 bond funds accounted for 55.7% of all assets, money market funds 20.1%, hybrid funds 14.9% and equity 9.3%. The number of funds rationalised from 81 in 2002 to 49 at the end of 2001, but rose to 116 as of September 2002, including five foreign funds, two asset allocation vehicles and five closed-end funds. The hybrid funds are mainly balanced, but also include structures such as guaranteed closed-end funds. Some investment firms also offer dollar or euro denominated funds, but these have suffered in 2002 as a result of the Polish zloty’s strong appreciation against both major currencies.
Of the 19 investment funds or TFIs, Pioneer Pekoa had a 25% market share of assets, followed with PKO/Credit Suisse with 21%, ING with 12% and DWS Polska, in which Deutsche Bank is the sole shareholder, 9%. Insurance companies such as Commercial Union and the former state-owned PZU and Warta also offer investment funds as well as life insurance products linked to investment performance, but in terms of market share have made more of an impact in the second-pillar pension market: Commercial Union’s open pension fund remains the largest here, followed by ING-Nationale Nederlanden.
According to Cezary Iwanski, chief investment officer at Pioneer Pekao Investment Management in Warsaw, the most successful of the TFIs are investment companies with a commercial bank link or ownership. Pioneer, which introduced mutual funds into Poland in 1992, initially distributed through brokerage houses. His fund company is now a joint venture with Pekao, Poland’s second largest bank after PKO and majority owned by Italy’s Unicredito. ING has a major bank franchise through its ownership of Bank Slaski.
Slovenia, with a per capita GDP on a par with Greece and Portugal, is the richest of the EU accession countries, with a high propensity for savings and until recently a propensity to keep foreigners out of its privatisations. The initial privatisation investment funds of the early 1990s had a troubled time as the government did not release sufficient privatisation assets to match the vouchers issued. Under a new act adopted by parliament in November 2002, they have to transform into mutual funds. The act will also bring Slovenia closer in line with EU laws by making independent custodial services obligatory for the investment industry.
Overall, the largest asset managers are state-owned: the pension company Kapitalska Druzba and the Rehabilitation Fund. The mutual fund industry consists of 11 asset management companies running 18 funds between them. The first mutual fund, Galileo, was launched back in 1992 by KD Investments, part of the large Slovenian financial KD Group, and is Slovenia’s largest. Along with Rastko, like Galileo a multi-asset fund, and its KD Bond fund (which includes bank and other issues in addition to government securities), the investment house accounts for 61% of mutual fund assets in Slovenia – total market assets are around e240m – the most intense example of market concentration in the region. Other big funds are Alfa, managed by Probanka Investment Company, with 12.4% of market assets, and Skala, managed by Kreikova Investment, with 5.7%. The funds are distributed through agents, post offices, a couple of investment centres in Ljubljana, and a local insurer. “Growth this year has been enormous,” notes Saso Ivanovic, portfolio manager at KD Investment Asset Management Company. Assets of KD Investments’ three funds rose from E34m at the ebginning of 2002 to E143m 11 months later. This has been largely driven by the exceptional performance of the local stock exchange over the last two years (see box), and consequently equity funds, unlike other markets in the region, are by far the most popular asset class. According to Ivanovic, the Galileo fund has produced a 62% return year to date, Rastko 63% (the industry average was 60%) while the bond fund yielded 18%. “Our funds can also invest abroad, so in the future we can compensate for any slower growth in our markets by investing abroad,” adds Ivanovic.

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