Two-way traffic ahead

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Asset management in the EU’s
central and east European members
states remains dominated
by the second pillar pensions system
that most of the countries have
adopted. While some of the pension funds
rank among the top 1,000 in Europe, the
investment fund industry is still small.
According to data from , the European
Federation of Investment Funds and
Companies (Fefsi), as of the end of
June 2004 the Czech Republic, Hungary,
Poland and Slovakia had a combined
market share of only 0.3% of the
€5,158bn of net assets in UCITS and
other nationally regulated funds.
Compared with June 2003, when
assets of the 23 members grew by 7.1%,
the Czech Republic had a below average
growth rate of 5.5%, while Hungary's
total assets fell by 1.5%. Poland,
with the largest of the CEE markets,
was up by 9.3%, while in Slovakia, the
smallest of the CEE Fefsi members,
investment assets soared by 32%.
However, in the second quarter of the
year the CEE countries were among
the few to buck the trend and increase
assets under management while most
of the rest of the European funds
industry was suffering from a fall in
confidence over the impact of soaring
oil prices on the world economy and
declines in west European stock
For the CEE asset management
industry, EU accession in May primarily
meant a rapid harmonisation of
the relevant legislation, not all of it
well received. The new Polish investment
act is considered by the market
to have a number of deficiencies.
Likewise the Czech act on collective
investments that came into force in
2004 is not ideal, according to Josef
Benes, CEO of CSOB Asset Management,
the largest Czech investment
fund manager, and awaits further
refinement. One of the act’s achievements
however was to distinguish
between regular investment funds
and ‘special funds’ such as hedge
funds and those dealing with real
In Latvia, on the other hand, harmonisation
rationalised previous regulatory
requirements by allowing
investment companies to manage discretionary
portfolios, previously
restricted to brokerages. Another
legal change, expected next year,
would allow the euro to be classed as
a matching currency alongside the
lats: currently Latvian pension funds
can invest a maximum 30% in nonmatching
For financial houses from the EU-
15, the cost of doing business in the
new members states falls as they no
longer need to set up a physical presence.
Given that most of the main
operators in the new member states
are already foreign owned - for
instance, 17 of the 18 investment
houses in the case of Poland - the landscape
will not change that significantly.
However, Benes warns that
the local investment houses can
expect competition in private banking
and consequent pressure on fees.
In the longer term the asset management
industry has to benefit if
membership delivers the promise to
increase wealth. According to a study
published by Pioneer Pekao, the largest
Polish investment manager, and its Italian
parent Unicredito, personal wealth
in the “new” Europe (including Bulgaria,
Croatia, Romania and Turkey
but excluding Slovenia), personal per
head was only e3,998 in 2003, compared
with e24,174 in the EU-15.
The study forecasts, nevertheless,
that household wealth will rise considerably,
with more money being
channelled into private pensions,
stocks and mutual funds, rather than
being hoarded as cash or kept on
deposit. By the end of 2007, the study
predicts investments into mutual
funds will have risen by 29%, pension
fund assets by 27% and securities by
17%, compared with only 8% for
bank deposits.
However, a number of the new EU
members had had major domestic
political problems. In Poland the
embattled prime minister Leszek
Miller resigned a day after EU accession,
while his successor Marek Belka
faces continuing problems of leading
a government without a parliamentary
majority. In July the Czech prime
minister Vladimir Spidla was replaced
by his deputy Stanislav Gross. In
August Hungary’s premier was forced
to resign, while the following month
the Latvian government collapsed. In
October the ruling Liberal Democracy
of Slovenia was swept out of
power in October’s general election,
to be replaced by a centre-right
The changes have generally been beneficial for the investment industry.
In the case of Poland, both the bond
and equity markets benefited. “The
former prime minister and government
had low credibility, which
adversely affected the rating of Polish
debt, and was a problem for the fixed
income market,” notes Zbigniew
Jagiello, president of Pioneer Pekao
TFI, Poland’s largest investment fund
company with around a third of total
assets under management. The new
administration also benefited the
equity market. The new treasury minister,
Jacek Socha, former head of the
Polish Securities Commission, is an
enthusiastic advocate of privatisation
and accelerated the sale of PKO BP,
Poland’s biggest retail bank, whose
November flotation pushed the Warsaw
stock exchange to record levels.
The exchange has also had a record
number of IPOs in 2004.
Poland’s second pillar pension funds
are major players on the Warsaw Stock
Exchange, the region’s largest bourse
by market capitalisation, while the
pensions system itself is also the
largest. Assets as of the end of September
grew by 37% year on year in
Polish zloty terms to total
PLN55.7bn (€12.7bn). Of these,
bonds accounted for 61% of assets
and equities 32%. While the second
pillar and investment funds are managed
by separate companies, a new
pensions product, the individual
retirement account launched in September
2004, can be offered by a
range of providers, such as banks, brokerages,
investment and insurance
The Polish investment fund industry
grew to PLN35bn of assets under
management in October 2004, from
PLN33bn a year earlier. The structure
by share of asset class has changed
markedly since 2003, when the bond
market was hit by poor economic
data and contamination from the
massive bond sell-off in Hungary.
As of October 2004, balanced
funds accounted for 22%
against 7% 12 months earlier,
pushing bond funds into second place
with 21% (against 48% a year earlier),
followed by money market funds at
17% (unchanged from 2003), and stable
growth funds (a type of voluntary
pension product), equity and foreign
bonds at 12%. In 2003 the respective
market shares of the last three were
12%, 6% and 8% respectively.
Equity funds have been this year’s
best performers, with returns of 15-
20% against 8-10% for balanced funds
and 4-6% for fixed income, reflecting
a high confidence in the Warsaw
stock exchange.
Jagiello cautions that Polish stocks
are now overvalued, and prices set to
become more volatile in the near
future, and that clients should be
shifting into safer fixed income and
money market funds.
Meanwhile fixed and money market
funds have since June suffered the
inevitable competition from bank
deposits as a result of three interest
rate hikes, totalling 125 basis points,
because of inflation fears. Jagiello
nevertheless forecasts that the second
half of 2005 should be a good year for
fixed income funds.
In Hungary fund performance was
less volatile than in 2003. The total
size of assets under management as of
the end of May 2004 was 2.144bn
Hungarian forints (€8,252.5bn),
including €2,087.4bn in the mandatory
pensions sector, €1,095.2bn in
the voluntary pensions sector,
€1,942bn in segregated portfolios
and €3,354.9bn in investment funds,
according to data from, the Association
of Investment Fund Management
Companies in Hungary
(BAMOSZ). Since the beginning of
the year the mandatory and voluntary
pensions sectors has grown by 16% in
forint terms, and segregated
portfolios by 22%.
The investment fund market has
contracted by 27% year on year and by
7% since the start of the year, largely
because of an outflow of money from
bond funds, following last year’s
interest rate rises. Domestic bond
funds still account for the largest proportion
of investment funds, 48% as of
end May 2004, but this is significantly
down on the 66% share 12 months’
Money market funds are the second
biggest class at 25%, followed by
international securities (11%), property
(8%), equity (7%) and balanced
funds at 1%. Since May 2003, bond
fund assets had fallen by 47% and
those of balanced funds by 46%, and
those of money markets by 14%.
The big gainers were international
funds up 77%, equity up 56% and
property up 44%. Equity investors
nevertheless favoured the international
market - international equity
funds totalled HUF 60.2bn against
HUF 55.3bn in domestic equity
funds - which with hindsight was not
the best decision, as the Hungarian
stock market was one of the world’s
best performers in 2004.
In the Czech market, the two main
branches of asset management are private
pensions and investment funds.
The private pensions market as measured
by participants’ funds, totalled
CKr89.101bn (€2.8bn) as of the
third quarter of 2004, a year on year
rise of 22% in Czech crown terms.
There is no second pillar as yet, but an
all-party parliamentary group is currently
examining a comprehensive
reform of the pensions system.
The investment fund industry is
one of the longest established,
with a long history of distributing
foreign funds. Assets under management
by members of the Union of
Investment Companies of the Czech
Republic (UNIS), fell to
CKr108.83bn (€3.4bn) as of the end
of June 2004, from a historical high of
CKr114.38bn 12 months’ earlier,
(primarily because of tax changes).
The big event for the market has been
the Prague stock exchange’s first IPO,
of the pharmaceutical company Zentiva,
which floated in June, along a
record turnover on the exchange. “It
created a very positive attitude
towards the exchange, following on
from a good year for Czech blue
chips,” notes CSOB’s Benes. Equity
funds based on Prague-listed stocks
have produced returns of 11-12%
compared with 4% for bond funds and
slightly less for money markets. Those
mixed funds with a high proportion of
central European assets have also produced
good returns, of 10-20%.
However, Czech investment fund
holders remained focused on money
market funds, which accounted for a
hefty 51% of all investment fund assets
as of mid-2004, a share unchanged from 12 months ago. The share of
bond funds declined to 21% from 27%
a year earlier, while the equity portion,
although up from 2 to 4%, remains
tiny. In such a risk-averse environment,
CSOB three years ago
launched capital guarantee funds.
Although they provide interest
income - the principal is guaranteed -
the underlying assets are worldwide
equities. Benes describes these as an
introduction to equities for traditionally
risk-averse investors.
In neighbouring Slovakia the investment
fund industry totals around
SKr54.6bn (€1.4bn) according to
data from Slovakia's Association of
Asset Management Companies.
Again money market funds dominate,
accounting for 56% of total net asset
value - declining interest rates and a
strengthening currency have been
important determinants here - followed
by bonds at 36%. “Their performance
has been good in absolute
terms, and also compared to international
markets,” notes Martin Duriancik,
portfolio manager of Tatra
Asset Management. Balanced and
equity funds account for a small 5%
and 3% respectively. “The core of the
business is still conservative,” he adds.
Like the Czech Republic, Slovakia has
a long established private pensions
industry; unlike its neighbour, it has
opted for a mandatory second pillar
system, which starts operating at the
start of 2005.
In addition to a largely voluntary
pensions market - mandatory funded
pensions only apply to selected professions
- Slovenia has a rapidly growing
fund market, totalling some
187.1bn Slovenian tolars (€780.2m)
as of mid November. The number of
fund holders has rocketed, to nearly
88,000 as of November, from 58,781
at the end of 2003 and 37,965 a year
earlier. Balanced funds are by far the
most popular, accounting for 69% by
assets, followed by equity at 27% and
bonds at a mere 4%. The biggest are
Galileo (mixed) and Rastko (equity),
both managed by KD-Investments,
Slovenia's largest investment manager
in terms of market share.
Slovenians have a high savings rate
by regional standards, but one of the
lowest investments rates in the EU for
mutual funds. Although the Slovenian
market has been to-date a local
industry, foreign fund managers are
set to present a challenge. In August
Raiffeisen Krekova Bank, the Slovenian
subsidiary of the Austrian group,
became the first bank to receive a
licence for marketing foreign funds
in Slovenia.
The Slovenian investment funds
industry has undergone some of the
most profound legislative changes.
The 50-odd privatisation funds that
were established from 1994 onwards
as an investment vehicle for privatisation
vouchers, and which never succeeded
in accumulating sufficient
assets, were eventually obliged by legal
changes in 1999 to transform into
mutual funds, joint stock companies
or investment companies. By the end
of 2003 all had converted, mostly into
investment companies, and in a number
of cases into several new entities.
In the Baltic states, money market
funds are, as in the Czech Republic,
highly popular, although for banks
cross-marketing, they present a challenge
of fee income versus interest
earnings, as they inevitably erode the
deposit base that funds loans. Pensions
account for the largest portion
of assets under management. In
Latvia, the state-funded scheme had
564,169 members and net assets of
Lats35.3m (€53.2m) as of the end of
June 2004, the private system 33,140
members and assets of Lats23.4m,
according to data from Latvia's
Financial and Capital Market Commission,
the regulator for the pensions,
securities and investment fund
The investment fund industry as of
the third quarter of 2004 consisted of
17 funds, of which 12 are open, managed
by nine companies. Net assets
totalled Lats31.2m (€46.5m), a year
on year rise in Lats terms of 43%. By
sector, government and corporate
debt securities (including money
market funds) accounted for 44% and
43% respectively, and equity 12%
(compared with 5% a year earlier).
Hansabankas's money market fund,
the oldest investment fund, accounts
for around half the market in
terms of assets.
“The absolute figures are small but
the growth rates are very good,” notes
Sergey Medvedev, president of Parex
Investment Company. “Our funds
grew by 217% in the first nine months
of the year.” The company manages
seven funds, including the largest
closed-end fund (investing in real
estate). Unlike the heavily retail oriented
markets elsewhere in central
Europe, Latvian investment funds
have a broader range of customers.
“Corporate clients invest in money
market funds for liquidity management
as interest rates are falling, insurance
companies in equity and balanced
funds, while pension funds use
our funds to gain exposure to different
asset classes,” explains Medvedev.
As of mid 2004 investment funds
accounted for 3% of state-funded pension
fund investment portfolios and a
sizeable 11% in the case of private
ones. Parex also offers two US dollardenominated
funds, one invested
exclusively in Russian equity (which is
priced in dollars), the other in east
European bonds, including a sizeable
proportion of Russian bonds, also
priced in dollars. “There are still many
Latvian clients investing in dollars,
but the dollar bond fund is losing
ground to our Euro-denominated
bond fund,” Medvedev adds.
Estonia has the largest state pensions
system, EEK2bn (€130m) as of
the end of the third quarter of
2004,which has grown rapidly since
its launch in January 2002, despite
being only compulsory for the new
labour market entrants, and requiring
additional contributions from participants
salaries in addition to the usual
diversion of a portion of the state pension
fund contribution. The much
smaller third pillar system had some
EEK139m in pension funds, in addition
to pension-insurance type products.
According to Mikhel Oim, head
of Hansa Asset Management, growth
in the second pillar system will probably
level off as only 15-20% of those
eligible to sign up have not done so.
Hansabank itself has 50% market
share of the assets under management
in the second pillar system “Most of
the effort will now be on performance,”
he adds.
On the investment fund side, there
were 17 contractual investment
funds managed by seven companies.
“Fixed income and money market
funds are stable, but losing market
share as equity funds pick up,”
reports Oim. The most popular are
funds based on central and east European
equities - the Baltic stock markets
themselves are relatively small.
On the fixed income side, bond
investments are all foreign as Estonia
has by law to try to run a balanced
budget and thus has not developed a
treasury market.
Estonia, and Lithuania have their
currencies pegged to the euro, and
both joined ERM-II, the mechanism
that countries must belong to for two
years before adopting the euro, in
June 2004. Latvia will be repegging
its currency from the Special Drawing
Right to the euro in January 2005.
“We introduced an equity fund with
units denominated in euros, which
helped to sell our funds in Latvia and
Lithuania”. “After Latvia replaces its
peg, our cross border business will
increase.” The investment company
is also trying to sell its equity products
in Finland, registering its UCITs
under the EU passport. “In the short
term this could be a bigger driver than
local equity,” adds Oim.
Lithuania’s asset management
market has lagged behind because
of delays in legislation. However, in
2003 parliament approved both a
UCITS-compatible law on collective
investments, which finally
allowed mutual funds to be offered
to the public, and a second pillar system,
which started operating
in 2004.
According to Saulius Racevicius,
managing director of VB Investment
Management, the mutual
funds market as measured by assets
managed by members the Lithuanian
Investment Management Association
had grown to more than
LTL550m (€159m), with global
and central European equity funds
the most popular at present.
Although still a young market
overall, the current trends, according
to Racevicius, include a switch
from fixed income to riskier assets,
accelerating growth of assets under
management, and more cross border
operations. With close to 90% of the
capital of Lithuania’s commercial
banks owned by foreign institutions,
the Lithuanian market is also a platform
for cross-border operations. VB
Investment Management is itself
owned by Sweden’s SEB Bank and sell
its parent’s range of funds in addition
to its own brands.

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