Bulgaria's €365m Doverie welcomes the relaxation of regulations but says there's still some way to go, finds Thomas Escritt

Bulgaria's pension system achieves the not inconsiderable feat of placing miners, sailors and ballet dancers on the same side of the fence.

Under the country's three-pillar pension system, people who typically enjoy shorter careers are lumped together into so-called professional pension funds, while the rest of the population sign up to general pension funds.

Authorised pension management companies can run one of each type, and they may also offer a third pillar voluntary fund. Nine companies are competing for Bulgarian retirement savers' business, including international financial services brands like ING and Allianz. The market leader, both in terms of number of clients and assets under management, is Doverie, which was acquired by the Austrian insurer Wiener Städtische last year.

Like all other pension providers in the country, Doverie is legally separate from the fund it manages - the fund itself is owned on a mutual basis.

Miroslav Marinov, CFO of Doverie, is enjoying the fruits of liberalisation from the government side. "Even a year and a half ago, regulation was very stringent," he says, adding that his fund has been careful not to move too fast. "Our transition to the new rules was planned to be slow. We made gains from the local stock exchange, but now we are moving towards international diversification."

The big change came at the beginning of 2007 when, with EU entry, pension funds were finally allowed to treat securities from other EU countries in the same way as domestic investments, effectively expanding the home investment universe.

The rules still err on the side of caution. Mandatory funds are allowed to invest no more than 20% of their portfolio in assets denominated in currencies other than the Bulgarian lev and the euro, regardless of hedging. Other restrictions are more curious. For example, Bulgarian funds are prohibited from issuing mandates to asset managers. The only pooled investments permitted are exchange-traded funds and Bulgarian-registered mutual funds. Marinov finds the restriction puzzling. "I am one of those asking the regulator to change this, but they are not willing."

Funds are also prohibited from investing in initial public offerings even of the most promising companies. "One of the main problems now is that even though the stock exchange is not so well developed, we have some new interesting companies going into IPO," says Marinov. "But we cannot invest in IPOs at the very beginning. We have to wait for the company to be listed before we can buy."

Doverie has been careful not to move too fast with international exposure. The fund has 75% invested in Bulgarian assets, 60% of which is fixed-income. "Most of the fixed-income exposure is in local bonds, including government bonds, mortgage bonds, corporate bonds and municipality bonds. We have a small portion of international bonds as well," says Marinov.

Some 25% of the fund is therefore invested abroad, though not exclusively in the euro zone. International exposure is somewhat cautious. For example, global emerging markets exposure is achieved through mutual fund holdings targeting the BRIC - Brazil, Russia, India, China - countries. Marinov is satisfied with the state of play, however. "I think it is proper to say we have international diversification, not EU diversification."

The domestic portfolio is managed in-house, though the fund also has an investment consulting contract with a local asset manager.

Bulgaria's law on pension fund holdings is very explicit, stating precisely which asset classes are permitted. In addition to fixed-income and equities, real estate investment companies and direct real estate are also permitted, and Doverie has exposure to both. But commodities, hedge funds and private equity are all off limits.

Derivative exposure is permitted only insofar as it is used to hedge out currency risk.

Diversification is increasingly important, however, given the size of the local stock exchange, and Marinov argues that Doverie is leading the way. "There are still some great returns on the stock exchange, but we are not so aggressive on the local market. We think that, while the stock exchange is developing, it has not yet gone far enough. It lacks transparency." He also has concerns about corporate governance, which, can make investment decisions hard to take. "Liquidity on the stock exchange is not enough," he adds.

This might be an especially serious issue for Doverie, which, with 1.2m members in its three funds and assets of €365m, is the largest of the country's funds.

The company owes its size to its long standing. Its first pension insurance product was launched in 1994, predating any formal legislation on private pension saving in the country.