Mutual funds going from strength to strength in CEE

Investment funds and other types of asset management products have shown record growth rates in Central and Eastern European countries in the past few years. In mid-year 2006, assets in mutual fund vehicles in the region topped ?34bn, rising from ?19bn in 2004. They are forecast to grow by between 20 per cent and 30 per cent annually. Christian Petter, head of business development for Central and Eastern Europe at BNP Paribas Asset Management, addressing an international audience at the recent PWM conference in Vienna, said that the tremendous growth of mutual funds assets under management is the result of various factors. Economic growth is robust, as demonstrated by the average gross domestic product (GDP) growth of 6 per cent in 2006 versus growth of 2.4 per cent in the eurozone. Other factors include rising wages, monetisation through credit of local economies and pension reform. The interest of foreign groups who, having purchased ownership stakes in local financial institutions, want to recoup these investments via sales or fee generating products and services, also comes into the equation. Regulatory initiatives and increased investors’ confidence in the value and safety of pooled investments complete the picture. Analysis shows that investment funds held by households as a percentage of total household financial assets have clearly grown since 2000, reaching over 10 per cent in Poland from 2 per cent in 2000 and 17 per cent in Slovakia from 1 per cent in 2000. However, there is still a long way to go. Analysis conducted by Pioneer Investments, one of the international players more active in the region, estimated that in the CEE region currency and deposits are still largely preferred over mutual funds. In fact, currency and deposits represent around 62 per cent of financial assets of households, which is double the percentage held by Western European households. However, the outlook is positive, and the ratio of investment funds to total deposits held by individuals in the region is certainly growing. “It is very important to check this ratio of investment funds to total deposits, because the main source of money flowing to mutual funds in all these countries are coming from banking deposits,” said Zbigniew Jagiello, chief executive officer at Pioneer Pekao Poland. Currently, the level of investment funds per capita is 20 times lower in this region. High expectations for the CEE investment fund industry were based on passing two major milestones. While the first, EU membership, has been achieved, the second goal of euro adoption remains some years away. In the Czech Republic, which opened the doors to foreign funds before joining the EU in 2004, there are currently 1,000 foreign funds registered for distribution, which currently gather 40 per cent of total mutual fund assets in the country. In Poland however, even if the number of foreign funds registered is larger than the local domiciled ones, it is estimated that cross-border funds represent only 1.5 per cent of the total ?27bn that the country has in total mutual funds. Indeed, Marek Kulczycki, chief executive officer at Deutsche Bank, PBC Poland in Warsaw, explained very well the difficulties of an open architecture provider when it comes to selling international funds. Poland during the last two years has enjoyed a particularly strong bull market, with the Polish stock market index growing by as much as 240 per cent from 2002 to 2005. Consequently, returns on the local investment funds are much higher than the international funds. “It is difficult to convince our customers that they should diversify their portfolio, but we warn them that this is not going to last forever,” he said. In Poland, Deutsche Bank PBC follows a similar guided architecture model implemented by the bank in its German home market. Deutsche’s Polish operation distributes international funds managed by three third-party companies, BlackRock, Franklin Templeton and Superfund. Although only 13 per cent of total sales come from these third-party funds, Mr Kulczycki defines it as a success story: “The problem is that local customers, in the majority of the cases are not educated enough to understand the difference between a simple deposit and the investment fund,” he said. Customers in fact expect to know with certainty how much a fund will deliver in the future, the way a deposit does, and certainly advertisements of funds based on past performance to attract customers does not help to clarify ideas. “Advice to customers is becoming a teaching profession,” said Mr Kulczycki. “Our advisers have to be trained on how to explain to customers the risk that the product involves. It is just an investment fund, but it is seen as a very complex one.”

Petter: robust economic growth has fuelled surge in mutual funds