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IPE.com 1/Feb/05: 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 prices.

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 currencies.

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.

In the case of Poland, both the bond and equity markets benefited. 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 companies. The Polish investment fund industry grew to PLN35bn of assets under management in October 2004, from PLN33bn a year earlier.

In Hungary fund performance was less volatile than in 2003. 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.

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.

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%. 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. 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 industries. The investment fund industry as of the third quarter of 2004 consisted of 17 funds, of which 12 are open, managed by nine companies. Unlike the heavily retail oriented markets elsewhere in central Europe, Latvian investment funds have a broader range of customers.

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. 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.

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. The Lithuanian market is also a platform for cross-border operations.

By Krystyna Krzyzak

Abridged from Investment and Pensions Europe