Coming up to scratch
The Eastern European countries which joined the EU in May were required to amend their fund legislation. Ekaterina Alexeeva of Cadogan Financial looks at the impact on their local markets
Eight Central and Eastern European ‘accession’ countries 1 joined the EU in May this year. Before joining, however, these countries were required to amend their fund legislation to include the provisions of the UCITS Directive 2.
This legislation is intended to simplify the access of foreign UCITS to these countries’ domestic markets and will allow fund managers of the new EU member states to distribute their UCITS funds to other Europeans.
With the amended legislation fresh on the statute books, now is a good time to take stock of how the fund industries of the accession countries have fared and what impact they have had on their local markets. Their success or failure could contain valuable lessons for potential newcomers to those markets*.
The development of domestic funds in 2003 was characterised by:
- modest growth in the value of assets under management: bond funds dominate these markets and these funds, with rare exceptions, failed to show any impressive growth in 2003. In most countries, stagnation, and in some instances, a decrease in the value of such funds was caused by both the falling prices of underlying assets and poor sales or net redemptions.
Interest in ever-popular bond and money instruments was undermined by interest rates ceasing to fall and by a relative revival of interest in equities. A decrease in the value of fixed-interest funds was only just compensated for by the sharp growth of equity funds and the equity component of balanced funds;
- the continuation or completion of the transformation/liquidation of privatisation funds in countries where such transformation was made a legal imperative (the Czech Republic, Lithuania, the Slovak Republic and Slovenia);
- the further development of pension reform, which permits investment funds to play a part in retirement provision, either directly or via pension funds or special tax favourable arrangements (wrappers);
- the preparation and promulgation of local fund legislation, adjusted to comply with EU legislation.
A brief overview of each country follows.
The Czech Republic
The total value of Czech investment open-ended funds 3 rose 5% on 2002, reaching 105.2bn Kcs (E3.2bn) at the end of 2003.
The value of equity funds more than doubled. The value of funds under management invested in fixed-income and money-market instruments, constituting the remaining 70% of total value of funds under management, remained broadly static, although they experienced net redemptions 4 . Nine domestic corporate closed-ended funds are traded on the stock exchange.
The foreign funds of about 25 providers (764) are currently sold in the Czech Republic, primarily through banks associated with fund providers. The list of providers includes such well known names as ABN Amro, HSBC, Credit Suisse, Franklin Templeton, ING, Julius Baer, Pioneer and Reiffeisen.
The total value of open-ended funds under management in Estonia grew by 48% in 2003, reaching 6,147m EEK (E0.4bn) at the end of the year. Fifteen foreign funds from eight providers, including Nordea, JP Morgan and Franklin Templeton, are currently sold in the country.
At the end of 2003, the total value of Hungarian investment funds (of which 113 are open-ended and eight closed-ended) was 882bn Ft (E3.4bn), 5% less than at the end of 2002. The main cause of this decrease was the fall in the value of bond and money-market funds, representing about 75% of total funds under management, which was affected both by falls in bond prices and rising redemptions. This, in turn, was due to the Central Bank of Hungary’s decision to raise interest rates to defend the forint.
The weakened forint increased the attraction of international funds, and real estate funds have become more popular. Equity funds comprised only 5.3% of total value of funds under management, so their growth in 2003 could not outweigh the reduction in the fixed-income sector.
Twenty-nine foreign funds from three providers – Credit Suisse, Paribas and Bayerische Landesbank – are currently distributed in Hungary.
The total value of open-ended funds under management has risen to 33.2bn Zl (E7bn), a rise of 48% on the previous year, with the greatest increases being in the value of equity funds, which more than doubled, and balanced funds, which more than tripled. This means that Poland remains the country with the biggest fund industry of all the Central and Eastern European accession countries.
Bond funds and money-market funds comprised 65% of the total value of funds at the end of 2003 and did not suffer a reduction in the value of assets under management during the year. Fourteen corporate closed-ended funds, originated at the time of mass privatisation, are traded on the stock exchange, whose specialist NIF price-based index has lost 1.7%.
No foreign investment funds are distributed in Poland at present.
By the end of 2003, the total assets of Latvian funds had doubled, reaching 26.5m LVL (E37.9m). The equity component of these funds has grown in value, but still remains tiny, comprising only 4.6% of the total value of funds under management.
During the year, domestic funds’ exposure to securities of foreign issuers grew substantially: at the end of 2002 more than 90% of funds’ value was invested in Latvian securities, but by the end of 2003 this amounted to only 68.7%.
Four foreign funds are currently distributed in Latvia via the banks.
The fund industry in Lithuania is small: it is represented by three contractual open-ended funds and two corporate open-ended funds, which have appeared only very recently. By 2004, all the corporate funds formed to participate in privatisation had decided to become ordinary joint-stock companies.
Foreign investment funds from two providers are also distributed.
The Slovak Republic
Between the end of 2002 and the end of 2003, the total value of open-ended funds in the Slovak Republic more than doubled, reaching 33.7bn SKK (E818.7m).
The value of equity funds doubled, reaching 1.6bn SKK (E38.9m). Unlike most other countries, bond funds and money-market funds increased in value, with bond funds growing by 200% and money-market funds quadrupling to E303.7m. The reasons for this include investors’ preference for more stable fixed-interest products and the increase of bond prices caused by yields falling.
According to the Slovak Association of Management Companies, money-market funds investing in the local currency have also been popular and are viewed as a panacea for the effects of the falling US dollar.
There is also a small segment of contractual closed-ended funds in the country, the total value of which is E1.86m – almost unchanged from the previous year.
Six foreign funds providers, including ING and Pioneer, currently distribute 181 funds in the Slovak Republic.
In Slovenia in 2003, the total value of funds under management fell, comprising 436bn SIT (E1.8bn) by the end of the year, less than their total value at the end of 2002 – 470.3bn SIT (E2.03bn).
On 31 December 2003, the terms for the transformation of privatisation funds into classical closed-ended funds or ordinary joint-stock companies or contractual funds expired. As a result of this transformation, as of April 2004, the fund industry was represented by 11 corporate closed-ended funds, 21 mutual funds (contractual, open-ended) and three privatisation funds, which mean to transform in the near future.
According to the annual report of the Ljubljana Stock Exchange, by January 2004, at least 14 privatisation funds lost their fund status and became ordinary joint stock companies.
Foreign funds are currently not distributed in Slovenia.
Ekaterina Alexeeva is senior researcher at Cadogan Financial, a consultancy specialising in the development of collective investment funds worldwide. Over the last decade Cadogan has worked with governments and regulatory authorities to create new collective investment institutions and to develop existing ones in more than 30 countries. For more information visit Cadogan Financial
Representatives of regulatory authorities and investment funds’ professional bodies: Pavel Prokes (Czech Republic); Arbo Kalk (Estonia); Andras Temmel (Hungary); Juris Bogdanovs (Latvia); Nijole Gerdvilyte (Lithuania); Magdalena Jagodzi ska and Katarzyna Czerwi ska (Poland); Lubor Kysel and Boris Procik (Slovak Republic); Karmen Rejc (Slovenia)
*All figures are correct at the time of writing – April 2004
1 The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia
2 Council Directive of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment un transferable securities (UCITS) (85/611/EEC) as subsequently amended by the Directives 2001/107/EC and 2001/108/EC
3 Only members of UNIS – fund trade association, which covers more than 90% of the industry
4 Trends in the European investment fund industry in the fourth quarter of 2003 and results for full-year 2003 by FEFSI