Increasingly savvy Balts turn to investment funds to beat inflationary curve

  • 2007-05-02
  • By Dorian Ziedonis

NASCENT MARKET: Nordea's Kristians Pudans says only 7 percent of Latvian households invest in funds.

Hedge funds and private equity investors are pushing Baltic stocks to new highs, while almost weekly a new East European investment fund of some sort is created to help worldwide money managers gain exposure to the exuberant Baltic economies. Dorian Ziedonis looks at whether investors in the Baltics are joining in, and what are some of the new investment products banks are offering their customers.

Since joining the EU, Baltic stock markets have out-performed those of Western Europe as foreign investors rushed in to buy shares of undervalued companies in an environment of rapid economic growth. At the same time the local population's rising personal incomes means that they are also in a position to gain exposure to the growth and make long-term financial decisions. And what better way than to put money with investment funds?
Sergejs Medvedevs, chief operating officer at Parex Bank, says that the number of investors at Parex, Latvia's third largest bank in terms of assets, has approximately doubled over the past year, and that local investors are becoming more assertive.
With inflation levels where they are 's as of March inflation in Latvia amounted to 8.5 percent 's they are looking for asset management services.

Hansabank reports that its portfolio of managed equity funds, which are open to foreign and local investors and are invested in companies in Central and Eastern Europe and the CIS, have recently surpassed 500 million euros in invested assets.
Banks use a variety of strategies in offering investment funds. Some build their own in-house stock-picking teams to research and buy company shares. Large, foreign owned banks in the Baltics may already have a large investment research department in their home country which runs the funds. They might also offer investors independent locally registered and managed investment funds or funds offered by global giants such as the Templeton fund group.
In the words of Pertti Rahnel, marketing manager of investment funds at Hansabank, "The number of investors in their own funds is growing rapidly, and the investment culture too is developing very rapidly."

The Baltics are, however, a nascent market. Compared with neighboring Sweden and Finland, where 39.5 percent and 27.7 percent, respectively, of the countries' assets are held in investment funds, in Latvia this number is only 1.1 percent, reports ICI.
"There is a lot of space and need for education in investing," said Marijus Kalesinskas, chief investment officer at SEB VB Asset Management. He said that clients tend "to have difficulty assessing risk levels for their investment portfolios, where many are over-aggressive and lack diversification, and some too conservative."
Awareness and understanding of financial products is growing. Walk into any bank and you'll find investment guides and brochures explaining their products.

Still, Nordea's in-house survey reveals that only 7 percent of Riga's residents invest in funds, a figure attributable to low disposable incomes and customers with other priorities, such as borrowing to buy property or for consumption, says Kristians Pudans, the bank's public relations director.
Medvedevs says that, whereas five years ago investors would expect unrealistic returns, those who are investing today are savvier. He adds, however, that investors are still reluctant to tie up capital in long-term investment vehicles.
Markets don't go up forever, at least not without the occasional correction, and with the strong performances of Baltic markets, valuations might be considered lofty; fund managers are moving on to the next investment opportunities.

Good opportunities lie in the emerging European countries like Romania, Bulgaria and Serbia, says Rahnel. Hansabank's strategy is to follow a "bottom up" approach to investing, which means investing in good companies at reasonable prices, even if the sector or overall market might be expensive. They feel there is still good value in the Baltics, Poland and the Czech Republic, in information technology and real estate.
Within the past 18 months, Hansabank has launched five new funds, including a fund focused on Central Asian economies, which are rich in commodities and now being courted by Western powers.

Parex, with its new Caspian Sea Equity Fund, considers this region as the latest promising emerging market. Rich in natural resources including oil and gas, these markets are benefiting from strong global commodity prices.
The opportunity in the Caspian Sea region, says Medvedevs, is that unlike the Russian market, which is strongly tied to commodity prices, there is a rapidly developing industrial sector and productivity growth. The big foreign investment houses are not there yet, so the fund is one of the first in and can take advantage of attractive share prices.
Kalesinskas believes that it's too soon to write off Baltic and Russian equities. He says stock valuations "are fairly attractive in the global comparison, and they have in common rapid economic growth and strong corporate development," which is supporting stock market levels.

New emerging opportunities the bank is looking at are the Ukraine and Kazakhstan.
With regard to pushing investment funds 's clients' money 's further eastwards, how risky is it to invest outside the home markets of the Baltics and Russia? Political uncertainties in Ukraine and in some central Asian countries, or a drop in currently high commodity prices would impact stock prices there.
Rahnel says that their clients on average "tend to have a strong home bias, meaning that more than half of investments are concentrated in the central adn eastern European countries and Russia."

Investing in foreign owned companies in the region who have a large presence in the market, Asian firms for example, is one strategy to diversify away country risk and local ownership risk, says Medvedevs. With Parex's own research team and long-term presence in the region, he adds that this experience gives fund managers better insight into the region.
A recent OECD report considers that investing in parts of south Eastern Europe, such as Romania and Serbia, carries risks due to high corruption levels, high unemployment and government policy inconsistencies. Despite progress made, without further improvements in tax administration, human capital and regulatory reforms these countries risk falling behind among other emerging economies in attracting foreign investment.

Nordea's fund offerings include about 40 different investment vehicles in which customers can diversify investments across markets and regions, locally and globally. Pudans says that their strategy is now to close "the gap between customer understanding of investment products, and opportunities" offered by their funds. He adds that, "Local investors are in search for short term profits, often changing portfolio structures, taking profits, and trading frequently," which ultimately reduces investment returns but offers room for improving customer performance with proper advice.
Having risen from a very low base, investment funds in the Baltics are set to continue growing rapidly and will be marketed to an increasingly sophisticated and knowledgeable investor group. With this, expect fund managers to maintain the flow of new products in the ongoing search for the next big opportunity.