June 2008

INVESTMENT IN POLAND: Poles are in position

The recent correction in the Polish stock market puts the country at a new stage in its financial evolution, bringing it closer to open architecture and diversification into foreign products. Fiona Rintoul reports ... poleposition.jpgRecent net sales figures for Poland tell a rather stark story. In 2007, Polish investment funds attracted net new sales of €6.9bn, according to data from Lipper Feri, making the market, which is still small in terms of AUM, one of the highest achievers in Europe. But year-to-date figures for 2008 tell a different story. They are a bright shade of red on the Lipper Feri printout and announce net outflows of €3.8bn.

The outflows were almost entirely attributable to balanced and equity funds, which saw net withdrawals of -€2.9bn and -€1.6bn respectively. Only the money market sector was in the black, with net inflows of €723m.

“Despite Polish economic indicators being positive overall, the stock market plunged by -27.34% between June 2007 and March 2008 as a result of the sub-prime crisis,” explains MaÃ?â??gorzata Góra, CEO of Union Investment TFI SA. “In the beginning, fund investors were watching the market carefully, but they decided to stay still during the correction. As the months went by and the WIG index was still bottoming, those who had bought fund units at the top were not able to take the pressure any more and started to redeem.”

Lesson in risk
Is it a disaster for the Polish market? Hardly. It may be causing some temporary discomfort, but in a country where 20% of people still don’t have bank accounts and a further 20% have had one for five years or less, it may be seen as a necessary lesson in risk in a developing market.

“In Poland, people are willing to take risks, but they don’t evaluate the risks well enough,” says Grzegorz Swietlik, a director at Fortis Investments in Poland. “They invest in an equity funds to make 30-40% and think the risk is minimal.”

Until the correction, a soaring domestic stock market meant that Polish equity fund investors could expect such lavish returns. When the correction came the results were predictable.

“This correction may be partially exaggerated by the herd effect,” says Swietlik. “There were people invested who should never have bought equity funds. People were asking for small cap funds because they were the best performers, then when they got burnt they took the money out, making things worse.”

Now the problems for promoters of local Polish funds are compounded by the fact that bank interest rates have gone up. “The banks don’t have liquidity issues, but because of loans they need for cash they’re competing on interest rates,” explains Swietlik. “The big banks are offering better interest rates than the Internet banks.”

Ultimately, lessons need to be learnt about diversification and about not necessarily selling a fund just because it’s doing badly at the moment. “We stepped into this market not so long ago,” explains Robert Wieckeiwicz, a financial consultant at the brokerage house Premium Financial. “That’s why people are so nervous. It’s much more difficult for new investors to put their emotions aside.”

But given that these lessons have not necessarily been learnt in Western European markets that have been at this game a lot longer than Poland, or even been fully grasped by all institutional investors, it may be a while before Polish investors approach the market with perfect equipoise – and in Poland as in many other markets investors are not always best served by their advisers. Nonetheless, there are signs that a key element of intelligent investing, diversification, is taking root.

Last year, in a special report on Poland, Lipper Feri wrote that: “In the medium term, Poland is poised for the next stage of evolution, which will consist of open architecture and diversification into foreign products. Indeed, with over 400 funds registered for sale in Poland under the EU passport, the infrastructure for this next stage of evolution is largely assembled, and all that is needed now is for investor sentiment to ignite.”

Ignition, it would seem, has now been provided in the shape of the correction on the domestic market, with some foreign funds able to attract new investment.

“The situation is slightly different for foreign funds than for domestic funds,” says Swietlik. “They have a broader product range. People are switching into commodity funds, for example.”

Investment in foreign funds are as yet small – Swietlik estimates that they account for 2-3% of total funds assets held by Poles – but the correction on the domestic market presents a perfect opportunity for foreign funds to begin to increase their base. In the past, when domestic funds were providing double-digit returns, it was virtually impossible to persuade Polish investors that they should diversify. Today, that’s no longer the case.

Poland’s pension funds
The funds are there. “Today an average investor may choose from a dozen different products from one fund company,” says Góra. “Almost all asset classes and investment regions are available right now for the Polish investor.” Now the investors may come, even if their brush with the tumbling Polish stock market has made them temporarily wary of equities.

New investment in foreign products may also come from Poland’s pension funds. Polish pension fund legislation is under review and changes are likely to include greater freedom to invest abroad, as well as increased flexibility in terms of asset allocation. At the moment, investment overseas is limited to 5% and there is a 40% allocation to equities.

“Initially the idea was good,” says Swietlik. “Forty percent was needed to make sure the story was a success. But now it’s time to make changes. For some people 40% may be too risky.”

It may take a while for the Polish market to recover from the shock of the local stock market crash, but the fundamentals that made it an attractive market last year basically still apply this year. GDP is growing, demographics are favourable and exposure to investment funds is as yet low.

“There is still a long way to go before funds are assimilated by the general public,” says Góra. “Every year a greater number of people become interested in investment products, especially baby-boomers who have started their professional careers. The investment product future therefore looks optimistic.”

Union Investment estimates that Polish fund assets will reach €41bn by 2012. With Polish pension fund assets already at the e40bn mark, this represents a substantial market.

Distribution diversifies
And just as asset allocation is starting to diversify, so is distribution. There are many new independent financial advisers in the market (too many, some might say – one commentator said they are sprouting up all over the place the way hedge fund managers were a few years ago) and the banks look likely to open their doors to third-party funds.

“Even if some distributors are still closed to third-party companies, the future for the sector is open architecture,” says Góra. “This will be forced by the changing and ever more sophisticated needs of the end customer.”

© 2008 funds europe

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