Page 138 - IFR Opportunities in Russian capital markets

CHAPTER MUTUAL FUNDS 11
Boris Yeltsin kicked off the pension reform by creating laws for mutual funds in 1996, known as PIFs in Russia. Just under 100 funds were set up, just as the RTS hit its peak, but the industry shrivelled and died in 1998 as the stock market sold off continuously over the next year until it crashed and burned in the financial crisis of August 1998.
“Many funds closed but most went into hibernation,” says Elizabeth Hebert, CEO of Pallada Asset Management, which has been operating funds since 1992. “These are vehicles tested by fire – they have a seven-year track record and now are starting to pay off as people are looking for an alternative to simply investing into cash dollars stuffed under the mattress.”
Russian investment in mutual funds
Investment in mutual funds has been surging in the last two years. Although the mutual fund business was all but destroyed by the 1998 financial crisis, it has come bouncing back. At the end of 2006 there was a total of US$10.6bn of pension fund money under management, including the obligatory contributions to the State Pension Fund (SPF), while the amount in domestic mutual funds doubled to RUB400bn (US$15.4bn).
Only 2% of Russians invest in mutual funds, but these numbers suggest that those Russians who are starting to invest prefer the shorter-term horizon of mutual funds to pension funds.
However, the prognosis for the sector is extremely good. The market players’ organisation, NAUFOR, published a report in December 2006 that estimates 21m Russian, or 15% of the population, will have investments worth US$290–360bn in the domestic equity capital markets by 2015.
Over this period, market capitalisation is expected to rise from the current US$1trn to US$2.94trn, says NAUFOR, with foreign investors accounting for US$300bn.
Sector revival
While international investors were withdrawing money in the aftermath of the May 2006 sell-off, Russian small investors started buying into the weakness in June, bringing the total under management to a new record of RUB300bn from RUB233bn at the start of the year, cushioning the blow and marking the start of a turn-around.
"What was remarkable about the sell-off in May and June is that Russian investors started buying and the [domestic mutual funds] took some of the edge off the sell-off by considerably increasing their equity holdings. The Russian funds seem to be very confident about the long-term prospects of the Russian market", says Peter Westin, chief economist at MDM Bank. "[Domestic mutual funds] have turned into a major player on the Russian markets."
By the end of 2006 PIFS had more than RUB600bn under management – partly thanks to the
70% growth the Russian stock market had put in over the year – of which just over RUB150bn was in opened funds,
Inflows in the first quarter of 2007 suggest this rate of growth should be maintained, according to Deutsche UFG strategist Georgy Kartashov, with weekly figures revealing average monthly inflows of RUB3bn over the period. “Only once we reach US$100bn is it likely to slow down,” he says.
Domestic mutual fund growth is shown in Figure 11.1.
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