Mutual Funds Should Reconsider Their Aggressive Behavior

Last week PAC Doverie raised it srating; ananalys is of the Bulgarian Credit Rating Agency praised the companys management for its social policy and the achieved stable Rate of return. Daniela Petkova, CEO and Chairperson of the Board of Directors of the company, analyses before the reasons that brought to the success and comments topical issues after the Allianz case and the expected legislative changes concerning the investment communityWhat raised the rating of PIC Doverie?

- There are several reasons according to the report of the credit agency. One of them is related to the management of the company regarding its investment policy. We included the so called socially responsible investment policy which we based on the principles and the criteria of the United Nations. Most broadly speaking this includes a very serious analysis of the issuers and the assets in which we invest the money of the insured persons.The second reason is that the credit agency, after making an analysis of the market, has found that the receipts from insurance contributions per person in Doverie General Pension Fund have considerably increased and reached beyond the average. And the third reason is that as a result from the company management the financial statements show a stable and positive trend of the realized operating profit.

Does this accounting period include the months in which BSE experienced a decline?

- No. The period audited by the credit agency ends on June 30, 2007, so with their next audit we will be able to see their assessment of how we have coped with the stock exchange decline. But even now I can say that I do not expect the credit agency to find any shortcomings in our actions as far as we are very careful especially with regard to that type of investment.

The analysis of the credit agency points out your clever proportion of investing both in Bulgaria and abroad. What is the rational formula?

- There is no universal formula for a rationalproportion. It is always different in time depending on the results from the analysis of our capital market and respectively of the others. The only common formula which should be observed by all investors and especially by the pension funds is to apply the principle of diversification in order to achieve maximum security of the portfolio. About 20-25 per cent of the Doverie pension funds’ assets, which are already beyond BGN 730 million, are invested on foreign markets and about 20 per cent on the Bulgarian stock exchange. So, our position is very well balanced since the possibility for the foreign markets to experience a downturn is much smaller than that for the Bulgarian stock exchange and several times during the period you mentioned we had the opportunity to watch with pleasure how the positive return we realize on the foreign market compensates for our clients the losses that all the participants on the Bulgarian Stock Exchange were realizing at that time.With respect to where we have invested the funds, the directions are basically three. First, these are the municipal bonds. On foreign markets we invest in mutual funds behind which there are portfolios of various types of assets, stocks of various stock exchanges and through such investments we have set foot on the Chinese stock exchange, the USA, in the European Union. We analyze in detail the exact type of assets included in the portfolio of the concrete mutual fund and invest in those where the stocks in the portfolio are from issuers with high rating. That naturally means that we cannot expect high return on the investments compared to those realized on the Bulgarian Stock Exchange since the risk is much smaller but we surely know that the portfolios of Doverie pension funds are much more stable and secure.Anyway, we strive at preserving the value of the money we are managing and at realizing yield higher than the inflation rate. Another type of investment abroad is in structured products and Exchange Traded Funds.

Do you invest in Bulgarian mutual funds?

- In practice we do not invest in mutual funds in Bulgaria for just one reason. Investment in mutual funds is one of the ways to increase the allowed limit on investments in stocks. Even in the end of 2006 after we measured the risk of investments on BSE and its respective impact on the total risk of the portfolios under management /it does not mean that risk is a hard word, we just measured it/ we decided the limit imposed by law on direct investments in stocks suits us and it would be risky for our clients to increase the share of that type of instrument by investing in mutual funds.Inaddition, we prefer to choose alone in which stocks exactly to invest and not to invest in mutual funds where the issuers include dare beyond our choice. It is unreasonable for us to invest in portfolios of mutual funds containing stocks in which we wouldn’t invest directly and stocks that do not conform to our policy from the point of view of its new component, the social responsibility.

And what about the other funds of the pension insurance companies’ branch? Have you got information about what percentage of the assets of the mutual funds are shares of the pension funds?

- I have no official data. Is far as we know, there are pension funds with big expositions to mutual funds in Bulgaria, to definite mutual funds at that, in which there are definite stocks, in which a definite pension fund is interested.

There is some talk that Allianz have withdrawn their investments from the mutual funds in order to manage their assets alone, which would save them some costs.

- In the end of last year we actually had the opportunity to see that our colleagues from Allianz went out from most of the investments made in Bulgarian mutual funds. I could not be surprised from such an act as far as Doverie has never invested in that type of instrument, so I consider it quite natural if someone, though later, has taken a decision which actually is the same as ours. I do not believe that the main reason for Allianz to leave the mutual funds is saving costs, though the fees of the mutual funds could in no way be ignored, but on the other hand last year the mutual funds realized huge profit which should make their investors pay no attention to the amount of the fees charged.

What would happen if other pension funds alsoact as Allianz did?

- If that is not Doverie, nothing would happen. And it could not be Doverie, since there is nothing to withdraw from mutual funds. About 60 – 70 per cent of the assets on the pension insurance market belong to Doverie and Allianz. The remaining 30 per cent, whether they would withdraw their investments from the mutual funds or not, could in no way affect the market. On the other hand, I think that some of the pension funds that have invested in mutual funds would not withdraw their investments since their reasons to invest there are let’s say complex.

Did anything change on the market after Allianz took that step?

- On the day it happened the prices on the stock exchange registered a serious drop, which means that all investors in Bulgarian stocks realized losses. In such moment, and knowing the reason at that, the severe exasperation of everyone is nothing but natural. There were ardent discussions in the investment forums on the net; information appeared in the press that there would be punitive actions, etc.Twenty-four hours later, when the stock exchange stabilized and shortly after most of the stocks restored their levels, feelings calmed down. In my view, after all, nothing so much happened. The truth is that our capital market is still quite small and such numbers as 30-40 million still give it a start but on the other hand that particular case showed us that, though still small, our market is already comparatively more stable against sharp motions like that of Allianz.

What are the lessons to learn from the situation? Are they leading to any changes?

- I hope this year the mutual funds would change their aggressive market behavior, first of all as investors on the stock exchange. I give no negative connotations to the word “aggressive”.I consider it normal for the entities at the beginning of the development of a given business to stick to a more aggressive behavior until they achieve their goals to attract more clients. We have gone through that stage too. The risk however from a long lasting aggressive market behavior is that since with such behavior there is by rule a quick growth of the scope of the business and the number of clients, already a fact with the mutual funds in the country, it often happens that the business organization, absorbed in attracting more and more clients and assets, has not enough resources, including time too, to prepare for the next obligatory stage, and that is to preserve the already achieved results, which is much more difficult than the first stage. The one who cannot manage to cope with that harder stage disappears from the market almost as quickly as he appeared as a result from his aggressive behavior.

The reare fears that the act of Allianz will not remain one and only and may be other foreign investors will also withdrawt heir shares. Do you share such fears?

- It is nice that our mutual funds managed to attract quite a lot foreign investors but there is no investor to keep one and the same position for decades. The yield levels realized on BSE in 2007, and possibly those that would be realized in 2008 too, are really attractive but surely they will not stay the same forever and will come closer to the European ones, which are significantly lower. Also in international plan new developing markets will certainly appear providing more attractive yield levels than those in Bulgaria. That means, there will certainly be investors to withdraw from the Bulgarian market in a given moment and not because they do not like Bulgaria or the development of our country or the respective mutual fund but because they will find better place for the risky part of their portfolios.The Allianz case is may be a good occasion for some of the mutual funds to reconsider their policy of aggressive market behavior and to make their portfolios more balanced in terms of diversification and liquidity, which would naturally decrease the rate of return but on the other hand would be of help both for them and for all other investors, including the pension funds. I dare to comment this issue only because the mutual funds are already a big player on the stock exchange and after the Allianz case we are all worried that if a new big investor decides to withdraw from its position in a mutual fund, no matter what the reasons are, we may again witness a serious negative change of the stock exchange prices for the only reason that a given mutual fund is forced to sellstocks in panic, including those of good issuers, in order to cover the obligation to pay back the money to the withdrawn investor, which would not have happened if the portfolio includes more near liquid instruments than the stocks on BSE.Since I believe in the professionalism of the managers of the mutual funds in Bulgaria I think that this year we will witness a more tempered market behavior on their part.

There is an idea for publishing the risk of the pension funds. May be it will be put into practice. In what time do you expect this to happen?

- Presently the risk level soft the portfolios of the pension funds. The Financial Supervision Commission to put some requirements, namely anyone to publish daily its risk level. Unfortunately I am not much optimistic that it would be that easy since it sounds simple but it really isn’t. First, it should be decided what particular index or indexes to be applied. What exactly the risk measure would be, because it should be one and the same and comparable for all the pension funds. In order to be compulsory, it should be a requirement of the Commission and as far as at present they have a greed with the idea just or a llyand, at least in my knowledge, the reisn othingpracticallydone, I am not optimistic about that happening with in the following 6 months. With the mutual funds it is about a decision of their association, which is a matter of a good will. Knowing the pension insurance market, the good will for taking such a decision exists but its particular realization would be difficult. And the question is really important because due to the high levels of risk takeing previous periods, the latest published data of the Commission about the Rate of return that the reare funds that for December have realized levels of 13-14 percent, but with negative Rate of return. May be if the clients of those pension funds, who have chosen them for their higher yield in these previous periods, have had information also about the risk to be taken, they would have thought more seriously over their decision what to do with their pension savings, whether they would agree to take that risk or respectively to escape from losses of 13-14 per cent on annual basis in December, observing the risk level of the particular pension fund and leaving the fund before the time has come for realization of negative Rate of return. In general, I believe that running high riskis quite a dangerous game for the pension funds and should be put to the limit. If you want quick profits it is not quite reasonable to make it with your pension savings and if you have some extra money and if the aim is a quick and bigger profit, the mutual funds are the best place to invest. I cannot but say that any other, especially the risky, investments are better to be made after we have already put aside part of our money for saving in a pension fund thus having provided for our financial security in the future.

Do you expect any negative events during the year to overturn the good perspectives?

- I do not expect any convulsions in 2008. An important thing for our investment policy is the expected inflation rate. We are preparing for at least that in the year 2007, which unfortunately is not low at all but in order to be better prepared we are planning our investment activity in 2008 such as to preserve the value of the money under our management even at higher inflation levels compared to those in 2007.Thepossibleriskof