A year on, NIFs leave investors miffed
But a year later, investors have little to cheer about.
The NIFs have performed dismally as an investment vehicle during their first 12 months on the market. While the all-share WIG index declined by about 4.5% from June 12, 1997 to June 1, 1998, the NIFs averaged a drop of about 30% in share price value.
MPP share certificates, which represent one share in each NIF, mirrored the funds' poor performance. The certificates dropped 27.6% in value to zl. 108.50 on June 1, 1998.
Only one fund, NIF No. 9 im. E. Kwiatkowskiego performed better than the WIG, posting a 3.75% drop in share value. (See also The List, page 14.)
The worst performing fund was NIF No. 10 Foksal, which posted a 47.9% drop over the year.
Things weren't supposed to work out this way when the NIFs went to market. Compared to other privatization programs in the region, the Polish mass privatization was considered one of the better schemes, said Maciej Wewiorski, an analyst at Wood & Co. He added that people initially went crazy over the NIFs, but soon were disappointed in them.
The reasons included a lack of transparency in the way the funds accounted for their holdings, the complexity of the program and a lack of liquidity in the NIFs' shares, analysts said.
"The NIFs are a very complex program," said Stephen Pettyfer, Poland analyst at Merrill Lynch. "And from a distant perspective they seem relatively small, relatively opaque."
The MPP was complex from its outset. The government set up 15 NIFs to manage 512 small and medium companies in the MPP. Each NIF had a 33% lead shareholding in about 35 companies and then minority holdings in every other company in the program. Before going to market, some NIFs consolidated a portion of their minority holdings, but the wide range of companies in their portfolios and small stakes makes valuation difficult.
In addition, quirks in accounting procedures the funds must use also cause problems for valuation, said Sebastian Meyer, an analyst at CA IB Securities. Typically, a fund will value holdings in listed companies by marking them to market. But the NIFs don't do this, he added. Rather, they are valued at their historical book value - which was determined by the government and may be widely off base - plus earnings.
"The funds aren't transparent enough for investors," said Pawel Tarnowski, an analyst at Raiffeisen Capital & Investment Polska. "People want to know what they are investing in."
And growth in net asset value (NAV) has mostly come from selling companies. Although many large, attractive concerns were sold last year, there have been few sales so far this year, meaning slower NAV growth, Meyer said.
He added that the real growth for the NIFs is not likely to come until far later in the life of the program. This is unless "the market will take a different approach to valuing them and I don't really see that happening," Meyer said.
While growth has not knocked investors' socks off, there are also questions about the fund managers and changes at some NIFs of fund management companies.
"Many of the management companies were quite renown," Wewiorski said. "But they failed."
In some cases, such as NIF No. 7 Kazimierz Wielki or NIF No. 10 Foksal, this led to the firing of the fund managers.
But it wasn't always a case of supervisory boards dumping fund managers, some analysts said.
"The funds didn't calculate well the costs of payments for the management companies," said Maja Pawlukiewicz, head of the research department at Bank Gospodarstwa Krajowego (BGK) Brokerage House. "That's why many of them left the funds."
In addition, the total costs, which exceeded in some cases 7% of assets, were more than double the expected 3%.
Government influence was also cited as a factor that discouraged investors. On average, the government has voting rights over 70% of a fund's shares.
"The present funds' system is very political," Wewiorski said. 'The government says it plays a passive role, but I went to many meetings and I know it's not quite true."
That will change by Jan. 1, 1999 as the owners of share certificates will have to convert them into NIF shares. This conversion will reduce the government's ownership to 15%. Certificates that are not converted will be retired, possibly concentrating ownership and boosting NAV per share.
Meyer said that while 21 million out of 25 million share certificates have been dematerialized - they are no longer in paper form - only about 8 million have been converted into NIF shares.
This means that for the past year certificates have been far more liquid than the NIF shares themselves. Merrill Lynch's Pettyfer believes that the forced conversion at the end of the year could lead to a boost in liquidity and possibly a pick up in share prices.
But that will only take place if investors get a better grip on the program. So far, foreign investors have shown little interest in NIF shares, analysts said. "Over the past year, I've had only one question (from a client) about NIFs," said Tarnowski.
In addition, interest among analysts themselves has declined as investors stayed away from the shares.
Those who did take a closer look may have gotten swept up by the initial euphoria that first surrounded the funds' listing. Analysts recommendations a year ago for specific NIFs were flagged with "buy" recommendations.
For example, in a report dated Oct. 27, 1997, analysts at Bank Gospodarki Zywnosciowej (BGZ) picked NIF No. 10 Foksal as one the hottest NIFs. "In our opinion, NIF Foksal is one of the most attractive funds, considering the return which can be expected from investing in the shares," the report said.
Seven months later, the recommendation doesn't look so good with Foksal's shares down 38% since the report was issued.
Many analysts had expected that the funds would trade at a discount to NAV of about 15%. But the discounts have been far larger. As of June 1, 1998, the NIFs were trading at an average discount of 45.4%.
Still, some hold out hope for the NIFs.
"This is a new program," Pawlukiewicz said. "And it's set for 10 years. It still has time."
The NIFs have performed dismally as an investment vehicle during their first 12 months on the market. While the all-share WIG index declined by about 4.5% from June 12, 1997 to June 1, 1998, the NIFs averaged a drop of about 30% in share price value.
MPP share certificates, which represent one share in each NIF, mirrored the funds' poor performance. The certificates dropped 27.6% in value to zl. 108.50 on June 1, 1998.
Only one fund, NIF No. 9 im. E. Kwiatkowskiego performed better than the WIG, posting a 3.75% drop in share value. (See also The List, page 14.)
The worst performing fund was NIF No. 10 Foksal, which posted a 47.9% drop over the year.
Things weren't supposed to work out this way when the NIFs went to market. Compared to other privatization programs in the region, the Polish mass privatization was considered one of the better schemes, said Maciej Wewiorski, an analyst at Wood & Co. He added that people initially went crazy over the NIFs, but soon were disappointed in them.
The reasons included a lack of transparency in the way the funds accounted for their holdings, the complexity of the program and a lack of liquidity in the NIFs' shares, analysts said.
"The NIFs are a very complex program," said Stephen Pettyfer, Poland analyst at Merrill Lynch. "And from a distant perspective they seem relatively small, relatively opaque."
The MPP was complex from its outset. The government set up 15 NIFs to manage 512 small and medium companies in the MPP. Each NIF had a 33% lead shareholding in about 35 companies and then minority holdings in every other company in the program. Before going to market, some NIFs consolidated a portion of their minority holdings, but the wide range of companies in their portfolios and small stakes makes valuation difficult.
In addition, quirks in accounting procedures the funds must use also cause problems for valuation, said Sebastian Meyer, an analyst at CA IB Securities. Typically, a fund will value holdings in listed companies by marking them to market. But the NIFs don't do this, he added. Rather, they are valued at their historical book value - which was determined by the government and may be widely off base - plus earnings.
"The funds aren't transparent enough for investors," said Pawel Tarnowski, an analyst at Raiffeisen Capital & Investment Polska. "People want to know what they are investing in."
And growth in net asset value (NAV) has mostly come from selling companies. Although many large, attractive concerns were sold last year, there have been few sales so far this year, meaning slower NAV growth, Meyer said.
He added that the real growth for the NIFs is not likely to come until far later in the life of the program. This is unless "the market will take a different approach to valuing them and I don't really see that happening," Meyer said.
While growth has not knocked investors' socks off, there are also questions about the fund managers and changes at some NIFs of fund management companies.
"Many of the management companies were quite renown," Wewiorski said. "But they failed."
In some cases, such as NIF No. 7 Kazimierz Wielki or NIF No. 10 Foksal, this led to the firing of the fund managers.
But it wasn't always a case of supervisory boards dumping fund managers, some analysts said.
"The funds didn't calculate well the costs of payments for the management companies," said Maja Pawlukiewicz, head of the research department at Bank Gospodarstwa Krajowego (BGK) Brokerage House. "That's why many of them left the funds."
In addition, the total costs, which exceeded in some cases 7% of assets, were more than double the expected 3%.
Government influence was also cited as a factor that discouraged investors. On average, the government has voting rights over 70% of a fund's shares.
"The present funds' system is very political," Wewiorski said. 'The government says it plays a passive role, but I went to many meetings and I know it's not quite true."
That will change by Jan. 1, 1999 as the owners of share certificates will have to convert them into NIF shares. This conversion will reduce the government's ownership to 15%. Certificates that are not converted will be retired, possibly concentrating ownership and boosting NAV per share.
Meyer said that while 21 million out of 25 million share certificates have been dematerialized - they are no longer in paper form - only about 8 million have been converted into NIF shares.
This means that for the past year certificates have been far more liquid than the NIF shares themselves. Merrill Lynch's Pettyfer believes that the forced conversion at the end of the year could lead to a boost in liquidity and possibly a pick up in share prices.
But that will only take place if investors get a better grip on the program. So far, foreign investors have shown little interest in NIF shares, analysts said. "Over the past year, I've had only one question (from a client) about NIFs," said Tarnowski.
In addition, interest among analysts themselves has declined as investors stayed away from the shares.
Those who did take a closer look may have gotten swept up by the initial euphoria that first surrounded the funds' listing. Analysts recommendations a year ago for specific NIFs were flagged with "buy" recommendations.
For example, in a report dated Oct. 27, 1997, analysts at Bank Gospodarki Zywnosciowej (BGZ) picked NIF No. 10 Foksal as one the hottest NIFs. "In our opinion, NIF Foksal is one of the most attractive funds, considering the return which can be expected from investing in the shares," the report said.
Seven months later, the recommendation doesn't look so good with Foksal's shares down 38% since the report was issued.
Many analysts had expected that the funds would trade at a discount to NAV of about 15%. But the discounts have been far larger. As of June 1, 1998, the NIFs were trading at an average discount of 45.4%.
Still, some hold out hope for the NIFs.
"This is a new program," Pawlukiewicz said. "And it's set for 10 years. It still has time."
