Adamski: This market is undergoing a period of stagnation
In 1998, it had a 13% share total turnover, which is consistent with where the brokerage was in 1997. While the outfit has managed to maintain its strong position, CDM President Tomasz Adamski said he realizes that it faces strong competition from foreign-backed houses and that the growth in this market is leveling off. Adamski has been with CDM since the stock market's inception in 1991, taking over as president in 1995. He talked to the WBJ's Bohdan Barylko about the weaker profit brokerages saw in 1998, how the market will continue to be flat in 1999 and what needs to change in terms of regulation to make the WSE more attractive for both companies that are listing and investors.
Q: Brokerages' profit plunged by 40% last year, according to data released last week by the Central Statistical Office (GUS). What made it such a bad year?
A: This market is undergoing a period of stagnation. First of all, the situation on other markets is increasingly influencing the Polish market. The number of stocks is increasing, but this has not affected the level of turnover. If you compare the volume of trading on the Warsaw Stock Exchange in 1997 and in 1998, it was practically the same. I also think that people here are not overly convinced they should invest their savings in capital markets, at least not compared to other countries. In Sweden, for example, everyone must have shares in Volvo.
Q: How has CDM managed to maintain its position as the largest brokerage in the country?
A: We managed to maintain the position of the leader thanks to two aspects of our strategy. The first is that we try to be a universal brokerage. We serve small retail investors, but we serve large institutional customers as well. The largest transactions on the equity markets are done through our brokerage. The other thing that allows us to keep the leading position is that we try to be innovative.
Q: Can you give me an example?
A: First of all, we are the only brokerage that operates on such a large scale. All of our 130 outlets operate on-line. We were one of the first brokerages to introduce services for investors on the derivatives market. We were one of the first brokerages to allow customers to invest in foreign markets. We have introduced a magnetic identity card, which now we want to change into a card that would allow our customers to manage their investment accounts through ATMs.
Q: What about the internet?
A: We are working on that too. The possibility of placing orders through the internet should be ready by the end of this year or the beginning of next year. Now we are testing a system for home banking. The main problem is to make the connections absolutely secure.
Q: CDM is the largest brokerage in terms of the number of outlets and the percentage of total WSE turnover. However, other brokerages with fewer outlets manage to account for a similar percentage of turnover. Why is that?
A: This follows from the fact that we are a brokerage open to retail customers. Openness to a retail customer naturally requires a larger number of outlets and brokers to deal with a large number of small orders. Some other brokerages have a dozen or so institutional customers that generate large turnover. COK Banku Handlowego, for example, does not deal with retail customers. It has just a few outlets and concentrates on institutional or very large individual investors. To have retail customers you need a large number of outlets and many brokers.
Q: In 1998, CDM accounted for 12.99% of total turnover, with COK Banku Handlowego coming in close behind at 12.65%. In the first quarter of 1999, your market share dropped to just 10%, while COK increased to 16% — thanks to large turnover in futures contracts. Where did you lose ground?
A: Their large share in the futures contracts is due to their having institutional investors as customers. Small individual investors are less likely to invest in derivatives, because of the large risk. You need knowledge and a lot of capital to invest in futures.
Q: What is the composition of CDM's customer base? Of the total accounts, what percentage are individuals?
A: Of the 300,000 accounts we run, individual investors are the majority. But concerning turnover, individual investors generate about 30%.
Q: How do you think this year will shape up for brokerages? What types of services hold the most potential for profit?
A: Well, you have to remember that brokerages are more than just intermediaries in stock trading. We also manage portfolios. There is also a whole area of debt instruments - treasuries in our case. Concerning perspectives for 1999, this year is not going to be any more spectacular than 1998. I think, however, that a certain opportunity will be in the reform of the pension system. The pension funds are going to be so important for the market because domestic institutional investors are weak. But by the end of this year, the funds will already play a considerable role on the market.
Q: But what are they going to invest in? Under the pension law, they are limited to investing no more than 40% of their assets in WSE-listed stocks.
A: A portion of assets will certainly be invested in stocks, but at the beginning it will not be a large portion. More importantly, in 1999 brokerages will start offering services that are typical for investment banking. A brokerage will play a role of a typical intermediary in the flow of capital between investor and issuer.
Q: Does that mean that investment banking does not exist here yet?
A: (He laughs) Let's say it is being born … maybe not with major complications but with some problems. I believe the concept of investment banking will crystallize over the next few years. However, we can not say that there is a typical investment bank or institution in Poland.
Q: What about the foreign investment institutions operating here?
A: Sure, Merrill Lynch or Credit Suisse First Boston are this type of institution, but they are operating on only part of the market. Merrill Lynch, for example, concentrates on the debt market rather than on options, while CSFB is maybe more universal and does large privatization projects.
Q: Has CDM become involved in any investment banking activities, such as underwriting an initial public offering (IPO)?
A: We are the leading brokerage in that area. However, the biggest privatizations are to a large extent the domain of the foreign institutions, which follows from the fact that often large amounts of capital are needed. Then they have a wide base of customers, so placing stocks is easier, and of course knowledge also plays some role. We have been the offering agent for eight companies, with a total value amounting to zl. 1.3 billion ($333 million), which is 12.8% of total public offerings done so far on the domestic market.
Q: Do you lose sleep at night worrying about competition from foreign brokerages, which have much greater access to capital?
A: I am asked that question a lot. And usually I say this: You have to look closely at the competition. Especially at foreign competitors, because we have a chance to learn a lot from them. Polish brokerages are behind as far as the know-how about large privatizations or large issues are concerned. I believe you should not be afraid of competition. You have to take up the challenge and try to keep pace. You cannot be paralyzed when a large institution comes onto the market.
Q: What amount of assets does CDM have under management? What has been the return and what investment strategies have you used?
A: CDM is managing assets worth about zl. 300 million ($77 million). It's a pyramid. Most of the assets are invested in debt instruments that do not bring high returns but are rather safe, while at the top is the aggressive, high-risk portfolio that brings the highest returns. In the first quarter of this year, that portfolio had a very good return of 22.8%. The strategy is based on a high concentration of stocks and the use of derivatives. The next one is an aggressive portfolio with a high content of shares, but with no derivatives. This one is quite risky and brought a return of 15%. In the case of the balanced portfolio, in which debt instruments constitute about half of the assets, the rate of return was 9.9%. While the benchmark, in which 50% is stocks included in the WIG and the other half is the average yield of 52-week treasuries, was 7%. The debt portfolio also had a good return of 4.5%.
Q: Are there issues in the legislative framework of the capital markets that could be changed to help increase the flow of money?
A: It is important to think about some kind of deregulation of the market. From the very beginning, the market has been very well regulated, and that used to be its very strong point. Now, however, as the market develops, it needs some liberalization. For example, the information requirements of the issuers on the over-the-counter market should be thought over. I have some doubts, for example, if in this highly regulated market, Bill Gates would be able to have the results he's had in U.S. markets.
Q: At the beginning of our conversation, you said that there are certain stocks retail investors must have. For example, every Swede must have shares in Volvo. What would be the 'must have' for investors in Poland?
A: Well, the largest and most liquid stocks, such as Telekomunikacja Polska (TPSA), Bank Pekao or Bank Handlowy.
Q: Aren't you afraid that if the market's regulation is loosened some issuers will go to foreign exchanges were they can maybe raise more capital easier than being listed here in Poland?
A: There is the danger that the largest companies will look for other places to be listed. Certainly the market would lose something if they left. It is a problem, but there is no way back from the process of globalization. The markets will be more open and they will overlap, this is a fact of life. What's the remedy? Making our market more attractive. To make it a cheap market, where it's easy to operate, with modern technological solutions in place that make deals quick and efficient. If the above conditions are met, there is a chance that the companies will stay here. Right now the domestic market is relatively expensive but I expect this to change. The fees that brokerages pay have gone down, and I hope they will continue to fall.
Q: Brokerages' profit plunged by 40% last year, according to data released last week by the Central Statistical Office (GUS). What made it such a bad year?
A: This market is undergoing a period of stagnation. First of all, the situation on other markets is increasingly influencing the Polish market. The number of stocks is increasing, but this has not affected the level of turnover. If you compare the volume of trading on the Warsaw Stock Exchange in 1997 and in 1998, it was practically the same. I also think that people here are not overly convinced they should invest their savings in capital markets, at least not compared to other countries. In Sweden, for example, everyone must have shares in Volvo.
Q: How has CDM managed to maintain its position as the largest brokerage in the country?
A: We managed to maintain the position of the leader thanks to two aspects of our strategy. The first is that we try to be a universal brokerage. We serve small retail investors, but we serve large institutional customers as well. The largest transactions on the equity markets are done through our brokerage. The other thing that allows us to keep the leading position is that we try to be innovative.
Q: Can you give me an example?
A: First of all, we are the only brokerage that operates on such a large scale. All of our 130 outlets operate on-line. We were one of the first brokerages to introduce services for investors on the derivatives market. We were one of the first brokerages to allow customers to invest in foreign markets. We have introduced a magnetic identity card, which now we want to change into a card that would allow our customers to manage their investment accounts through ATMs.
Q: What about the internet?
A: We are working on that too. The possibility of placing orders through the internet should be ready by the end of this year or the beginning of next year. Now we are testing a system for home banking. The main problem is to make the connections absolutely secure.
Q: CDM is the largest brokerage in terms of the number of outlets and the percentage of total WSE turnover. However, other brokerages with fewer outlets manage to account for a similar percentage of turnover. Why is that?
A: This follows from the fact that we are a brokerage open to retail customers. Openness to a retail customer naturally requires a larger number of outlets and brokers to deal with a large number of small orders. Some other brokerages have a dozen or so institutional customers that generate large turnover. COK Banku Handlowego, for example, does not deal with retail customers. It has just a few outlets and concentrates on institutional or very large individual investors. To have retail customers you need a large number of outlets and many brokers.
Q: In 1998, CDM accounted for 12.99% of total turnover, with COK Banku Handlowego coming in close behind at 12.65%. In the first quarter of 1999, your market share dropped to just 10%, while COK increased to 16% — thanks to large turnover in futures contracts. Where did you lose ground?
A: Their large share in the futures contracts is due to their having institutional investors as customers. Small individual investors are less likely to invest in derivatives, because of the large risk. You need knowledge and a lot of capital to invest in futures.
Q: What is the composition of CDM's customer base? Of the total accounts, what percentage are individuals?
A: Of the 300,000 accounts we run, individual investors are the majority. But concerning turnover, individual investors generate about 30%.
Q: How do you think this year will shape up for brokerages? What types of services hold the most potential for profit?
A: Well, you have to remember that brokerages are more than just intermediaries in stock trading. We also manage portfolios. There is also a whole area of debt instruments - treasuries in our case. Concerning perspectives for 1999, this year is not going to be any more spectacular than 1998. I think, however, that a certain opportunity will be in the reform of the pension system. The pension funds are going to be so important for the market because domestic institutional investors are weak. But by the end of this year, the funds will already play a considerable role on the market.
Q: But what are they going to invest in? Under the pension law, they are limited to investing no more than 40% of their assets in WSE-listed stocks.
A: A portion of assets will certainly be invested in stocks, but at the beginning it will not be a large portion. More importantly, in 1999 brokerages will start offering services that are typical for investment banking. A brokerage will play a role of a typical intermediary in the flow of capital between investor and issuer.
Q: Does that mean that investment banking does not exist here yet?
A: (He laughs) Let's say it is being born … maybe not with major complications but with some problems. I believe the concept of investment banking will crystallize over the next few years. However, we can not say that there is a typical investment bank or institution in Poland.
Q: What about the foreign investment institutions operating here?
A: Sure, Merrill Lynch or Credit Suisse First Boston are this type of institution, but they are operating on only part of the market. Merrill Lynch, for example, concentrates on the debt market rather than on options, while CSFB is maybe more universal and does large privatization projects.
Q: Has CDM become involved in any investment banking activities, such as underwriting an initial public offering (IPO)?
A: We are the leading brokerage in that area. However, the biggest privatizations are to a large extent the domain of the foreign institutions, which follows from the fact that often large amounts of capital are needed. Then they have a wide base of customers, so placing stocks is easier, and of course knowledge also plays some role. We have been the offering agent for eight companies, with a total value amounting to zl. 1.3 billion ($333 million), which is 12.8% of total public offerings done so far on the domestic market.
Q: Do you lose sleep at night worrying about competition from foreign brokerages, which have much greater access to capital?
A: I am asked that question a lot. And usually I say this: You have to look closely at the competition. Especially at foreign competitors, because we have a chance to learn a lot from them. Polish brokerages are behind as far as the know-how about large privatizations or large issues are concerned. I believe you should not be afraid of competition. You have to take up the challenge and try to keep pace. You cannot be paralyzed when a large institution comes onto the market.
Q: What amount of assets does CDM have under management? What has been the return and what investment strategies have you used?
A: CDM is managing assets worth about zl. 300 million ($77 million). It's a pyramid. Most of the assets are invested in debt instruments that do not bring high returns but are rather safe, while at the top is the aggressive, high-risk portfolio that brings the highest returns. In the first quarter of this year, that portfolio had a very good return of 22.8%. The strategy is based on a high concentration of stocks and the use of derivatives. The next one is an aggressive portfolio with a high content of shares, but with no derivatives. This one is quite risky and brought a return of 15%. In the case of the balanced portfolio, in which debt instruments constitute about half of the assets, the rate of return was 9.9%. While the benchmark, in which 50% is stocks included in the WIG and the other half is the average yield of 52-week treasuries, was 7%. The debt portfolio also had a good return of 4.5%.
Q: Are there issues in the legislative framework of the capital markets that could be changed to help increase the flow of money?
A: It is important to think about some kind of deregulation of the market. From the very beginning, the market has been very well regulated, and that used to be its very strong point. Now, however, as the market develops, it needs some liberalization. For example, the information requirements of the issuers on the over-the-counter market should be thought over. I have some doubts, for example, if in this highly regulated market, Bill Gates would be able to have the results he's had in U.S. markets.
Q: At the beginning of our conversation, you said that there are certain stocks retail investors must have. For example, every Swede must have shares in Volvo. What would be the 'must have' for investors in Poland?
A: Well, the largest and most liquid stocks, such as Telekomunikacja Polska (TPSA), Bank Pekao or Bank Handlowy.
Q: Aren't you afraid that if the market's regulation is loosened some issuers will go to foreign exchanges were they can maybe raise more capital easier than being listed here in Poland?
A: There is the danger that the largest companies will look for other places to be listed. Certainly the market would lose something if they left. It is a problem, but there is no way back from the process of globalization. The markets will be more open and they will overlap, this is a fact of life. What's the remedy? Making our market more attractive. To make it a cheap market, where it's easy to operate, with modern technological solutions in place that make deals quick and efficient. If the above conditions are met, there is a chance that the companies will stay here. Right now the domestic market is relatively expensive but I expect this to change. The fees that brokerages pay have gone down, and I hope they will continue to fall.
