Eager eyes on equities

Savvy investors willing to take new risks

By Timothy Sifert

The Warsaw Stock Exchange is finding many friends among major investors - now that the WIG20 is up over 30 percent since the same time last year, and usually risk-averse investment heavyweights, investment and pension funds, have recorded strong growth in their aggregate assets.

Most recently, domestic investment funds have registered an increased appetite for Polish equities, as their aggregate assets ballooned 27 percent in the first half of the year, making it the second most rapidly growing fund industry anywhere in Europe.

Funds managed over zł.32 billion at the end of June, and some estimates see their coffers rising to as much as much as zł.38.6 billion at the end of the year - a growth of 70 percent.

Equity-focused fund managers have benefited from the Monetary Policy Council's persistent interest rate-cutting strategy, which goads Poles to transfer cash out of bank accounts and into more risky, but potential much higher yielding funds. On top of that, managers cite the emergence of a savvy investor class in the country as a primary impetus for asset growth, but also the growing willingness for Poles to move fixed income positions to equity.

"We've done some research on investment funds," says Piotr Kwiecinski, investment advisor at Dom Maklerski Banku Handlowego. "They have the main role on the WSE right now."

The firm estimates that investment funds will invest zł.2 billion in stocks alone this year.

The firm adds that the total assets in these domestic funds could double by 2006. Taking that estimate into account, the firm also expects investment funds will boost their equity allocations to 23 percent from the current 17 percent, during the same time period. This would yield some zł.19 billion in investment in equities from these funds.

"This is just the beginning of the transformation (of the industry)," says Marek Łukaszewski, president of associated of investment fund companies in Poland.

Łukaszewski says that along with increasing assets under management, most investment funds predict that equities will become the investment of choice, mirroring investment funds in the West. Kwiecinski agrees: "These funds are becoming very important investors." He notes that last year investment funds were "not visible" on the WSE.

The more-wealthy pension funds, which still guide the stock market, were usually the most viable investors, he says. "This year the situation has changed," he adds. Investment funds, though still outpaced by pensioners' money, put up as much as zł.400 million for stocks last month. He expects a stable investment rate between zł.300-400 million a month, provided the stock exchange doesn't plummet.

Łukaszewski points out the investment fund industry hit its inflection point around the end of 2000, before which time the asset under management hardly breached the zł.2 billion mark.

"There is an eleven year history of this sector in Poland," he says. "For almost eight years from the start, the industry couldn't get above the zł.2 billion mark. It's not that it was a very important number; it was the reality." Then things changed. "This year the interest rates were cut and cut and cut," he says. "Naturally people are looking for alternatives to banks."

Thus, he says, consumers warmed to investment funds, and fund managers warmed to equities. This factor sprouted a host of balanced funds, which invest in both equities and bonds.

Pension funds have also grown and matured since the government instituted a revamped social security system in 1999, but with zł.42.14 billion in net assets (as of August) they're a step ahead of investment funds.

According to Don Maklerski Banku Handlowego, pension funds exposure to equities grew to 30.8 percent in August from 26.7 percent. They invested some zł.542 million in stocks, zł.200 of which went to foreign securities. In that vein, analysts believe funds will begin to increase their exposure to equities compared to bonds - to the point that existing investment restrictions allow. "This is all driven by the good performance of the stock market, however," notes Kwiecinski.

And whether the positive movement on the WSE will continue is anyone's guess. Although, Kwiecinski points out that the WSE market for initial public offerings has picked up, which does indeed bode well for investors, who have perpetually complained that domestic equity investment provided only a handful of sizable, liquid stock to invest in.