Polish pension funds buck market trends in equities

As worldwide markets continue the downward slide, multinational pension fund managers are reviewing their traditionally dominant exposure to equities. But not in Poland, where pension funds remain firmly in the market because of limited alternative investment opportunities on the Warsaw Stock Exchange. They will also be the first to come back to the stock market in strength if it rebounds.
"Pension funds cannot withdraw from the equity market as there is no sufficient demand for the shares they own," said Andrzej Kosiński, a portfolio manager at the brokerage of BIG Bank Gdański.
The Polish independent funds, which entered the scene when pension reform opened up the market in 1999, are one of the two major players influencing capital movements on the Warsaw Stock Exchange, according to market analysts. There are 17 companies operating on the Polish market, with a total capitalization of €6.71 billion. The three market leaders - Commercial Union, ING Nationale-Nederlanden and Powszechny Zakład Ubezpieczeń (PZU) - collectively control €4.35 billion, or 65% of all invested capital.
As the other principal player, foreign capital, is retreating from smaller and weaker markets such as Warsaw to reduce risk exposure, pensions funds remain the brightest hope for the battered Polish equity scene.

There is no sentiment attached to their position. Large scale unloading of investments by the pension companies would act as a major depressant on the market, Kosiński said. "Pension funds are only able to sell the shares they own slowly."
In September, the Polish pension funds had approximately zł. 7.10 billion (€1.74 billion) located in shares, whereas in August the value of their investments in equity amounted to about zł. 7.06 billion (€1.73 billion). Although it appears their exposure on the WSE marginally increased, the amount allocated to the equity market within the overall structure of pension funds' investment portfolios actually declined from 27.06% in August to 25.60% in September. The negative trend started in June and is attributed not only to lower equity values, but also to funds reshuffling their investment policies.
The field is a narrow one, either to widen exposure to the bond market or move into international securities.
"As shareholders of pension funds have to cover the costs of foreign brokerage services, they are unwilling to invest abroad," said Artur Szeski, a market analyst at CDM Pekao Securities. He also pointed to the relative lack of experience of some Polish portfolio managers in the international equity market. None of the Polish funds have taken up their rights under foreign exchange law for up to 5% exposure to foreign equities.
As interest rates fall and the profitability of investing in bonds erodes, the equity market remains unavoidably attractive to asset managers. Analysts even predict that pension funds may kick-start a recovery on the WSE if there is finally a global warming in equities.

"Bonds, which amount to even 60% of pension fund portfolios, will no longer be attractive, and then the assets will be redirected to the equity market," Szeski said.
"Considering the fact that profits generated in the stock market are not subject to the 5% tax (imposed on interest from bank deposits), the Warsaw Stock Exchange may rebound in early 2003," Kosiński said.