Regional funds wary of local politics

Poland's economic and political developments will determine whether regional mutual funds change their asset allocations in Polish companies this year, following overall minor decreases last year as foreign sentiment toward portfolio investment in Poland cooled. The country's ongoing dismal economic situation, especially with gross domestic product growth (GDP) expected to be only 1% this year, high interest rates and a soaring budget deficit could prompt some portfolio managers of regional funds to redirect investments from Poland to the stronger economies and more stable political environments of the Czech Republic and Hungary. "The restrictive interest rates from the Monetary Policy Council (RPP) are clearly dampening the economy, which in turn dampens economic growth," said Christian Ramberger, the fund manager of Zürich-based Julius Baer Central Europe Megatrend Stock Fund, which was started in February 2001 and has 40% of its total portfolio assets of $24 million in Polish companies. The fund holds its largest Polish positions in telecom and power firm Elektrim (5.9%), Bank Pekao (5%), copper and metal firm KGHM Polska Miedź (4.5%) and telecom giant Telekomunikacja Polska (TPSA) (4.5%).

Eye on the government Regional fund managers are also scrutinizing political developments since most remain moderately leery of investing in state-owned companies where top managers are political appointees. They are also concerned about the pace of lagging privatization and the state treasury's participation in companies listed on the Warsaw Stock Exchange (WSE). One fund manager pointed to the need for more regulatory requirements to boost foreign investors' confidence in the Polish equity market. "We would like to see the stock exchange adopt and enforce international standards of corporate governance, and more resources to be applied to the legal system to expedite justice for small shareholders," said Mark Mobius, the fund manager of the U.S.-based Templeton Eastern Europe Fund. Last year the fund scaled back its exposure in Poland, switching some investments to other countries in the region that offered more potential for upward equity price movements. At the end of January, the fund had 19.1% of its total €47.6 million ($41.4 million) portfolio capital invested in Hungarian companies vs. 12.5% in Poland. For some fund managers, other factors will continue to play into their decisions to allocate investment to Polish companies this year.

Management and strategy "It's more important that a company have good management and a strategy" rather than economic or political factors, said Dimitri Schatzoudis, the fund manager of the €197.8 million ($172 million) Amsterdam-based ABN Amro's Eastern Europe Equity Fund, which decreased its assets invested in Polish companies from 25% in January 2001 to 21.7% during the past year. Some Polish companies' poor earnings last year may continue to drive down investor sentiment this year. "The fundamental story is that lots of companies reported bad earnings last year, and it's not a big reason to invest in Poland," said Guenter Fasching, the portfolio manager of the Zürich-based Vontobel Eastern Europe Equity Fund, which invests in equities in Central and Eastern Europe and in Russia. The fund, which has 33.1% of its €80 million ($69.6 million) net assets invested in Poland, holds its largest Polish positions in oil refiner Polski Koncern Naftowy Orlen (PKN Orlen) (almost 7%), TPSA (4.2%), KGHM Polska Miedź (3.2%) and Bank Zachodni WBK (3%) Yet, despite the discouraging economic situation and uncertain political climate, managers of regional funds pointed out that Poland's pension funds, which supply a constant demand for equities from domestic institutional investors, would continue to give the capital market a degree of stability and liquidity not found in the Czech Republic or Hungary. The 21 pension funds, which had more than 28% of their managed capital of about zł. 11.7 billion ($2.79 billion) invested in stocks as of last March - would continue to buy equity prices this year as the size of their assets under management kept increasing, they said.