Eastern investors hold firm

By Ruth Sullivan

Investment houses exposed to the fledgling asset management industry in central and eastern Europe are managing to offset weakness in western Europe as investor appetite in the continent's former communist states remains robust.

Stripping out low-margin money market funds, the CEE's mutual fund markets showed net outflows of just €6bn (£5bn, $9bn) in the first six months of the year compared with nearly €164bn in western Europe, according to data from fund information service Lipper Feri.

This comes after a period of breakneck growth that has seen the volume of fund assets in Europe's ex-communist states surge to €67bn from just €18bn five years ago, even as many western European nations have haemorrhaged assets.

"Investors in eastern Europe are much more likely to put money into their own equity markets than their western counterparts. CEE fund markets are underdeveloped and mostly domestically oriented, which makes them attractive to domestic investors and so the money is flowing in," said Bella Caridade-Ferreira, publisher and editor at Lipper Feri.

Until the late 1990s, the former communist countries had no mutual fund sector. Since then, the industry has taken root, with more developed markets such as Poland seeing assets increase fivefold during the past five years in spite of modest recent outflows.

The latest quarterly data from Lipper Feri showed mature markets such as France, Italy and Spain suffering big redemptions in the three months to June while the Czech Republic, Slovenia, Latvia and Romania all recorded positive flows.

Almost without exception, eastern European economies are growing faster than their western peers, driving up income, savings and investment assets. Among the international banks and asset managers that have benefited from the rampant growth in eastern Europe is Austria's Raiffeisen International. It now has €4.5bn in assets; €3.4bn in mutual funds and the rest in pension funds.

Barbara Valkova, head of asset management at Raiffeisen, said: "If markets do well, we could grow as much as 20 per cent in countries that are most developed in the region such as Croatia, Hungary and Slovakia."

Last year, Raiffeisen opened its doors in Serbia, where it is focusing on equity funds, and it is planning to expand into Ukraine. It now has eight asset management operations in the region at different stages of development, with Romania and Bulgaria among the most embryonic. In Romania, Raiffeisen is targeting growth of 150 per cent in 2009 if market performance is strong.

Belgium's KBC, another of the biggest players in the region, generates a 10th of its €180bn of assets from eastern Europe, according to Johan De Ryck, general director of KBC Asset Management for central and eastern Europe and Russia.

Over the past four to five years, KBC's asset management business has experienced growth rates of 30-40 per cent in the region and, although this year is not showing such strong flows as 2007, Mr De Ryck forecasts at least 20 per cent growth in 2009. He expects even stronger fund growth from less mature markets such as Bulgaria, Romania, the Balkans and Russia.

"Although inflation is rapidly increasing across the region, the strong salary growth of the past years does not yet seem to have slowed down, so savings and disposable income are still strong," he said.

Pioneer Investments, part of Italian banking group UniCredit, is also active in the region, which accounted for almost 5 per cent of its €230bn of assets under management at the end of last year.

Although the region has shown mixed performance this year, fund managers and central and eastern European aficionados agree with Ms Caridade-Ferreira's conclusion that "it is a region where the fund industry will continue to grow".