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					Need for Liberalization in legal Legislation
The Focus on Money Market Funds (MMFs)


               UAIB Conference
            June 18 - 21, 2009, Yalta

                  Sándor Szalai
            Deputy CEO – regional operation
              OTP Fund Management Ltd.
Motto




     „Without differences im opinions there would not be even horse race…”



                                                            Mark Twain
                                                Pudding Headed Wilson




 2                                                                           2
Nature of the current crises – Is it severe?

Breakdown of crises by their nature from 1970 to date

                                                                                         Credit
                                                                                         crises



                                                                    10




                                                            3               1
                                                                    4


                                                      18                         31
                                                                    9

                      Real estate                                                                 Equity bubble
                     bubble based                                                                    based


 Others = 46

  The current crises is the 5th from the last 132 where all the 3 dimensions as reasons are present

 Notes: 122 recession on OECD since 1970
 Source: IMF working paper “What happens during recessions, crunches and busts”, December 2008



   3                                                                                                              3
Was the impact on equity markets serious also in historical comparison?
                                                         2007
                                                         2005
                                                         1994
                                                         1992
                                                         1987    2006
                                                         1984    2004
                                                         1978    1993
                                                         1970    1988
                                                         1960    1986
                                                         1956    1979
                                                         1948    1972
                                                         1947    1971
                                                         1923    1968
                                                         1916    1965
                                                  2000   1912    1964
                                                  1990   1911    1959
                                                  1981   1906    1952
                                                  1977   1902    1949    2003
                                                  1969   1899    1944    1999
                                                  1962   1896    1926    1998
                                                  1953   1895    1921    1996
                                                  1946   1894    1909    1983
                                        2001      1939   1892    1905    1982
                                        1973      1934   1889    1901    1976
                                        1966      1932   1888    1900    1967
                                        1957      1929   1882    1897    1963    1997
                                        1941      1914   1881    1886    1961    1995
                                        1940      1913   1875    1878    1951    1991
                                        1920      1910   1874    1872    1943    1989
                                        1903      1887   1870    1871    1942    1985
                                        1893      1883   1869    1864    1925    1980
                                        1890      1877   1867    1858    1924    1975
                                        1884      1873   1866    1855    1922    1955
                                        1876      1861   1865    1850    1919    1950
                             2002       1873      1860   1859    1849    1918    1945    1958
                             1974       1854      1853   1856    1848    1898    1938    1935
                             1930       1841      1851   1844    1847    1891    1936    1928
                             1917       1837      1845   1842    1838    1885    1927    1908
                             1907       1831      1835   1840    1834    1880    1915    1879    1954
                  2008       1857       1828      1833   1836    1832    1852    1904    1863    1933
        1931      1937       1839       1825      1827   1826    1829    1846    1830    1843    1862
       -50 -40   -40 -30    -30 -20    -20 -10   -10 0   0 10   10 20   20 30   30 40   40 50   50 60



                           2008 was the second worst year in the last 183 years
 Source: Bloomberg, OTP Fund Management Ltd.


   4                                                                                                    4
And how much the financial industry was hit?




  5                                            5
Start-up statements and thoughts


One of the most serious crises in capital markets’ history with severe real economy effects
Heavy impact on all the higher risk capital market segments and asset classes like equities
Banking industry is especially under fire: lack of liquidity, expensive funding, worsening
 profitability and many bad performing, capital market related productv

                                              
Shaking confidence of clients in financial institutions and products
Sharply increasing risk aversion, turning towards cash as „safe heaven”
Pressure on supervision authorities and on codifiers for restriction and more transparency

                                              
Liberalization of capital market related products is reasonable at these times at all?


                                              
          It depends… Have a look at a certain practical problem in our region:


   6                                                                                           6
What happened on CEE equity markets in 2008? – deep fall …




 The crisis pushed CEE local equity markets into heavy sell-off in 2008

 Size of fall exceeded decrease of developed markets (S&P500-DAX-NIKKEI: -38-42%; Hang Seng-India: -
  49-52%), mainly driven by significant jump in risk premiums

 New EU members + Croatia clearly underperfomed to CETOP20 markets – lower liquidity, higher valuation


   7                                                                                                      7
… and serious decreases in fund market sizes




Data source: EFAMA, Bamosz


 Former EU accessors with larger market size suffered less, except for the Poland as the largest

 Group of new EU members and Croatia lost 2/3 if their total market, except for Romania as the best
  performer



    8                                                                                                  8
Critical points: strong preference of local equity investments




Data source: EFAMA, Bamosz


 Croatia-Bulgaria-Poland: correlation between high proportion of equity funds and the deep fall of fund
  market sizes

 Romania as exception: high ratio of institutionals, seed money, money market funds’ saving collection

 Czech Republic and Hungary: law risky fund exposure – moderate decline in fund market sizes


    9                                                                                                      9
And how it was going on in Ukraine?


Mutual funds’ money market related investment limits till January, 2009

   Up to 30% of the prevailing NAV in cash and cash equivalents, and gold

       

Consequences


  Due to unsufficient availability of bonds and restrictions on any foreign assets, derivatives and
   alternative assets local equities became „obligatory” elements of local funds’ investments

  As a result of it there was no „safe heaven” alternative fund vehicles available when the crises came

  Crises caused dramatic losses at almost all the running mutual funds


       
  Market of local mutual securities funds was hit at its infant stage of development

  Investors’ initial confidence broken




 10                                                                                                        10
Which solution was missing? - money market funds for sure…


 Key characteristics of EU/CEE+ MMF tools

 Mutual fund, usually as UCITS (stricter diversifications limits – 5/10/40 as general + 20% for deposits)
 Investments mainly in deposits, different bonds with shorter maturity, repo transactions
 As a result of it low volatility with moderate expected return (close to term deposits’ performance)
 Low cost vehicles: moderate or zero distribution fees, low additional fees
 Short settlement period (usually T+1/2 days or even T+0), low face value of investment


 Reasons why MMF’s segment is not develop in many of the CEE+ countries ?

 Early (infant) stage of development on mutual fund markets: Bulgaria, Romania, Ukraine
 Low risk – moderate performance attribution: no serios attractivity compared to equities
 Legal environment led the market towards higher risk investments: Poland, Ukraine
 Temporarily overperforming local equity markets attracted savings: Bulgaria, Ukraine, Poland, Croatia
 High central depositary fees ruined the preformance of MMFs: Bulgaria
 Concrete legal restrictions in investment limits: Ukraine




 11                                                                                                          11
What do we love MMFs? 


 Why are MMFs benefitial solutions for our customers? Because they

 provide easily understandable and usable investment solution for the households’ everyday savings

 are optimal also for corporates’ liquidity management

 are low risk investments and thus, well adjusted to CEE’s financial culture

 can serve as proper start-up education tools for mutual fund investments

 provide good „safe heaven” type investment opportunities when riskier asset classes are falling


 Are MMFs benefitial also from the banking system point of view?

 In case of consequent legal legislation and related risk&liquidity management MMFs are safe
  solutions without serious reputation risk when offered, even in case of critical market conditions

 Benefitial supplementary element of the product offering: good for client retention and acquisition

 Funding tools for banks: fund collection at reasonable price

 Direct revenue through management fee income




 12                                                                                                     12
      International experiences – MMFs in Europe

   Fund categories on the UCITS fund market - 2003-2008                               Market Market share MMF from the total market - market – 2008Q4
                                                                                             share of of MMF from the total fund fund 2008Q4
                                                                                60%
                                                                                                                                                                 52%
  19%            21%              18%               16%          16%                                                                                     47%
                                                                         25%    50%

                                                                                                                                              36%
                                                                                40%
                                                                                                33%                                  34%
                                                                                                         27%      30%
                                                                                30%


                                                                                20%
                                                                                       12%                                  12%
                                  39%               41%          40%
  33%            35%                                                            10%
                                                                         30%

                                                                                0%
  2003           2004             2005              2006         2007    2008         Bulgaria Romania Greece*    Italy*   Poland* Hungary   Croatia    Czech Slovakia*
                                                                                                                                                       Republic*
                       Equity   Bond     Balanced     MM   FoF   Other           * Figures contain only UCITS fund related numbers
Source: EFAMA report




   Equity Funds: significant decrease of AUM during the crisis – net cash outflow + revaluation
   MMFs: clear safe heaven function - attracting flows from other funds, mainly from equity funds
   MMFs as basic saving instrument: its market share is ususally 30-50% on the total mutual fund market
   MMF as the only fund type which could generate net cash inflowsin 2008, supported by positive yields


         13                                                                                                                                                        13
       Domestic experiences – MMFs in Hungary

         Share of cash vs. Securities type investments in                           Development of mutual funds in Hungary 1997-2008
                 households savings in Hungary
100%
90%      24%
                                                                       50%
80%
70%
60%
50%
40%
30%
20%      76%                                                           50%
10%
 0%
       1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

          Cash, Bank deposits                 Securities Investments

Source: Hungarian National Bank                                                Source: Association of Hungarian Investment Fund and Asset Management Companies




  Clear process of securitisation within households savings, compared to 1995 weight of weight of securities type
        investments increased from 24% to 50%; stabil weight even in critical years (2003, 2008)
  Increasing diversification on fund market in terms of fund types: widening sortiment of higher risk solutions,
        however, MMF’s became the leading instrument and remained stable even in critical years
  Structured guaranteed funds became popular, thanks to their limited risk – higher potencial yield attribution


         14                                                                                                                                                      14
 In-house experiences – fund assets diversification within OTP Bank Plc.

 Breakdown of fund classes by clientele types                       31.12.2004.
100%           3%                                         2%         Moderate width of product range
90%                            Fund of Funds
                               Portfolios                            No previous regular training of sales staff for
80%
                               Equity Funds                           diversifiaction and „fund portfolio” concept
70%

60%                            Absolute Return                       Very high concentration of assets in one single
                               Funds                                  fund type: (short) bond funds
50%            96%                                        97%
                               Capital-protected
40%                            Funds                                 Law awerness level both on sales and buy side
30%                            Bond Funds
                                                                      regarding product knowledge
20%                                                                  High risk of non-diversified product portfolio both
                               Money Market
10%                            Funds                                  on OTP and client side
 0%
            PB NAV (%)                             Retail NAV (%)
100%
                                                          5%
                                                                    30.04.2009
               9%              Fund of Funds
 90%
                               Portfolios                            Very intensive product development, extension
 80%
                               Equity Funds            28%            in product offering
              20%
 70%

                               Absolute Return
                                                                     Launch of HUF mone market product (pure
 60%
              11%              Funds                   12%
                                                                      deposit fund) – January 2005
 50%

 40%
                               Capital-protected
                               Funds                                 MMF takes over the role of base product
 30%
              52%
                               Bond Funds
                                                       52%
                                                                     Thanks to conscious product development and
 20%                                                                  education clear move ahead of equity and
                               Money Market
 10%                           Funds                                  capital protected funds
  0%
            PB NAV (%)                             Retail NAV (%)


                         Source: OTP Bank DataWarehouse
       15                                                                                                               15
  OTP MMF – becoming key instrument without cannibalization

             4,000                                                                                                        14%
    EUR mn



                                    Capital gain tax                           Start of crisis
             3,500                   introduction                                                                         12%

             3,000
                                                                                                                          10%

             2,500
                                                                                                                          8%
             2,000
                                                                                                                          6%
             1,500

                                                                                                                          4%
             1,000
   EUR mn




              500                                                                                                         2%


                0                                                                                                         0%
                 Sep-05    Jan-06 May-06 Sep-06        Jan-07 May-07 Sep-07   Jan-08 May-08 Sep-08               Jan-09
                     MMF                                OTP Bond+Mortgage bond                   Sight deposit

                     Term deposit                       OTP Optima bond fund                     Base rate


 Sept. 2005 – to date: steady growth of MMF while deposit volumen remains stable - no serious cannibalization
 August 2006: introduction of capital gain tax resulted in immediate inflow into products with fixed interest, with longer
    maturity – OTP bonds and mortgage bonds

 October 2008: significant demand for products with fixed interest rate and increased deposit guarantee – term
    deposits, OTP bonds, mortgage bonds; paralell withrawals from OTP MMF


       16                                                                                                                       16
  „Close to” term deposit performance with daily liquidity

                    Retail term deposit volumes and interest rate vs. OTP MMF AUM and past yield

               5                                                                                        14%
      EUR bn




                                                                                                        12%
               4
                                                                                                        10%

               3
                                                                                                        8%


                                                                                                        6%
               2

                                                                                                        4%
               1
                                                                                                        2%


               0                                                                                        0%
               Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

                         AUM of OTP MMF                                  Volume of retail term depo
                         3M p.a. past yield of OTP MMF                   Best retail deposit offer*


 OTP MMF 3M p.a. past yield was close to but 1-2% below the best prevailing retail deposit offer of OTP Bank Plc.
 Difference between peformances of the 2 key instruments can be considered as price of liquidity
 Investors are tend to pay this price as they are compensated through the daily liquidity



    17                                                                                                               17
    Development of OTP MMF penetration in retail clientele




                                 Close and remove of inactive
                                  accounts from the account
                                        keeping system




Source: OTP Bank DataWarehouse



    Around 330 000 active retail clients with securities account in OTP Bank Plc. – ca. 10% of total clientele
    120 000 clients have MMF – ca. every 25th retail client has MMF within OTP Bank Plc.
    The numbers of clients having OTP Bonds and Mortgage Bonds is also constantly growing as a clear result in
        strengthening risk aversion due to the credit crises and related capital market impacts



       18                                                                                                         18
Conclusions: „We need…


 to do efforst and bring new innovations


 to think of opportunities for modernization and adjustment of legal legislation


 to educate ourselves, our sales staff and our clients permanently and


 to intoduce new ideas and products through simple ans easy understandable basic
   solutions




                                     …in order to avoid…




 19                                                                                 19
…these kind of situations…




 20                          20
     Thank you for your attention!




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