Presentation on theme: "Need for Liberalization in legal Legislation The Focus on Money Market Funds (MMFs) UAIB Conference June 18 - 21, 2009, Yalta Sándor Szalai Deputy CEO."— Presentation transcript:
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.
2 2 Motto „Without differences im opinions there would not be even horse race…” Mark Twain Pudding Headed Wilson
3 3 Nature of the current crises – Is it severe? Notes: 122 recession on OECD since 1970 Source: IMF working paper “What happens during recessions, crunches and busts”, December 2008 The current crises is the 5th from the last 132 where all the 3 dimensions as reasons are present Real estate bubble based Equity bubble based Credit crises 10 3118 4 1 9 3 Breakdown of crises by their nature from 1970 to date Others = 46
4 4 Was the impact on equity markets serious also in historical comparison? 2008 was the second worst year in the last 183 years Source: Bloomberg, OTP Fund Management Ltd.
5 5 And how much the financial industry was hit?
6 6 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:
7 7 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 What happened on CEE equity markets in 2008? – deep fall …
8 8 … 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
9 9 Data source: EFAMA, Bamosz Critical points: strong preference of local equity investments 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
10 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 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 Consequences Market of local mutual securities funds was hit at its infant stage of development Investors’ initial confidence broken
11 Which solution was missing? - money market funds for sure… Key characteristics of EU/CEE+ MMF tools 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 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
12 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
13 International experiences – MMFs in Europe * Figures contain only UCITS fund related numbers 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 Fund categories on the UCITS fund market - 2003-2008Market share of MMF from the total fund market – 2008Q4 Source: EFAMA report
14 Domestic experiences – MMFs in Hungary 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 Share of cash vs. Securities type investments in households savings in Hungary Development of mutual funds in Hungary 1997-2008 76% 24% 50% Source: Hungarian National Bank Source: Association of Hungarian Investment Fund and Asset Management Companies
15 In-house experiences – fund assets diversification within OTP Bank Plc. 30.04.2009 Very intensive product development, extension in product offering Launch of HUF mone market product (pure deposit fund) – January 2005 MMF takes over the role of base product Thanks to conscious product development and education clear move ahead of equity and capital protected funds 31.12.2004. Moderate width of product range No previous regular training of sales staff for diversifiaction and „fund portfolio” concept Very high concentration of assets in one single fund type: (short) bond funds Law awerness level both on sales and buy side regarding product knowledge High risk of non-diversified product portfolio both on OTP and client side Breakdown of fund classes by clientele types Source: OTP Bank DataWarehouse
16 Start of crisisCapital gain tax introduction 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 EUR mn OTP MMF – becoming key instrument without cannibalization
17 „Close to” term deposit performance with daily liquidity 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
18 Close and remove of inactive accounts from the account keeping system 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 Source: OTP Bank DataWarehouse Development of OTP MMF penetration in retail clientele
19 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…