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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.
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Motto
Without differences im opinions there would not
be even horse race
Mark Twain Pudding Headed Wilson
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Nature of the current crises Is it severe?
Breakdown of crises by their nature from 1970 to
date
Credit crises
10
1
3
4
31
18
9
Real estate bubble based
Equity bubble 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 1970Source
IMF working paper What happens during
recessions, crunches and busts, December 2008
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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.
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And how much the financial industry was hit?
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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
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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 (SP500-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

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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

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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

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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

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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 T1/2 days or
  even T0), low face value of investment

• Reasons why MMFs 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

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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 CEEs 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 riskliquidity 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

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International experiences MMFs in Europe
Fund categories on the UCITS fund market -
2003-2008
Market share of MMF from the total fund market
2008Q4
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

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Domestic experiences MMFs in Hungary
Development of mutual funds in Hungary 1997-2008
Share of cash vs. Securities type investments in
households savings in Hungary
24
50
76
50
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, MMFs 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

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

• 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

• 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

Source OTP Bank DataWarehouse
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OTP MMF becoming key instrument without
cannibalization
Start of crisis
Capital gain tax introduction
EUR mn

• 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

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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

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Development of OTP MMF penetration in retail
clientele
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

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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
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these kind of situations
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Thank you for your attention!