The tug-of-war between the Ministry of Finance and investment funds like PSIS's Sporofond has evoked suspicion among small investors towards collective investment, with the result being that many are drawing their money out of funds and "pouring them back into banks," said Rudolf Lachkovič, president of the Association of Investment Managers and Companies in Slovakia.
Fearing this development, many investment companies and funds have been transforming themselves into joint-stock companies within the last year. By doing so, they are able to offer essentially the same services to investors as investment companies, while unleashed from present legislation and state supervision.
"It is a question of whether to have funds that are not controlled by the Ministry of Finance, are not obligated to comply with legislative limitations, and, therefore, have higher profits," Lachkovič said, "or funds that respect specific restrictions, are closely monitored by the Ministry of Finance and have lower profits." According to Lachkovič, 10-12 companies have made the switch to date. Other firms, such as First Guaranteed (FG) and First Pension Income (FPI), were created as regular share companies.
The advantages of being a regular share company rather than an investment company are multifold, according to representatives from firms that have done it. Share companies are not bound by legislation stipulating that a fund can own only 10 percent of shares of one issuer, a requirement that Andrei Bartolomei, the general director of Fingroup (a holding company of FG and FPI), considers "deadly." "Acquiring larger stakes in companies is the only way to make money on the Slovak capital market," Bartolomei said.
Another restriction that First Guaranteed and First Pension Income, created in August 1995, wanted to avoid is having to place all its resources on the capital market. Both companies strategically invest their fixed assets in the marketing and advertisement industries.
Out of EU's bounds
While these transforming companies escape regulation, some investment company managers say their activities run counter to financial sector regulations in the EU's member application manual, "Preparation of Associated Countries of Central and Eastern Europe for Integration into the Union's Internal Market," also known as the "White Book."
"The path of joint-stock companies outside the range of present control seems questionabl,." said Matej Smieško, director of the Renta investment company, alluding to the White Book. But the path is enticing. FG, the share company, offers its stocks to investors and signs a buy-back futures contract with its shareholders with a specific price and expiration date.
Investment companies offer a similar product called close-end funds. With them, though, the owner of units cannot sell them back to the company until a set time ranging from years to decades. After that time, the owner will receive the whole accumulated sum or a regular payment as the investment is further graded. Such payment could be also understood as a kind of retirement benefit. "After Sporofond, we opted for close-end funds," said Ján Tušim, the director of the First Pension investment company. "Investors' interest is increasing."
But there is a distinction between products offered by newly-transformed share companies and those by investment companies. The investor has a set interest rate stated in a legal document with a share company like First Guaranteed, while an investment company like First Pension does not guarantee but only predicts the investment's future value.
The individual investor's preference is clear. Investment companies like First Pension expect to clear 100 million Sk by the end of the year through offers of pension products; in contrast, share companies like FG and FPI, expect double that providing comparable services.
But this may come to an abrupt end. "[Such] transformations are illegal," said Jozef Magula, Deputy Finance Minister. "FG and FPI are cases of [taking advantage of] legislative loopholes which the legislation we are now preparing should eliminate."
What Magula wants to do is create new laws that will bring share companies back under legislation but allow them more flexibility than before when operating under legal requirements. "We want to create a broad spectrum of subjects in collective investment where citizens can choose between risk and profit," Magula said. This in turn will create more options to individual investors, he added. Furthermore, the Ministry of Finance wants to initiate educational programs, Magula added, so that it would not have to protect small investors on such a scale as it does now.
"What occurred [with the shutdown of Sporofond and other investment funds] has created a good basis for honest collective investment," Magula said. "The time of gold-mining must end."
There are basically only four choices an individual investor can choose from if he wants to invest on the capital market. He can go either to a securities dealer, an investment fund, an open, or an close-end fund. While some securities dealers do provide public services, it is mainly as conduits for the deal, and not advisors to investors. _ubo_ ÁŹ of Eastbrokers recalls only two or three cases when the individual investor knew exactly where to put money for profit.
A product which would also involve professional skills of a securities dealer in valuating money is called portfolio management. But the individual investor must have a lot of money to play with to make it intersting for the broker. "To make it attractive for Invest Brokers, the investor has to have at the very least 200,000 Sk," Milo_ SuroviŹ of Invest Brokers said. "I am not aware of any securities dealer which would ordinarily offer such service," he added pointing out considerable amount of required labor and instillation of a special software. Both SuroviŹ and ÁŹ would rather prefer larger, or institutional investor.
An investment fund, as another option for a small investor, seems complicated whereas he [fund or investor] has to buy its shares on an organized market. Also, price of the bought security is a result of supply and demand, or, in other words, can heavily fluctuate.
Many of these problems are solved by an open-end fund which sells its own units and is obligated by the law to buy it back at any point according to the will of its owner. The law even commands the fund to pay the buy-back off in 30 days at the latest. These transactions are provided by the fund itself. The unit price is computed from an actual value of the fund's portfolio divided by number of units. Yet, after Sporofond, this solution is being less and less exercised as shown by the graph. "People are afraid they will lose their primary investment," LachkoviŹ said.
"It is only a by-product," LachkoviŹ continued, since the managing investment company can charge a maximum only one percent. He drew attention to the fact that every functioning open-end fund has, in essence, a strong supporter who helps the managing investment company.
Actually, the valid legislation requires every investment company to manage an open-end fund. "Investment companies establish such funds in silence only to satisfy the law," LachkoviŹ said. According to him, some of these funds are only a bunch of papers. A close-end fund is another possibility for a small investor.
Offering similar products, Renta also chose close end-funds. Matej Smie_ko of Renta explains that in open-end funds it is hard to "apply mathematics." The problem lies in the right of every unit-holder to draw his money from the fund whenever he wants. The law further commands liquidation of such fund when at least one third of its assets are drawn out.
In spite of this disadvantage, Renta is thinking of an open-end fund. According to LachkoviŹ, this type of fund will be very popular when the trust in collective investment is restored. He estimates it to five or six years with the presumption that no more similar affairs will occur.
In order to evade another anti-fund decision of the MF, investment companies and investment funds brought up a movement of transformation to regular joint-stock companies unleashing themselves from the present legislation and state control.
On the other hand, First Guaranteed and First Pension Income do not comply to the special legislation for investment companies and investment funds or the state regulation. Such freedom evokes uncertainty in Smie_ko. "Control of activities in financial sector is indispensable according to the Preparation of Associated Countries of Central and Eastern Europe for Integration into the Union's Internal Market ( known as 'white book'). From this point of view, the path of joint-stock companies outside the range of present control seems questionable," he said. "I do not see close or open-end funds as rational," Bartolomei said.
11. Sep 1996 at 0:00 | Andrej Čop