Fall in portfolio investment firms affects depth of capital market
A great deal is being said lately about portfolio investment companies (PICs), their shares, their book values and the benefits these confer on their parent financial groups when merged with them in the form of either tax breaks or in improving their capital base. Given the current fluidity and uncertainty, the investment community is giving great consideration to the future of PICs. As opposed to mutual funds, which are open-ended and whose assets vary under management as investors buy or sell shares, PICs are closed-end funds, that is, their assets are given under management at any time. PIC shareholders mainly invest in the value and quality of the company’s portfolio, which determines the share’s internal value, meaning its net asset value. The price at which the share is traded usually differs from its book value. If it is higher than the book value, then the share offers a premium. If it is lower, it offers a discount, which shows an investor how to buy into the portfolio at much cheaper than its real value, which either reflects an investment opportunity or bad quality portfolio. In the current negative stock market climate, the shares of listed PICs are traded at an average discount of 40 percent. As asset management is a relatively new institution in Greece, with few firms possessing the considerable experience and know-how required, most PIC managers – like most of their mutual fund counterparts – have a limited investment base and operate without the full range of modern investment and risk management tools. PICs and equity funds that have managed to outperform the indices are rare. Such trends, combined with the stagnation of the capital market, are now threatening to shrink the PIC sector, as various financial groups are seeking possible short-term benefits from mergers with their PIC subsidiaries. But a possible shrinkage of the sector is likely to have negative repercussions on the Greek capital market. For one thing, it will further erode real market liquidity at an already difficult point in time and it will further reduce market depth – the number of active investors, liquidity and trading volume. Authorities and market players, unfortunately, do not seem to have realized that PICs are about the only investment vehicles in the Greek capital market, which does not wield the flexibility of other developed markets. The lack of flexibility – largely the result of the lack of market depth – hampers the creation of funds of specific investment strategies and orientation, leaving the investor between the options of PICs and shares. If PICs shrink, individual shares are the only option left. PICs are the only institutional funds in Greece requiring complex and independent management through systematic portfolio restructuring and dynamic asset allocation. This is because the structure of their portfolio is not subject to the limitations that mutual funds are. A PIC manager undertakes a given volume of capital and the development of this fund over a period of time determines its performance in relation to that of other managers. A manager’s track record, therefore, is built by comparing the performance of different PICs. Christos Avramidis is the chief economist at Proton Investment Bank.
