Investing in foreign securities is slowly but surely gaining ground

Faced with very low money market rates and government bond yields, and hesitant to commit more funds to the local stock market in view of the steep losses incurred during the protracted stock market slump, more and more Greek individual investors have started flirting with the idea of putting more money, either directly or indirectly, in foreign stocks and bonds. Although it looks as if it is going to be a slow process, this represents a challenge to the local financial services industry. A few years ago – that is, prior to Greece’s joining the eurozone at the beginning of 2001 – many pundits expected Greek investors to follow the example of their counterparts in other European Union countries, such as Portugal and Belgium, and put a good chunk of their money into mutual funds, investing mainly in foreign stocks and bonds. This dramatic shift never occurred. However, slowly but steadily, a growing number of local investors is willing to engage in some sort of international portfolio diversification. This is more evident in individuals with a good deal of personal wealth who usually follow the advice of bank officers, managing their accounts in local private banking departments or asset management offices set up here by well-known foreign banks. This is also evident, to a lesser degree, among investors with modest portfolios who are willing to take a bet on a foreign stock index or stocks or even invest in foreign securities in search of higher yields. Conservative investors By all accounts, the average Greek individual is conservative when it comes to investing. Nevertheless, past experience has shown he can be lured into speculative plays, mainly in stocks, with the promise of highly abnormal returns. Local stock brokerages understood this early on and tried to fill the vacuum created by the bitter memories of heavy losses on the Athens bourse by offering them access to major European stock exchanges such as Frankfurt. It is no secret that many Greek investors today bet daily on the direction of the German stock index DAX by buying and selling futures and options on that index, attracted by its high volatility. This, of course, does not mean the average local investor does not have a conservative investment profile as evidenced by the huge amounts of money they have parked in time deposits, repurchase agreements (repos) and money market funds despite the fact that money market rates are at all time lows. Just a look at the breakdown of the local mutual fund industry is indicative of the prevailing high degree of risk aversion. Greek equity and balanced mutual funds account for about 25 percent of the local industry’s total assets, whereas money market and bond funds take the lion’s share with about 75 percent. In the European mutual fund industry, excluding Ireland, the assets of equity and balanced funds account for 45 percent, whereas money market and bond funds account for about 53 percent, based on the most recent available data. Although the pace of international portfolio diversification is admittedly slow in Greece, it is definitely alive and there are signs from the mutual fund industry that demand for units in funds investing in foreign securities is slowly but steadily gaining ground this year albeit starting from a low base. Bond funds preferred According to data compiled by the Association of Greek Institutional Investors, the outstanding number of domestic bond fund units increased by 34.45 percent to about 831 million from the beginning of the year through September 30. Foreign bond fund units increased by 50.18 percent to 129.4 million and international bond fund units jumped 73.21 percent to 141.6 million during the same period. The total number of balanced mutual fund units fell by 40.39 percent to about 494.2 million year-to-September 30 but the number of foreign balanced fund units rose a spectacular 70.11 percent during the same period to 1.8 million. International balanced fund units eased 0.63 percent to 19.8 million. In the category of equity funds, foreign funds saw their units increase by 12.24 percent to 138.4 million by end-September and international funds by 7.49 percent to 23.3 million, whereas domestic equity fund units rose a mere 2.70 percent to 739.7 million units. Outstanding units at domestic money market funds rose 43.85 percent to 2.98 billion in the first nine months of the year, whereas foreign money market funds experienced a decline of 4.90 percent to 22.1 million in the January-to-September period and international money market funds had an impressive jump of 542.65 percent to 13.3 million. It should be noted that the so-called foreign equity funds are required to invest «no less than 65 percent» of their total assets in foreign stocks, whereas the so-called international equity funds invest both in domestic and foreign funds. The same classification applies to bond funds, money market funds, balanced funds and the so-called special type funds. So far, this process is slow and has done little to drain liquidity from the Athens bourse or from Greek government bonds where a few local banks and large foreign banks dominate. Contrary to that, foreign funds appear to have increased their exposure in Greek stocks and bonds. It would be too good to believe that this trend will continue in the years to come when the Greek economic engine is expected to slow down. The chances are that more and more Greeks would be willing to put a bit more of their cash into buying foreign stocks, bonds and other structured financial products. A few local banks and brokerages have grasped this unfolding reality and have presented their customers with financial products, incorporating international investment choices, giving more impetus to the underlying trend of international portfolio diversification. The majority of local financial institutions though still sticks to a more Greek-centric investment approach and therefore runs the risk of losing market share and revenues in the years ahead.

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