Greek funds’ low returns
The Greeks poured cash into international mutual funds and pulled money out of domestic funds in 2004, confirming that a transformation of Greece’s mutual fund industry is under way. Although a reallocation of assets toward international mutual funds should be expected given their small market share in the local industry, this development also reflects disappointment over the performance of domestic funds. Surprising as it may sound, the latter should be mainly attributed to the hesitancy of local banks, the major shareholders of AEDAK (Mutual Fund Management Companies) to fully embrace the concept of financial supermarkets, promoting competition. Assets under management in the Greek mutual fund industry grew by 4.0 percent to more than 1.2 billion euros last year but this development reflected higher asset prices rather than net inflows. In total, net inflows into the Greek mutual fund industry amounted to some 54 million euros in 2004 compared to 139 million a year earlier. The domestic money market, equity and balance funds realized huge outflows in the order of 737, 416 and 346 million euros respectively. Domestic bond funds managed to go against the tide with net inflows of 88 million euros. Contrary to domestic mutual funds, other funds, domiciled in Greece but investing the majority of their assets abroad, did much better. Net inflows into international bond funds exceeded 700 million euros, into international equity funds, 160 million euros and into international balance funds investing in both stocks and bonds, 370 million euros. Local investors poured some 150 million more than they withdrew from international money market funds last year. Still, the market share of international mutual funds in the local industry remains small compared to other countries as Greeks did not follows the example of their Spanish, Portuguese and Belgian counterparts to invest abroad following the introduction of the euro a few years ago. Moreover, the Greek mutual fund industry remains at odds with the average European fund industry. Greek equity funds account for some 16 percent of all assets and money market funds for some 49 percent whereas the average European equity funds have a market share of 34 percent and the money market funds about 22 percent. So, what is wrong with the Greek mutual fund industry? Take a look at the returns, the experts say. Indeed, for yet another year, the average return of the domestic equity funds came out at 10.2 percent, underperforming the benchmark General Stock Index on the Athens bourse. The latter returned some 23 percent whereas the blue chip FTSE/ASE-20 did even better, advancing more than 32 percent in 2004. In addition, only two out of 68 domestic equity funds managed to beat the General Stock Index. Both funds portray themselves as index funds while some funds managed to produce a loss for their shareholders. Regulatory constraints Fund managers are quick to blame the underperformance on regulatory constraints such the requirement that mutual funds invest up to 10 percent of their assets in a single stock at a time the market capitalization of certain listed companies warrants greater allocations. The same managers admit that the funds’ misguided view of the market’s direction also played a role in producing poor returns. Some are willing to go a step further and blame a small portion of the underperformance on interventions by parent companies, usually banks, in investment decisions. The latter presumably serve more the business interests of the parent rather than the interests of the funds’ shareholders. Poor performance But domestic equity funds were not alone in underperformance. The majority of domestic bonds funds also fared poorly last year, returning less than benchmark bond indices or the five-year and 10-year government bond. Only three bond funds managed to surpass the 4.0 percent mark last year while 10 bond funds returned less than 2.0 percent, the net interest rate any private investor can get in a repo or time deposit. Still, fund managers in this category appear to be less concerned, saying investors are still happy if the fund returns more than bank accounts. After all, most do not know that benchmark bond indices exist. So, the Greek average investor’s ignorance may have also played a role because it puts no pressure on mutual funds to improve their performance. Unfortunately, Greek investors are not shopping around for mutual funds. They usually stick to what their banker gives them and this promotes inertia. Although mistrust toward the stock market and the mutual fund industry, especially domestic equity funds, explains the huge net outflows from domestic equity funds, the poor returns produced by the latter has not brightened prospects. Fund managers say poor performance should also be attributed to lack of proper organizational structures, lack of staff as well as the training of the personnel. «The parents of AEDAK, that is, mainly banks, do not feel the pressure to do more. They are content to do what they have been doing and the people who sell at their branch networks are not interested either. Sometimes, they may forward client complaints to us or provide information on the selling of some mutual funds but nothing else,» says a fund manager at a state AEDAK. What could change the situation? Competition among AEDAK and banks, says the same fund manager. But this will not come about unless the concept of financial supermarkets takes hold here. Unlike in the US or in other European countries, where banks sell their competitors’ mutual funds to their clientele in addition to theirs, this has yet to happen in Greece except for very few large banks, such as Citibank, operating in the country. The major local players with the large distribution networks, that is large banks, have not yet reached this point. They have started selling mutual funds of foreign banks through their branch networks but not the mutual funds of their Greek competitors. This way, the average local investor does not have a greater menu of known domestic mutual funds to choose from and the banks do not sense the need to do more to help modernize their own mutual funds to attract new customers or retain the existing ones. This situation may suit banks at this point but cannot last forever. Strange as it may sound, it is in the best interests of local banks to realize that the benefits from the financial supermarket far surpass the costs. This way, competition will take off in the local fund industry and produce better returns, making their customers happy. If they do not it now, they will be forced to do so later at the expense of market share and fees.
