Foreign funds dawning
The long-awaited shift of Greek private investors toward international securities, mainly stocks, bonds and money market instruments, has started, according to bankers, a move confirmed by available data on the mutual fund industry. This is a blessing both for the average Greek investor, who can look forward to a better risk-adjusted return, and for the Greek financial services industry that appears to encourage it, reaping the profits. A number of bankers and mutual fund managers predicted in the late 1990s that the average Greek investor would follow the example of his Belgian or Portuguese colleagues after the country joined the European Monetary Union and put a good deal of his portfolio money into foreign securities, especially those denominated in euros. Subsequent developments did not vindicate these predictions despite signs of a shift toward international portfolio diversification a couple of years or so ago. Bruised by the protracted slump of the Athens bourse from mid-September 1999 through March 2003, hordes of Greeks turned their backs on risky assets, especially equities. They chose instead to put their savings into low risk-low return investments such as repos, time deposits and government securities via bond funds, even if it meant a loss in purchasing power since nominal interest rates and returns after taxes were often lower than inflation, running above 3.0 percent on average during this period. The average Greek retail investor did not return to the Athens stock market even after three years of exceptional double-digit returns spanning April 2003 to end-2005, but the gap was more than filled by foreign institutional investors, high net-worth Greek individuals and others who helped propel the Athens General Stock Index to levels not seen since December 2000. It is reasonable to say that the painful experience of the Athens bourse may also have played a role in dissuading them from turning to foreign equities at least in sizeable numbers. Of course, aggregate mutual fund industry data revealed a slow turn toward foreign securities from 2004 onward, but the numbers were not that big. So it is safe to say that the unpleasant experience with the Athens bourse helped shape a more conservative investment profile with money market instruments, bonds and capital guarantee products dominating their portfolios. Of course, many retail investors, encouraged by the lowest mortgage rates in generations, chose to invest in real estate, paving the way for the steep advance in prices which have made it one of the best investments so far this decade. But this conservative attitude toward investing appears to be changing, starting from the more affluent private banking clients to the average individual investors. «What has really struck me is the fact that many individual investors demand a diversified international portfolio,» says Petros Christodoulou, general manager at National Bank of Greece who also heads the private banking division. Christodoulou, like other bankers, find Greeks, especially private banking clients, more receptive to recommendations that invest their money into foreign securities from developed markets such as eurozone, US and Japan to riskier emerging markets. He like others sees a growing appetite for information about alternative investments abroad from Greeks who appear to be more reluctant to venture beyond conventional bonds and capital guarantee products. A more aggressive investment attitude is also detected by local brokers, who are happy to see that slowly but steadily retail investors are becoming more active participants in Greek equities in the last few weeks. There are no numbers, however, to support this view beyond the out-performance of mid- and small-cap stocks, which is the preferred vehicle for investment on the Athens bourse by individual investors. Nevertheless, figures released recently from the Association of Greek Institutional Investors referring to the mutual fund industry in 2005 confirm the existence of three trends. First, a major shift toward international securities; second, the growing share of bond funds at the expense mainly of money market funds; and third, a migration away from domestic equity funds. At the end of 2005, assets under management from international bond funds reached 8.59 billion euros, exceeding those of domestic bond funds, which stood just below 5.0 billion euros. Net inflows into international bond funds managed by domestic institutions surpassed 6.2 billion euros last year, which explains the turnaround. A similar trend was detected in the money market fund category, where net inflows into international money market funds reached 1.8 billion euros, helping propel assets under management to 2.27 billion euros compared to 2.66 billion for domestic money market funds, which saw huge outflows in the order of 12.4 billion. It should be noted, however, that some of these huge flows are due more to technical reasons than anything else. The same story played out in the balanced funds category as well, with outflows from domestic funds reaching 1.76 billion euros compared to inflows of 737 million into the international funds. Given the significant weight of local banks in the mutual fund industry, one is right to assume that the huge inflows into international funds partly reflect the wish of the parent banks of mutual fund companies. After all, the management fee is larger in a balanced or a bond fund than a money market fund, and this is something banks seeking to maximize shareholder value cannot afford to ignore. It is known that a large Greek bank made a major effort to convince its clients to transfer from the money market fund category into other categories, especially bond funds. Whatever the reasons, the underlying shift toward a more international portfolio is a fact and it is more likely to be solidified and perhaps accelerated in 2006 as more Greeks come to know the merits of international portfolio diversification. To the extent that individual investors earn a higher return for the same level of risk and the institutions encouraging them to do so earn a higher fee, amounts to what we can call a win-win situation. In this respect, leading the charge toward international portfolio diversification is better than waiting for this to happen by somebody else, perhaps financial institutions located abroad. On the other hand, it may be painful for the Athens bourse since potential investable funds go into foreign securities, but there is still plenty of domestic liquidity available even now for Greek equities, which at this point benefit from foreign inflows.
