Flight from Greek funds

The community of institutional investors worldwide is enjoying one of its best periods ever with assets under management growing fast and fund managers getting hefty pay and record bonuses on the back of a three-year rally in stock markets, buoyant commodity prices and the largely unexpectedly good performance by bonds, at least until now.  But this is not so in Greece. The local mutual fund industry is shrinking along with closed-end funds and many fund managers are wondering whether there will be any jobs left in a few years if this trend continues. Yet, despite this gloomy outlook, there is a hope provided by the government, the regulatory authorities, the banks and the fund managers themselves if they take the right steps. Outflows continue It was business as usual for the Greek mutual fund industry last week with net outflows hitting the domestic money market, bond and equity funds. According to data from Alpha Trust, spanning the period March 13 to March 23, unit holders redeemed shares worth 68.27 million euros in domestic bond funds and 34.32 million in domestic money market funds. Unit holders took some 16.31 million out of domestic equity funds, despite the fact that they only returned 1.36 percent on average. The domestic balanced funds category, which invests mainly in local stocks and bonds, fared better since it experienced net inflows of 2.29 million euros on a positive weekly return of 0.57 percent. Fund managers are seeing their assets under management get smaller as liquidations exceed purchases. In 2005, net redemptions in the entire mutual fund industry reached a record high of 5.79 billion euros, helping to bring net assets down by 11.62 percent. The domestic money market fund category and the domestic bond fund category were particularly hit but this can be explained to a great extent. Money market funds It is well known but a well-kept secret that banks and other institutions selling domestic money market fund shares gave their customers so called «indicative returns» on their investments for the time horizon sought which were usually higher than those paid by repos and classic bank deposits. The actual returns of such placements turned out to be exactly the same as the «indicative returns» stated in the contract and the individual investors came to expect them. But returns on mutual fund investments are not guaranteed and the new Capital Markets Commission, fully aware of the industry practice, decided at last to enforce the rules. This so-called technicality, along with the low returns paid in a period of historically low interest rates, convinced many unit holders to park their money elsewhere. They did so with the help of banks which offered them a wide range of low-risk products, such as short-term bonds and structured products offering additional returns. The low returns, even negative ones, offered by domestic bond funds also provided a good incentive for individual investors to flee. Most of them were used to the hefty returns of the good old days when the high-yielding drachma bonds were still around but this is not the case any longer. After all, bonds may be a safer investment than stocks but this does not mean they always provide a positive return. Greek bond-holders learned this lesson a little bit late and reacted accordingly. In addition, their returns were hit by taxes and other expenses. Greece applies a tax of 10 percent on coupon bonds and levies a 0.3 percent tax on the mutual fund’s next assets in addition to the management fee applied. This is very painful for investors when returns cannot exceed 3.5 percent, helping explain the hemorrhage. Fund of funds Moreover, a number of banks and others encouraged customers to switch to a new category of funds, the so-called fund of funds, which invests in the shares of other mutual funds. This category was one of the very few experiencing growth last year, as investors poured in some 550 million euros. Fund managers say in private that a mutual fund management company (AEDAKs) and its parent bank have an incentive to convince customers to put part of their money into this kind of funds, provided the cash goes into mutual funds of the same group. The reason? They earn more in commissions. As far as the almost continuous liquidations in domestic equity funds are concerned, despite a three-year period of double-digit returns, this has to do more with the lack of trust on the Athens Stock Exchange after the traumatic experience of the 1999-2000 bubble than anything else. The fact that local fund managers are not held in high esteem must also be related to this, although there has been progress in improving corporate governance in recent years. Fund managers also contend that Greek banks and others set up mutual funds abroad in countries such as Luxembourg to overcome over-regulation and heavy taxation at home. According to them, this deprives jobs in Greece and brings fewer taxes into state coffers. Of course, the shift of Greek private investors toward international securities, mainly stocks, bonds and money market instruments, has also contributed to the problems since part of the money is channeled into mutual funds abroad and operated by foreign entities. Undoubtedly, the local mutual fund industry is not going through its best days. Part of the problem though lies with old habits nurtured by an industry in search of higher profits. Still, the demand for lower transaction taxes and a more flexible interpretation of EU directives when becoming Greek law is rational and should be satisfied by the relevant authorities to make the industry more competitive. In addition, the stepping up of efforts to institute higher standards of corporate governance and a greater shareholder activity during the general shareholders meetings are also necessary to instill confidence in the industry’s role.