The trend toward international portfolio diversification has gathered pace in the last year or so in Greece as average local investors follow in the footsteps of their wealthier peers with the encouragement of some large banking groups. Affluent Greeks, mainly shipping magnates, businessmen and corporate executives knew all along the benefits of portfolio diversification. Some were forced to learn it the hard way because of the restrictions on the movement of capital imposed in the past by the Greek state. Having a bank account in Switzerland or other countries was so common before Greece joined the eurozone that the former socialist PASOK government a few years ago tried to follow the example of its Italian counterpart and lure investors back to the country by offering a tax amnesty. The policy failed, attracting just a few billion euros from the estimated hundreds of billions deposited in banks outside Greece. Other wealthy Greeks followed suit during the last few years as local banks placed more emphasis on private banking and international banks set up local offices to seek out rich customers. Although no relevant statistics are available, top bankers estimate that the number of private banking clients currently exceeds 50,000 in Greece and this figure is expected to rise further as the economy continues to grow and incomes rise. These private banking clients have been introduced to the concept of international portfolio diversification by their account managers and have placed some of their cash in foreign securities, that is, stocks, bonds, commodities, etc. However, it turned out that the average retail local investor was a late convert, eventually vindicating the forecasts of bankers and mutual fund managers with international experience back in the late 1990s. For the latter had predicted that the average Greek retail investor would invest a sizable portion of his money in foreign securities, especially those denominated in euro, following Greece’s entry into the eurozone, like others had done before, particularly their Portuguese and Belgian counterparts. Getting riskier The huge losses suffered by many investors during the Athens bourse’s prolonged slump from mid-September 1999 through to March 2003 may have something to do with this tardiness. The average investor became more risk averse, opting for savings and time deposits at banks rather than investments in securities, even though after-tax interest rates were below the inflation rate. Although it took a few more years, the average retail investor finally yielded. Starting in 2004, he gradually placed more money in domestic mutual funds that invested primarily in foreign stocks and bonds. The move toward international investments has accelerated this year as some major local banks appear to be encouraging their clients to switch and/or add money to mutual funds set up abroad, e.g. in Luxembourg, but administered by their asset managers in Greece. According to data of the Association of Institutional Investors, there are 268 Greek mutual funds and 61 mutual funds of foreign capital markets which are domiciled abroad but managed by three Greek mutual fund asset management companies (AEDAK). The assets being managed by these latter companies almost tripled between early 2007 and the end of April, becoming the fastest growing category. The assets in the portfolios of the so-called mutual funds of foreign capital markets totalled -2.46 billion at the end of April, up 183.9 percent from about -868 million on January 1, 2007. The second fastest growing category with an increase of 22.1 percent during the same period was that of Greek mutual funds investing at least 65 percent of their assets in foreign money market instruments. This is also the largest category in terms of absolute figures, with the respective assets reaching -5.47 billion at the end of April, up from -4.48 billion at the beginning of the year. A look at net inflows, that is, inflows minus outflows from shareholders, to the mutual fund industry during the first four months of the year shows that net inflows to the category of mutual funds of foreign capital markets surpassed -1.5 billion to reach -956 million in the case of Greek mutual funds investing primarily in foreign money market instruments. Moreover, net inflows to the 61 mutual funds based abroad were almost equal to the net outflows of all other mutual fund categories. It is clear that this would not have happened without the encouragement and guidance of large local banks. The latter have realized that the old policy of trying to keep retail mutual fund clients within their group by alternatively offering banking products and Greek mutual funds investing in foreign money market instruments and securities was no longer effective. They also understood that selling clients units of certain mutual funds of well-known international banks investing in foreign capital markets did not generate the same amount of fees. So, they set about establishing their own mutual funds abroad, in countries offering a much better tax and regulatory framework than Greece, such as Ireland or Luxembourg. This enabled them to reduce costs and share them with their clients. As a consequence, it is reasonable to expect that Greek banks and other local financial institutions will set up more of these mutual funds abroad in the coming months and years, thereby contributing further to the trend towards international portfolio diversification in Greece. The shift by the average Greek investor towards a more international, diversified portfolio is a welcome development because it should lead to higher returns for the same level of risk in the medium term. The Greek authorities should embrace the trend by making it easier and less costly for local institutions and individuals to set up mutual funds and other investment vehicles investing abroad so as to avert what will otherwise be an inevitable loss of taxes and jobs.