Russian small mutual fund industry battles bank alternatives
Russia’s fledgling mutual fund management industry, still small compared to its peers in both developed and emerging markets, has its biggest battle on the home front: local bank deposit rates provide investors with a trusted and lower-risk alternative to fund investing.
At the moment, instead of growing like others around the world, Russia’s domestic mutual fund market is actually contracting. With an estimated value of around $4bn, it makes up just 0.25% of the country’s gross domestic product.
In comparison, Poland’s mutual fund industry was last year estimated at around $37bn, or 5% of GDP. In China it makes up around 10%, and it forms between 30%-40% in Latin America. In sharp contrast, figures from EFAMA, the European Fund and Asset Management Association, show total assets under management in Europe equal 102% of European GDP.
Russia’s fund industry is just over 15 years old. Anton Rakhmanov, managing director at Troika Dialog Asset Management, says: “The first fund [Troika’s] was formed in 1996, and since then the country has gone through four crises.”
As a result the local fund market has been extremely volatile, driving away both foreign and domestic potential investors. Russian investors are not engaged with the industry, even though household income is around 42% of GDP. That raises the question: what happens to the money not invested in funds?
Managers say the answer is that some is channelled into foreign or domestic bank accounts. Rakhmanov explains: “If current rates in the Eurozone are 1% to1.5%, in Russia you can easily get 9% to11% by just holding your money in a bank account, so 99% of the population prefers to keep their assets in bank deposits. There is simply no point in investing in funds, which are higher volatility, but don’t bring better returns.”
Of the 439 open-ended funds on the Russian market, 126 are currently listed on the newly-merged MICEX-RTS stock exchange, but since most funds are open-ended with daily liquidity, this does not influence fund selection.
Another factor may be that Russia still has no official fund management association to represent the industry to the investor base. In 2007 Russian fund managers formed the National League of Management Companies (NLMC), a not-for-profit partnership which currently has 65 management firms as members.