Russia’s long-term investors put faith in bank deposits

Russian pension funds and asset managers are flocking away from equities, towards bank deposits, reflecting the tendency that has prevailed among local retail investors all year.

The reason is simple – bank deposits still offer around 10% annual returns, well above the 6% inflation in the country.

Equities, on the other hand, have not performed so well this year. In the second quarter, the MICEX index fell 17% relative to the corresponding period last year.

As a result, both managers and pension funds have cut their allocations to equities, shifting assets into fixed income products and deposits.

On average, local asset managers reduced allocations to equities by 13.3% last quarter.

The proportion of pension assets invested in equities is even lower. Last quarter, it fell by around a third to 8.8%, according to the Federal Financial Markets Service.
At the same time allocation of pension assets to deposits almost doubled to around 18%.

These more conservative investment strategies were adopted by both the state controlled investment management firm, Vnesheconombank, which controls the assets of the state pension fund, and private market participants.

Although the local law allows managers to invest up to 65% of pension savings and 70% of pension reserves in equity, they say there in no point to take on the extra risks when the rewards are not there.

Even the conservative portfolio of Vnesheconombank, invested in deposits and fixed income, made 7.71% by the end of Q2, comfortably beating inflation.

As banks maintain interest rates above inflation, investors are also driven away from mutual funds. The mutual fund industry in Russian has been in decline for several years.

Anton Rakhmanov, managing director at Russia’s Troika Dialog Asset Management says: “99% of the Russian population prefers to keep their assets in bank deposits. There is simply no point investing in funds, which are higher volatility, but don’t bring better returns.”

Practitioners do not expect to come back to equities until the market becomes less volatile or bank deposits come down to lower levels.

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