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1
Mutual Funds in Russia:
Developments and Prospects
April 23, 2003
PIOGLOBAL Asset Management
2
Mutual Funds in Russia: Developments and Prospects
PIOGLOBALOur Success in the Russian Market
Established Financial Services and Real Estate operations
Disciplined institutional strategies that capitalize on internal skills, experience, and research capabilities
More than $100 million in assets under management in PIOGLOBAL funds
Controls 20% of the Russian open-end unit fund industry
Proven Russian performance and the best customer service in the market
Extensive nationwide network of contacts
Over 60 highly qualified Russian and Western employees
Named #1 Asset Management Company in 2002 by rating agency RosBusinessConsulting, Business Open and Euromoney
PIOGLOBAL Asset Management
3
Mutual Funds in Russia: Developments and Prospects
Positive developments Political stability, previously
undreamed of
Improving fundamentals (stable exchange rate, reduced inflation, budget surplus, trade surplus)
Unprecedented pace of structural reforms
Growing domestic and foreign investment, capital flight curtailed
Growth in real earnings and increased consumer confidence
Foreign debt repaid ahead of schedule
Possible concerns Global slowdown, significantly
reduced demand for energy and metals, expectations of declining oil and metals prices
GDP growth slowdown
Weak banking system
Although maturing, the Russian political system remains very dependent on personalities
Russian economy today Strengths and concerns
PIOGLOBAL Asset Management
4
Comprehensive tax reform
Restructuring natural
monopolies
Flat personal income tax at 13% Simplified corporate profit tax at 24% Jump in profit tax receipts, reflecting reform in force
Gas and electricity markets to be liberalized Establishment of Electricity Trading System Administrator Tariff hikes up to 35%, and repeated policy commitment to
at least the same level of real increases in 2003 and beyond
Pension reform
Pension reform introduced in 2002 Law on Investing Pension Reserves effective from 2003 Establishment of individual pension accounts
Russian Reforms in Progress
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
5
Financial changes
Stable growth in currency reserves Currency regulation will be liberalized Opportunity for the Russian citizens to invest in foreign
assets and open accounts with foreign banks
WTO and deregulation
Faster WTO acceptance is the main benefit to be reaped Small business licenses and regulations simplified Improved rate of small business creation In June 2002 Russia was awarded the status of market
economy by the US In November 2002 Russia was awarded the status of developed
economy by the EU
Corporate governance
In 2003 corporate governance is expected to continue to improve
We expect to see further developments in areas such as disclosure and appointment of independent directors
PIOGLOBAL Asset Management
Russian Reforms in Progress
Mutual Funds in Russia: Developments and Prospects
6
Russia Stands TallSelected GEM Indicators
Brazil South Africa Poland Russia
GDP growth 3.4 2.9 2.1 4.3
Domestic Investment (% growth) 4.6 7.0 3.0 14.9
Curent account balance -5.5 -0.4 -6.1 11.2
Reserves (% of Imports) 30.2 15.6 45.3 72.0
External Debt (% of GDP) 47.6 31.3 38.3 44.0
External Debt (% of exports) 351.9 89.0 158.3 132.0
Debt Service (% of GDP) 9.3 4.3 4.1 4.2
Debt Service (% of exports) 69.1 12.3 16.8 13.0
S&P Rating (November, 2002) B+ BBB- BBB+ BB
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
7
RTS Market in 2001-2002 and 1Q2003
0
10
20
30
40
50
60
70
80
90
100
Volu
me,
US$
mln
50
100
150
200
250
300
350
400
RTS
Inde
x
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
8
Market for Great Business Opportunity
Russia was the world’s second best performing market in 2001-02
Sovereign discounts are set to decline further
Stocks are still inexpensive compared to GEM
Growth is yet to be priced into the markets
Further re-rating is inevitable
Corporate governance is improving
Smart managers and stakeholders will need and want to open up to capital markets
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
9
Stocks are still cheap compared to GEMsRussian valuations relative to global emerging markets
Hungary
Turkey ArgentinaMalaysia
Singapore
Taiwan
Hong Kong
India
Russia
South Korea
Poland
Czech Republic
Brazil
Mexico
Chile
Peru
China
Philippines
South Africa
Israel
5
10
15
20
25
30
2 4 6 8 10 12 14 16 18 20
EV/EBITDA 2002E
P/E
20
02
E
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
10
Growth is yet to be priced into the marketsRussian growth relative to GEMs
Russia
South Africa
Israel
Indonesia
Brazil
Poland
Czech Republic
HungaryGreece
Turkey
Malasya
South Korea
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
2003E GDP growth, %
2002E
GD
P g
row
th, %
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
11
Mutual Funds in 2002International Comparisons
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
Assets under Management
Number of Funds
United States 7,062,027 8,381
Luxem bourg 773,732 6,766
France 734,823 7,682
Italy 352,135 1,060
United Kingdom 346,494 1,844
Japan 310,808 2,805
Germ any 212,887 1,072
Ireland 209,222 1,650
Brazil 155,506 2,551
Korea 129,250 7,058
Mexico 35,217 355
Greece 20,819 266
Portugal 16,773 199
South Africa 15,550 434
Poland 3,213 93
Hungary 2,934 91
Czech Republic 2,177 77
Russ ia 374 51
Rom ania 17 22
Source: Investment Company Institute. International Mutual Funds Survey
12
Mutual Funds in Russia: On the Road to Success
Overcoming of 1998 financial crisis
Robust sales growth
Improved attractiveness of mutual funds
New law on investment funds and regulations
Association of fund managers is playing a very active role
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
13
Mutual Funds in Russia: Favorable Tax Regime
Mutual funds do not pay profit tax
Mutual funds do not pay tax on dividends received
Unit holders do not pay taxes on unrealized capital gains
Income tax of individual unit holders is collected and paid by the Management Company
Legal entities are allowed to reduce taxable income by the cost of the units purchased
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
14
Mutual Funds in 2002-1Q03
Source: National League of Fund Managers, 2003 update
PIOGLOBAL Asset Management
Fragmented industry: out of 92 management companies in Russia 42 were registered in 2002 and 10 in 1Q2003
Low barriers to entry: 19 unit funds were registered in 2002 (3 closed, 4 interval, 12 open) – compared to 14 in 2001 and 11 in 2000
Assets are highly concentrated: top 5 companies occupy 91.5% of assets, compared to even higher concentration of 94.29% in 2001
Around 11,100 investors in all funds by the end of 2002 compared to around 6,300 at the end of 2001
Individual investors are still “trading funds”
Mutual Funds in Russia: Developments and Prospects
15
Industry: Assets Under Management
PIOGLOBAL Asset Management
Source: National League of Fund Managers, April 17, 2003
Closed2%
Interval77%
Open21%
Mutual Funds in Russia: Developments and Prospects
16
Open-End Funds AUMMajor Competitors in $80 million Universe
DIT9%
UFG3%
Regiongazfinance11%
Pioglobal20%
Pallada3%
Other13%
Optimum Capital M anagement
1%
Nikoil1%
Troika39%
PIOGLOBAL Asset Management
Source: National League of Fund Managers, April 17, 2003
Mutual Funds in Russia: Developments and Prospects
17
PIOGLOBAL Asset Management
Independent Qualitative Rating of Management Companies
Assets
Acitity in attracting investors
Market presence
Management fees Own equity Profitability
Overall rating
PIOGLOBAL AM 8
Troyka 8
NIKoil 7
MenedgementCenter 7
AlfaCapital 5
MontesAuri 4
Pallada AM 4
UFG 4
Monomah 3
AVK 3
DIT 2
Optimum CM 2
Capital AM 2
Source: National League of Money Managers, “Your Money” magazine, April 2003
Mutual Funds in Russia: Developments and Prospects
18
Significant Increase in the Average Purchase Size(in USD)
1999 2000 2001 2002 1Q2003
INSTITUTIONAL CLIENTS 7,926 6,855 15,131 17,574 43,069
INDIVIDUALS 881 1,157 1,015 1,986 2,292
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
Source: PIOGLOBAL Company Data
19
Average Purchase as Function of Investor Age (in RUR)
PIOGLOBAL Asset Management
18, <30 Under 18 In their 30s In their 40s In their 50s Over 60 All
Source: PIOGLOBAL primary research.
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
90 000
100 000
Mutual Funds in Russia: Developments and Prospects
20
PIOGLOBAL Asset Management
“Foreign Roots” – 5%
“Past Performance” – 30%
High reputation and good brand name – 47%
“Other” – 12%
“Hard to answer” – 6%
Most “Reasonable” Guarantee of Success According to Russian Investor
Source: PIOGLOBAL primary research. 4052 respondents.
Mutual Funds in Russia: Developments and Prospects
21
PIOGLOBAL Index FundA unique product in the Russian Market
The first index-based interval mutual fund in Russia. Registered by FCSM on January 22, 2003
A successful combination of two widely-recognized brands of PIOGLOBAL and MICEX
A unique opportunity for investors to enter and exit the market at a low cost
High transparency and diversification
Passive management, free of individual bias
Low costs: management fee 0.5%, overall costs below 1%
Expected dividend yield in the range of 2.0-3.5%
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
22
MICEX IndexA widely recognized market tracker
Index - developed and administered by the Moscow Interbank Currency Exchange (MICEX).
Comprised of 18 stocks of the 12 most liquid companies, which represent 90% of the total market
Market Cap weighted
Adjusted for Free Float and Liquidity - two parameters crucial for the Russian market, dominated by closely-held and partly government-owned companies
Calculated on-line and overseen by the MICEX Index Committee which includes members of investment community and PIOGLOBAL representatives. Restated quarterly
The Fund’s portfolio will track the Index and will not deviate from it by more than 3%
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
M
i
k
i
M
ii
k
i
kk
Cap
AdjCapDMICEXMICEX
1
1
11
)*(
23
PIOGLOBAL Index FundSources of liquidity
The Fund will be open for purchases and redemptions 4 times a year
The Funds units will trade as individual stocks in the secondary market (MICEX and OTC)
Available to a wide range of investors Accessible in the regions Lower service fees charged by National Depository Center (in comparison to
stocks)
Daily liquidity maintained by market makers
Units will not sell short or be bought on margin
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
24
Mutual Funds: Further Developments
Pension reform
Education of general public
Increasing horizon for individual and institutional investors
Growing distribution network
PIOGLOBAL Asset Management
Mutual Funds in Russia: Developments and Prospects
25
PIOGLOBAL Asset Management
ПИОГЛОБАЛ Эссет Менеджмент
PIOGLOBAL Asset Management