ROMANIAN MUTUAL FUNDS ASSETS PARENTED BY ASSET MANAGEMENT BANKING COMPANIES DURING

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1 ROMANIAN MUTUAL FUNDS ASSETS PARENTED BY ASSET MANAGEMENT BANKING COMPANIES DURING Ioana POP-RADU Babes-Bolyai University, Doctoral School of the Faculty of Economic Sciences and Business Administration Cluj-Napoca, Romania Abstract Lately, banks have expanded their range of services by launching subsidiary entities that manage investment funds. As a fact, among all asset management companies, banking groups represent the dominant parent category of the asset management controlling half or more of all asset management companies. Therefore, the main objective of the paper concerns analyzing the Romanian mutual fund parented and asset managed by banking groups. In order to evaluate their performance, first we present the asset management industry in Romania and highlight the important share market held by the asset management banking companies. Secondly, we emphasize the dimension of the asset management industry in Romania using several indicators grouped by type of asset allocation and by asset management banking companies, during 2007 to We find that the Romanian mutual funds managed under banking sector have defined the trend of the mutual fund market. Our findings on this topic add consistency within the national financial literature, by being the first attempt of study on presenting the Romanian banking asset management mutual funds. Following the analysis results, we conclude and promote future prospects for strengthening the further research. Keywords Mutual Funds, Asset Management Company, Asset under Management, Banking Management JEL Classification: G23, O16 1. INTRODUCTION Investment funds have spread rapidly for their ease access of small investors to the capital market. Also, these investment vehicles attracted most investors by assuring professional experience and services, better information and time economy. The base support of the access on the capital market - the bank intermediation is now gradually being replaced by associations or consulting and/or investment groups. However, banks remain an important player of the financial market since they have a wide area of financial service distribution. In order to maintain their share on the financial market, banking holdings have adjusted their services and created their own asset management companies that are accompanying the banking services. As a consequence, the European asset management industry was the extent to financial service groups. Such groups may be dominated by a certain type of financial services, or may consist of a mix of asset management firms, banks, and insurance companies etc. (EFAMA Report, 2012, p.12). Following a brief presentation of the role of the asset management companies, we extend our analysis on the Romanian case, since in the last

2 years, the Central and Eastern European countries registered a significant increase of this industry. While the Romanian mutual fund industry comprises only o share market of 0.3% of the GDP, this market presents attractiveness among investors since in 2009 it had attracted significant capital that has defined an increase of the funds total assets of almost 2300%. Therefore, it is important to check the significance of the banking involvement on distributing and promoting this investment opportunities among all investors. 2. ASSET MANAGEMENT INDUSTRY FACTS Large player across European countries concentrate more than half of the asset management companies. In order to see this, we observed the EFAMA facts and statistics report on the asset management industry in Europe, that its market ranks as the second largest market in the global asset management industry, managing 33% of global assets under management(i.e. AuM) (EFAMA, 2012, p.2). For 2012, EFAMA reports that the total AuM in Europe increased by approximately 12% in 2012 to EUR 15.4 trillion. Moreover, in relation to GDP, the value of AuM is estimated to reach 108% at end 2012, up from 99% in 2011 (EFAMA Asset Management Report 2013, p.37). In the case of Romania and Bulgaria, both comprise a small share of the AuM market, respectively EUR 1,7 billion and EUR 179 million at the end of In Europe, asset management is highly concentrated in a limited number of countries. The top three countries -- the UK, France and Germany -- together accounted for 65% of total AuM in Europe at end Instead, we can observe that Romania comprises a reduced share of the European asset management market, but becomes comparable in the number of AuM from Norway, Denmark and Slovenia. Particular cases are the one of France, Ireland, Luxembourg, Italy and Germany, countries that became home for the highest number of asset management companies. The high number of asset management companies operating in Ireland and Luxembourg reflects the role of these two countries in the cross-border distribution of UCITS and the regulatory requirement that was in place until the introduction of UCITS IV that require fund houses to have a management company in each country where they have funds domiciled. This does not mean that Luxembourg and Dublin have become asset management centers similar to London, Paris and Frankfurt. Indeed, most global asset management groups with a fund range from Luxembourg or Dublin operate under a delegation model, whereby the pure investment management functions are carried out in their asset management centers (EFAMA Report, 2012, p.12). In order to present a more comprehensive analysis on the investment fund assets of AuM, EFAMA reports high rations of AuM to GDP. For example, UK with a ratio of 91% and France with 71%, both surpass the European average of the AuM in relation to GDP (i.e.46%). These examples are particular since it reflects the importance of the asset management industry in these countries and promotes the ability of their asset managers in attracting assets domiciled abroad. Related to the asset allocation, it varies between investment funds. As the

3 UK accounts for one third of the total AuM in Europe, the European average accounts 29% on on the rest of the asset allocation, 46% on bond asset allocation, 11% on money market asset allocation and 14% to other types of allocation. In contrast to the European asset allocation, in Romania the AuM market comprises a share of 7% equity assets, 41% bond assets, 50% money market assets and the rest to other allocations. However, clear comparisons between the different allocations in the total AuM market can be seen within the equity assets and fixed income asset allocation. For example, the fixed asset allocation has risen in most European countries in 2011, with an average of 57%, as far as, this increase is defined by sustained low interest rates on shorttime period and despite the intense competition on the banking sector. 3. MUTUAL FUNDS ASSETS UNDER BANKING MANAGEMENT Banks have expanded their range of services by launching subsidiary entities that manage investment funds, the so called Asset Management companies (in Romanian abr.sai). Therefore, we use assets under banking management (abr. AuBM) term in order to express this particular case. Among all asset management companies, banking groups represent the dominant parent category of the asset management controlling half or more of all asset management companies in Hungary, Germany, Portugal, Greece, Austria and Turkey. The main exception to the bank dominated model is the UK. In the UK, only 18% of asset managers are owned by banking groups, with insurance groups controlling 17% (EFAMA Report, 2012, p.13). The advantages and the association with popular names of Romanian banking system (e.g. BCR, BRD, Raiffeisen, Banca Transilvania, OTP, Bancpost, Carpatica etc.) were factors that have corroborated to the seizure of a significant weight of domestic mutual fund industry by increasing the investor confidence in these alternative investments. Thus, it can be observed by the increasing number of investors after However, the investors trust has been gradually gained following the major crises that have damaged investors confidence (first in 1994 the collapse of FMOA (literally translation for Business Professionals Investment Fund) and second in 2000 the case of FNI (i.e. National Investment Fund ) and FNA (i.e. National Administrated Fund), both managed by SOV-Invest) (Radu I., Sava C., 2012). 3.1 Asset Management Companies parented by banking groups in Romania At the date, in Romania are seven banking groups that are parenting and manage the assets of most of the investment funds domiciled in Romania. From a total of 63 mutual funds, 46.21% of them are parented by asset management banking companies. As a consequence, the investment fund industry in Romania is concentrated in the banking system, since the seven banking groups comprise a share market of 46.21% from a total of 31 asset management companies authorized by the Romanian National Securities Commission (Table 1).

4 Table 1. The structure of AuBM market in Romania in 2013 Asset Management Mutual Close-end Individual TOTAL Company Funds funds accounts (NAV and market share) Total AuBM* 10851,9 (97,82%) 318,9 (69.84%) 54 (37.61%) 11264,3 (61.40%) TOTAL AuM 11093,5 456,6 143, ,7* Source: authors own calculations following AAF facts. NAV stands for Net asset value. *The total comprises even other funds that were except from our study. Following the table above, we can see that the mutual fund industry in Romania is concentrated in a percentage of 61.40% of the total assets in 7 banking management companies. Moreover, at least half of the total industry assets are managed by 5 asset managers parented by banks. In fact, this situation is not news for the European countries, since the European economic integration had its aim on achieving a Single market that look for a concentration of the top five asset managers in each country, as an indicator of the level of financial integration in the asset management industry in Europe (EFAMA, 2012, p.12). Analyzing by type of funds, we observe that the asset management companies parented by banking groups are more oriented to the open-end market or to address to individual investors by creating individual accounts. For example, only Raiffeisen Asset Management, BT Asset Management and OTP Asset Management have diversified their services among the close-end funds. Also, the same companies and Erste Asset Management have in their portfolio individual accounts, even if the amounts allocated aren t plenty. More notable, is the quote of the assets under banking management of 97.82% that demonstrates that banks are controlling the distribution of mutual funds in Romania. By allocation, the asset management banking companies have chosen almost an equal number of funds. Even if the number is almost equally distributed among the mutual funds, we notice that during 2013Q1, the asset management banking companies are actively on the mutual market with 71.43% of the bond funds, with 62.50% of the money market funds, with 46.67% of the equity funds and with 29.17% of the balanced funds. Among these BCR-ERSTE Asset Management assigns for 14.29% of the mutual funds in Romania, which is closely followed by Raiffeisen Asset Management with a share of 12.70%. The assignment of the major share in the case of BCR Asset Management is mostly due to its historical, since it is the accounted among the first mutual funds. Instead, in the case of ING Asset Management, both funds were founded during the year 2012 and are a particular case for Romania since they are managing in Romania throughout national distributors foreign capital. 3.2 Performance analysis of the AuBM mutual funds in Romania For comprising the results of our analysis, we use the available data for the first quarter of each year during 2008Q1-2013Q1. Each data presents the annual average change of the indicators that express the performance or the risk of the mutual funds. By following the available data for the first quarter of the year the

5 study has some limitations regarding the existence of a high seasonal effect (the so called January effect) on the market timing strategies. The annual performance of the funds is measured through the 12-months average variation of the NAV per unit fund indicator. The risk is valued by the modified duration indicator for money market funds and bond funds. For balanced funds and equity funds the risk is measured by the volatility of the NAV per unit and through the value-at-risk indicator. In order to assure a better comparison of the mutual funds returns we proceed on analyzing their evolution closely related to the interest rate for bank deposits and the annual inflation rate. By following the National Bank of Romania (i.e. BNR) database and the Romanian National Institute for Statistics (i.e. INSSE) we extract the monthly reporting data for the two variables. Since the data for the AuBM funds is restricted to the 1 st quarter evidence, we calculated the inflation rate and the interest rate for bank deposits as an average of the monthly data for the 1 st quarter of each year. Also, we note that the inflation rate was expressed as an annual indicator calculated with a monthly chain variation by the type: month i year n reported to the same i month of n-1. Instead, for the interest rate, where used the rates applied for the new bank deposits which are considered to be the traditional method of multiplying financial wealth and rather safer than other investment alternatives. Figure 1 highlights the main results on return analysis of the AuBM funds in Romania during 2008Q1-2013Q1. The return analysis shows that mutual funds with AuBM slightly follows the fluctuation of the interest rate for new deposits and the interest rate dynamics, during the time analyzed. Figure 1. Return of mutual funds with AuBM companies Q (%) Source: author s own calculations using Excel Office 2010 At the date, the money market funds in Romania have captured the AuM attention and the AuBM industry in the case of these funds comprises 62,50% of

6 the market. All 5 funds had a slightly fluctuation in fund performance, varying between 6,37% (lowest) and 14,30%(highest, except Bancpost Plus return for the year 2010) during the last 5 years. Among these, the BCR Monetar fund and Simfonia 1, managed by investment companies affiliated to the Romanian Commercial Bank (today BCR - Erste Bank) and Societe Generale Bank, have maintained the portfolios strategy proper for the money market funds, instead others have changed their strategy along the time. By evidencing the return of the money market funds with AuBM in Romania during the last 2 years, we can notice that these funds had a common dynamics defined by an increasing trend. The prudent investment policy of the money market funds has become favorable to all investors that have been confronted with major fluctuations caused by the financial crisis. Therefore, money market funds have become an important product of investing and preservation their assets. Large fluctuations could be noticed among the equity funds (i.e. FA_AuBM) funds that demonstrate the highest returns and volatility of the shares traded on the Romanian exchange market, especially in the case of year 2009 and Instead, the bond funds are not well developed since they confront with a weak legal environment and with investors that do not have much financial literacy. However, their dynamics is directly connected to the interest rate evolution, as the bond funds have a fixed income and with a reduced apetite for risk. Among all the bond funds active on the Romanian mutual fund market, the ones under banking management have maintained their portfolio with positive returns and higher than the bond fund market average return during all five years analyzed. 4. CONCLUSIONS As a consequence, the AuBM activity has become very important in Romania since it comprises half or more than half of the mutual funds market. Also, we noticed that the banking sector concentrates among a small group of banks almost all the assets of the mutual fund industry (i.e %). In fact, we might say that the banking sectors activity dominates the mutual fund market, and its volatility might affect the mutual fund industry. Therefore, it is important to check constantly the dynamics of the banking sector, which might directly influence the mutual fund industry. References [1] EFAMA Report on Asset Management in Europe, 5 th Annual Report, May 2012, [2] EFAMA Report on Asset Management in Europe. Facts and Figures, 6 th Annual Report, June 2013 [3] ICI Factbook 2010, 50th edition A review of trends and activity of the Invetment Company Industry, last accessed: [4] Filip A.M. (2008) Evaluarea performanţei fondurilor mutuale din România, Editura Casa Cărţii de Ştiinţă, Cluj Napoca [5] Radu I., Sava C.C. (2012) Shifting investment strategy from equity to money market funds. The Case of Romanian open-end market during the financial crisis, Bulletin of the Transilvania University of Braşov Vol. 5 (54) No Series V: Economic Sciences [6] last accessed: ; last accessed: ; last accessed: