Institutional Investors and Hungarian Stocks in 2014

Institutional Investors and Hungarian Stocks in 2014

Institutional Investors and Hungarian Stocks in 2014 Capital markets were generally on a roller-coaster ride in 2014, with increased volatility and higher volumes, but also more international attention from institutional investors that had their eyes mostly on market and sector leaders. The views of fund managers concerning investments in emerging markets differed widely throughout the year though overall with an increased inflow of assets allocations to emerging and especially frontier markets increased. Due to debt worries in Europe and political tensions in Eastern Europe, risk aversion and risk control were the top priority for market participants. Foreign institutional investors clearly remain the top investors in the free float of the Budapest Stock Exchange (BSE). US investors surpassed UK-holders again to regain the top position, followed by investors based in countries such as Norway, Poland, the Netherlands, and Canada. US-based, Hungarian as well as Canadian and French institutional investors were major relative buyers, while Scandinavian, German and Austrian investors significantly reduced their exposure in the free float of Hungarian issuers. In terms of investment style, the results are in line with previous figures, with GARP styles further reducing their market share. Growth, value and yield investors showed a slight relative increase compared to the last study, while passive strategies (index and quantitative strategies) as well as GARP investors decreased significantly. As in previous years, especially uncertainty regarding political, default and governance risks were cited as the major reasons for international investors cautiousness. Potential growth opportunities and undervalued stocks were referred to as upside in the most recent study of annual ownership changes. These are the key messages of the study, Institutional Ownership of the Budapest Stock Exchange (cut-off date: 31 December 2014), conducted on behalf of the CEE Stock Exchange Group (CEESEG) by the market intelligence company, Ipreo. The conclusions arrived at by the detailed study of the Budapest Stock Exchange as of 31 December 2014 are given below: Higher free float market capitalization The survey analyzed the trends in investments of the top institutional investors in the free float of all BSE-listed prime market issuers that are not foreign issuers or secondary listings. The conclusions below were reached on the basis of a combination of confirmed data from forensic shareholder analysis of some of the local issuers as well as publicly available ownership data and information reported by the local exchange and other entities such as Eurostat and Efama. The free float of BSE-listed issuers increased again in 2014 from previously EUR 4.8 billion to EUR 5.8 billion 1. This change is due to numerous factors such as several large international investors that increased their stakes in selected Hungarian large caps, favorable exchange rates and a further reshuffling within the index as the composition of the index has been recalculated and changed. For issuers listed on the BSE, an estimated volume of EUR 4.4 billion or 75.9% of the free float is held by institutional investors. The remaining EUR 1.4 billion or roughly 24.1% are estimated to be held by domestic private households and non-financial institutions. 1) By comparison, total equity market capitalization of domestic BSE issuers amounted to EUR 14.3 billion at year-end 2013 and EUR 12 billion at year-end 2014. 2

Institutional investors in the BSE by country as of 31 December 2014 EUR 3.3 billion of the EUR 4.4 billion held by institutional investors were identified and allocated in detail: EUR 3.2 billion or some 97.1% are held by international investors, EUR 0.1 billion or 2.9% by Hungarian institutional investors. Others 8.4% * France 1.5% Switzerland 1.6% Czech Republic 1.6% Canada 2.4% Hungary 2.9% USA 32.8% Netherlands 3.2% Poland 6.9% Norway 8.5% USA 30.2% * Among others, Sweden, Germany, Austria, Singapore, Denmark Source: Ipreo, December 2014 Scandinavian investors decrease stake US, French and the Netherlands with higher relative exposure International institutional investors were very active in 2014, several of them entered and exited the market throughout the year and thus showed high activity rates. The US overtook UK-investors and regained the position as the largest investment region in BSE-stocks after having ranked in second place for one year. In 2014, the US raised its relative stake in the BSE-free float from 30.2% to 32.8%, while UK-based institutions dropped from 30.9% to 30.2% of all identified institutional holdings. The relative increase of US-investors was driven especially by UK-investors reducing their positions on a more widespread basis, whereas US-firms remained more stable. Some of the major sellers were Aberdeen UK, Schroders UK, Blackrock UK, while buying happened at First State, Somerset Capital, Trilogy or Sprucegrove Capital. Selling also happened at several passive investors where especially ETF-houses such as Blackrock and Vanguard pulled out money. Overall, major relative buying centres were driven by investors from Canada (from 1.5% to 2.4%), France (from 0.9% to 1.5%), the Netherlands (from 2.8% to 3.2%), and the US (from 30.2% to 32.8%). Smaller scale-buying also happened across several smaller investment centres such as Ireland, Estonia, China, and Luxembourg. Norwegian and UK-investors belonged to the major group that withdrew holdings (from 9.3% to 8.5% and from 30.9% to 30.2% of all identified holders respectively), followed by the Czech Republic (from 1.8% to 1.6%), Poland (from 7.2% to 6.9%), and Germany, which declined from 1.8% to 1%. It should be noted that these figures only refer to identified institutional investors. In addition, a large stake of the Hungarian free float is estimated to still be held by domestic retail investors and households and domestic-oriented investment firms (pension and mutual funds) including mandates. Ipreo found that only 2.9% (up from 2.6% a year earlier) of all identified institutional investments were made from the home market, though due to the limited transparency of the public data as well as an investment shift to more domestic holders this is likely to be understated. It also comes as no surprise that market feedback remained uniform regarding the growing importance of not only ESG-factors 2 in investment management decisions and also with respect to the involvement of investors, which is being discussed in upcoming European legal changes, too. Investors confirmed that while CEE-exposure is selectively still seen as positive, it does not seem to play as much of a role as it did a few years ago, mostly due to other economies that offer more attractive growth or yields at lower risk. Companies that already have an established 2) ESG (Environmental, Social, Governance) 3

track record and network in emerging markets were cited as the main reasons for the remaining higher investment levels at some of the companies listed on CEESEG s member exchanges, but for pure growth potential, institutional investors now often prefer markets such as MENA, Asia, Turkey or other parts of Emerging Europe to Hungary. They stated that they would rather pick specific investment stories of issuers as a basis for entering special market segments. This is a trend also identified across the markets of CEESEG and in other parts of Europe where investors watch governance, political and debt issues much more closely. As already seen in the last years, the trend towards significantly increased capital flows from passive and ETF investors into the European equity markets is not reflected in CEESEG, most likely due to market cap and governance reasons. According to market feedback, Ipreo s intelligence states that investors are now selectively increasing their allocations again to emerging markets funds and the region, with London gaining importance in terms of investable assets for the region. Also, when it comes to investment management decision-making for CEE and other markets, fund managers are increasing their presence in London, as numerous investment managers have split and increased investment teams for emerging markets between Asia and London, with London being responsible for CEE & SEE markets. Overall, also capital inflows from Asian and MENA-based investors are expected to rise with some sovereign wealth funds also increasingly looking at wider Europe and smaller issuers as potential targets when the political, economic and governance status is investment-grade worthy. These trends coincide with a more focused stockpicking approach for developing and growth markets which is also reflected in several large ownership changes on the issuer level within the Group. Also, the trend towards integration of nonfinancial criteria in the investment decision-making process has caught up throughout Europe, with the largest fund managers now more actively communicating with issuers, also in CEESEG. Yield strategies on the rise GARP investors reduce stake As in the past years, the traditional investment styles growth and value remain the dominant styles used for investments in BSE issuers. While investment style remains a key issue in the analysis of a company s and exchange s shareholder base, with growing volatility on markets, increased OTC and electronic trading and new multi-style strategies, the distinction between the various styles has become somewhat blurred. Significant volumes of money fled equities during the financial crisis in the last years; it returned with less risk adverse investors in the recent months, but shifting money into emerging markets remains mainly a stock pickers approach to intrinsically undervalued firms under high risk controls, which was also the case for Hungarian issuers. With respect to overall investment styles in Hungary, yield (i.e. dividend)-focused investors were the major relative buyers, increasing from 2.5% to 3.2% in 2014, while growth (39.3%, up from 37.3%) and value (30%, up from 28.9%) strategies were on the rise as well. Index (14.1%), specialty (0.5%) and alternative investors (0.1%) all slightly decreased but remained at overall similar levels compared to the last report. Institutions following a GARP approach were a major group that reduced holdings, decreasing by more than 30% from 14.4% of all identified holdings to 9.8% in 2014. Investors are attaching greater importance to non-financial or ESG-factors which come into play in several investment strategies and add an extra level of complexity to the decision-making process. This is also driven and supported by some international legal and NGO pressure such as the UNPRI, stewardship codes or the upcoming European Union legal changes. Corporate governance teams at the largest investors not only have an increased influence on buying and selling of shares, but also communicate more frequently with issuers directly via ongoing engagement processes or before general meetings. These factors also play a role in numerous passive strategies as they can be used for so-called enhanced index strategies where issuers get excluded or over-/underweighted compared to the benchmark depending on whether they meet transparency, disclosure or governance requirements. Several of the large institutional management groups have started to build and include these types of strategies into their mainstream funds and investment management process, a trend to watch out for and monitor. 4

Portfolio turnover ratio declines The portfolio turnover ratio indicates how often institutional investors switch securities within their overall portfolios on average per year. The turnover ratio of active investors (high and/or very high turnover rates) for the financial market of Budapest currently stands at 3.2%, down from 5.8% in 2013. This development is below the general trend in Europe and also CEESEG, where Ipreo saw stronger trading and more active institutions up to 8.7% in 2014 from 8.5% previously. However, this ratio only sheds some light on long-term strategic portfolio turnover, as it is a slightly delayed function of buying and selling movements in recent months and which were computed at investment group level. It is also a measure based on publicly available information and comes with a certain time lag, ignoring OTC and dark pool trading. Therefore, the numbers will tend to understate the actual trading activity within portfolios and investors, especially since data collected by Ipreo suggests that a growing portion of all trades in European stocks is conducted OTC or via alternative trading platforms. General explanations for switching within portfolios are, e.g., the entry of long-term institutional investors, inclusion in or exclusion from portfolios due to non-financial criteria, redemptions or market capitalization issues but also the entry of short-term alpha-focused hedge funds 3 that profit from current price levels. In the present market environment, this ratio is scarcely indicative just like the current changes in investment style of long-term strategic portfolio switching, because investors are currently often confronted with the need to alter their positions without consideration of the fundamental aspects, as well as the growing importance of OTC and dark pool trading and limited disclosure. Currently, in several larger and developed markets in Europe, an ever growing share of trading is conducted OTC or via alternative trading platforms, and therefore, Ipreo has observed the growing importance of proactive outreach of IR and management to active portfolio managers 4. The predominant types of institutional investors especially international ones still have low to moderate turnover ratios, which implies a positioning in the BSE generally for the long term. Very High 0.9% High 2.3% Moderate 34.1% Low 62.7% Source: Ipreo, December 2014 3) Alpha-focused investors pursue outperformance with respect to a benchmark. 4) Active investor relations and outreach will gain in importance as the current trend to an ever growing number of passive investors as well as to alternative trading will reduce the number of decision-makers that can be influenced. Active portfolio managers and analysts will therefore have a greater impact on the (fair) valuation of issuers share prices on local stock exchanges which in turn are the reference prices for alternative trading platforms. The need to fully know, understand and target the right active institutional managers is therefore likely to increase in the coming years. 5