Institutional Investors and the CEE Stock Exchange Group in 2014

Institutional Investors and the CEE Stock Exchange Group in 2014

Institutional Investors and the CEE Stock Exchange Group in 2014 The top group of investors in the combined free float of the member exchanges of the CEE Stock Exchange Group (CEESEG), which consists of the stock exchanges of Budapest, Ljubljana, Prague, and Vienna, remain international institutional investors. They come primarily from the US and the UK and are followed by Austrian institutional shareholders, as well as investors based in European countries such as Norway, France, Germany, and Poland. Overall, European stock markets were on a roller-coaster ride in 2014, often lacking the performance of other regions such as Asian or the US markets. However, there were several differences in investors perception and interest when it comes to investing in Europe and also in the markets of CEESEG. Market participants saw higher volatility and volumes in the region as well as more international attention from institutional investors who mostly had eyes on market and sector leaders. The views of fund managers on 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 top priority for market participants that, globally, tended to shift their allocations into equities in 2014. A big shift in allocation came from US and UK investors, who have been very active in Europe, but also in CEESEG. With the exception of Prague, US-based investors increased their relative exposure to all exchanges and are the largest investor region for the individual exchanges and the Group. The trend to increasing international interest and a larger foreign share in the free float was also true for CEESEG and all individual exchanges with the exception of Budapest, which saw a slight increase in domestic investment. In terms of investment style, growth strategies still lead all investment strategies followed by value; both account for almost 70% of all identified institutional holdings of CEESEG. Passive styles such as index or ETF investments also increased, but were not seeing the same large inflows as other markets. Overall, institutional trends were driven mainly by buying and selling of large-cap issuers, as investors focused on the Group s blue chips by taking advantage of the higher liquidity in these major stocks. Several institutional holders with a focus on Central and Eastern Europe (CEE) and the growth markets of the region significantly changed their positions in their exposures in companies like OMV, Raiffeisen Bank International, Vienna Insurance Group, MOL, Magyar Telekom, ČEZ, Komerční Banka, Gorenje, and Krka. For smaller capitalized issuers, sector-specific institutions or funds showed interest in special investment stories to gain access to specific industry segments. As in the previous years, uncertainty regarding political, debt and governance risks were cited as the major reasons for international investors cautiousness in the most recent study on annual ownership changes. These are the key messages of the updated study, Institutional Ownership of the CEE Stock Exchange Group (cut-off date: 31 December 2014), conducted on behalf of CEESEG by the market intelligence company, Ipreo. The conclusions arrived at by the detailed study on CEESEG as of 31 December 2014 are given below: Free float reshuffling with slight decrease The survey analyzed the trends in investments by the top institutional investors in the free float of all listed companies of the member exchanges of the Group. 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 combined free float of issuers listed on the Group s member exchanges decreased again slightly from EUR 52.5 billion to EUR 50.8 billion 1 in 2014, mostly as a result of a further reshuffling within the exchanges as the composition of the relevant indices was recalculated and changed 1) By comparison, total equity market capitalization of domestic BSE, LJSE, PSE and ATX prime issuers amounted to EUR 127 billion at year-end 2013 and to 112.3 billion at year-end 2014. 2

and there were also adjustments to the free float capitalization of various stocks. Across the Group, an identified volume of EUR 31.9 billion or 62.9% is held by domestic and foreign institutional investors. The remaining EUR 18.8 billion or 37.1% are estimated to be held by domestic private households as well as non-financial institutions. Institutional investors in CEESEG by country as of 31 December 2014 The institutional investor base in the stocks listed on CEESEG s member exchanges breaks down as follows, according to their country of origin: Others 13.4% Canada 2.1% Switzerland 2.2% Netherlands 2.9% USA 27.7% Poland 3.4% Germany 4.6% France 5.1% Norway 5.9% UK 17.5% Austria 15.2% * Among others, China, Czech Republic, Sweden, Denmark, Japan Source: Ipreo, December 2014 The largest institutional investors across all exchanges continue to come from the US (27.7%, up from 24.8%) which has been one of the largest relative buyers in the entire region. US-based institutions were followed by investors from the UK, which increased their stake again from 15.7% to 17.5% of all identified institutional investors. UK holders were slightly more selective with their investments into stocks listed on CEESEG s member exchanges and are followed by Austrian investors which currently account for 15.2% (down from 16.1%). Austria is followed by Norway (5.9%, slightly down from 6.1%), France (5.1%, down from 5.6%) as well as Germany (4.6%, slightly up from 4.4%). These figures are average numbers calculated from the findings of the individual exchanges. Therefore, the results for home markets are clearly skewed towards the relevant jurisdiction, as obviously more Austrian, Hungarian, Czech or Slovene institutions invest their money into the local stock market and thus represent a much larger stake locally compared to the CEESEG average. In addition, the varying degrees of transparency result in a slightly skewed picture of concentrated holdings in the more developed and international markets. Ownership in stocks listed on CEESEG s member exchanges again saw several significant shifts in 2014, with prominent names rotating out of some of the largest issuers, while smaller more specialized firms upped their investments. Some of the most prominent names invested in the Group are the Capital Group, Norges Bank, the Blackrock Group, China Investment Corporation as well as JP Morgan, Aberdeen Asset Management, State Street Global, and The Vanguard Group. Interestingly, there were some different trends for the individual exchanges within the Group as, e.g., foreign institutional investors in Ljubljana for the first time really caught up with their domestic counterparts which showed a high ownership concentration. By contrast, in Budapest local investment increased most likely due to governance and political reasons that prevented foreign investors to further increase their stakes. Also, the trend towards significantly higher capital flows from passive and ETF investors into European equity markets is not reflected in CEESEG, probably due to market cap and governance reasons. According to market feedback, Ipreo s 3

intelligence states that investors are now increasing their allocations again on a selective basis to emerging markets issuers, with London gaining importance in terms of investable assets for the region. Also, when it comes to investment management decisions in favor of CEE and other markets, fund managers remain strongly present in London, as numerous investment managers have split and increased their investment teams for emerging markets between Asia and London, with London being responsible for CEE & SEE markets. Overall, capital inflows from Asian and MENA-based sovereign investors are also expected to rise with some sovereign wealth funds 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 stock-picking approach for developing and growth markets which is reflected in several large ownership changes on the issuer level also in the Group s markets. Also, the trend towards integration of non-financial criteria into the investment decision-making process has caught up throughout Europe, with the largest investment firms now more actively communicating with issuers, also in CEESEG. New and further investments from institutional investors such as sovereign wealth funds like China Investment Corporation or Kuwait Investment Office as well as more money inflows from funds that specialize in emerging markets such as Capital Group, Aberdeen, JP Morgan, Templeton and Parametric were identified. This is also true for ESG-linked holders such as Blackrock, APG and several international pension fund mandates that want to gain international exposure. As in the past, the majority of foreign institutional firms mentioned their intent to continue to closely monitor the situation in the CEESEG markets, especially as parts of the region have suffered downgrades and EU countries have generally been seeing worsening transparency and stability. Several investors confirmed their view from the year before that even though CEE exposure is selectively still seen as positive when it comes to market positioning, it does not seem to play as much of a role as it did a few years ago. The growth potential for companies that already have an established track record and network in emerging markets were cited as the main reasons for the remaining higher investment levels in some of the companies listed on CEESEG s member exchanges. However, for pure growth potential, institutional investors now often prefer markets such as Asia and Latin America to CEE. Generally, the study shows that the concentration of holdings managed by the large US and UK investment firms is increasing again, while smaller international players from different countries are starting to invest in the CEESEG markets, including countries previously not so prominent such as China, Hong Kong, Japan, New Zealand, Australia, and South Africa. Interest in value stories decrease in growth and GARP styles As for most indices or issuers, the traditional two investment styles growth and value remain the dominant styles used for investments in stocks listed on CEESEG s member exchanges. While investment style remains a key issue in the analysis of a company s and exchange s shareholder base, with increased volatility on the markets, the distinction between the various styles has become somewhat blurred especially as investors have diversified as well and offer different styles within their ranges of funds. As allocations from bonds to equities picked up again in 2014, investors often picked stocks with high dividend yields or stocks with opportunities in terms of intrinsic value, which was also the case for issuers listed on CEESEG s member exchanges. With respect to overall investment styles for the Group, Ipreo identified the main styles of growth and value at a very consistent level, whereas especially passive strategies have picked up, but lag behind the average international growth trend. On average, the CEESEG benchmark for investment style shows growth investors (35.7%, down from 39%) followed by value (31.6%, up from 29.3%), GARP (8.1%, down from 10.3%), index (15.4%, up from 13.5%) and other smaller styles. Ipreo further reconfirmed and identified the increased importance of 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. 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 or before general meetings. A higher governance sensitivity can be seen in 4

over 70% of all international institutional investors holding stocks listed on CEESEG s member exchanges. Hence, it should not be underestimated by issuers. 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. Portfolio turnover rate declined 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 markets within the CEE Stock Exchange Group currently stands at 8.7%, down from 12.4% in 2013. This development is below the general trend in Europe, where Ipreo saw stronger trading and more active institutions. 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 2 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 portion of all 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 3. The predominant types of institutional investors especially international ones still have low to moderate turnover ratios, which implies a positioning in CEESEG generally for the long term. Very High 2.5% High 6.2% Low 55.2% Moderate 36.1% Source: Ipreo, December 2014 2) Alpha-focused investors pursue outperformance with respect to a benchmark. 3) 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