In May 2004 eight central and east European countries – Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia - join the EU. While the increased economic prosperity that membership promises will undoubtedly provide more customers for local investment fund businesses, they will also have to adapt if they are to face the challenges from pan-European houses. So concludes a study conducted by PriceWaterhouseCoopers and BAMOSZ, the Association of Fund Management Companies in Hungary, entitled ‘Implications of the EU Accession on the Investment Management Industry in Hungary’.
Per capita assets under management in Hungarian investment funds is low – E6,453 compared with E24,000 in the EU in 2002 – but growing at a faster pace, by 63% since 1997 against a 24% growth in the EU. For historical reasons, including the greater risk aversion of Hungarian investors, higher local currency interest rates and low stock market valuations, the asset profile of Hungarian investment funds differs markedly from the EU average. As of the end of last year bonds accounted for 68% of Hungarian assets under management against 28% in the EU, and equities 19% against 31% in the EU.
The fee structure differs from EU practices. Hungarian asset managers charge a low fixed fee for the front and back-end load, against the relatively high percentage-based fees in the EU. Custody fees are similar for bond and balanced funds but higher than the EU for money market and equity funds, 100% and 60% respectively.
Of the CEE countries Hungary was the most aggressive in privatising its industry, including financial services, but the leading bank in investment and pensions funds provision is the locally owned OTP Bank, which prior to the collapse of communism was the country’s only retail bank. Unlike the other major banks, which were sold to foreign strategic investors, OTP was privatised, in 1995, through an IPO.
The survey concludes that after EU membership foreign-owned entities will increasingly exploit the pan-European production platforms and investment fund ranges of their parent groups, while domestic players such as OTP will have to introduce new funds, especially equity products, to compete. At the same time the domestic players, especially OTP, have the distribution network. “Foreign domiciled managers not yet present in Hungary and wishing to sell funds into this fast growing market may need to use this power,” the survey notes.
Peter Holtzer, CEO at OTP Fund Management and a board member of BAMOSZ agrees that there is a huge potential for foreign-owned competitors because of their synergies, low costs and central product development and portfolio management, but distribution will be the key. “The closed architecture typical in Hungary will remain for some while. This is also a small market, and it’s questionable how much the global players will want to spend on marketing, sales motivation and the like.”
Apart from a few other exceptions such as Latvia's Parex Bank, the big players in all the EU accession CEE countries are part of a larger foreign owned financial group. In Poland Zbigniew Jagiello of Pioneer Pekao TFI foresees a rapid impact on client selection of fund strategies, broadening out into European securities. “Our Polish investment fund business will be more distribution and product oriented, while asset management will move to the European financial centres such as Dublin, Luxembourg, Frankfurt or London,” he predicts.
Mihkel Oim of Estonia's Hansapank, majority owned by Sweden’s Swedbank predicts a greater polarisation, except in areas such as pensions which require local expertise. “In the US investment fund industry there is a segregation between ‘manufacturers’ and ‘distributors’. Most of our products will not be manufactured by us unless it’s our home base where we can gain competitive advantages; elsewhere we will use specialised asset managers and their international expertise.”

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