Hungarian mandatory and voluntary pension funds have broadly similar investment limits, with two exceptions. Second pillar funds, unlike third-pillar ones, cannot invest directly into real estate (although they can do so through real estate investment units). They also have a 50% maximum limit on equity investment against 60% for third-pillar funds. Foreign investment is limited to 30%, of which no more than 20% can be in securities of non-OECD member states. As of January 2002, any class of investment security allowed in the domestic market can also be purchased in foreign markets.
The performance of Hungary’s second pillar funds is still distorted by their unfortunate launch date. In 1998 Russia’s financial collapse undermined all central and east European stock markets, frightening off many Hungarian fund managers from capitalising on the international equity boom that followed. There is an inherent problem in any case with the Budapest Stock Exchange, with fund managers complaining that there are only around five stocks liquid and large enough to buy. “Many large Hungarian companies have foreign owners and get their capital from their parent companies,” adds Andras Kozek, managing director of Allianz Hungaria’s pension funds. BSE never received the governmental support seen in Poland, where large privatisations inevitably included a Warsaw listing, and where the pensions industry is now a major player, accounting for around 30% of turnover, against around 1% in Budapest.
In 2001, however, it paid to be conservative. As a result of the strengthening forint and inflation at 6.82%, only Hungarian government bonds produced positive real returns, ranging from 12.01% in forint terms for the MAX index of government bonds longer than one year and 11.03% for the RMAX index of short-term government bonds. By comparison returns on international bond indices in forint terms in the JP Morgan Global Government Bond Index yielded –2.78%.
In the equities market the Budapest Stock Exchange BUX index produced a return of –9.15%, although this was more respectable than investing in other central European markets. The Prague Stock Exchange’s PX50 and Warsaw Stock Exchange’s WIG 20 index, in which a small number of Hungarian funds did invest, produced forint returns of –15.9% and –31.91% respectively.
Not surprisingly, the best performing Hungarian funds last year were those heavily weighted in domestic government bonds, but that is not the end of the story. According to a performance survey conducted by Hungarian pensions investment consultancy FI-AD Financial Advisory, of all the 22 mandatory pension funds, and 10% of the voluntary pension funds that participated, 11 funds produced a Global Investment Performance Standards (GIPS) return above inflation last year. As an average, the pension funds produced a GIPS return of 5.6%, a negative return of 1.2%. Had funds adhered more closely to their benchmarks, the average return would have been 7.84%. The requirements for pension funds to establish benchmarks came into effect last March, which have to be reported to the HFSA. Most companies use the MAX index of Hungarian bonds, with or without a component of other securities indices such as BUX, but there is no obligation to base asset allocation decisions on them, and according to FI-AD’s survey, a third of the non-government bond assets was invested outside of the benchmark.
The best performing fund actually had 57% of its assets outside its benchmark, indicating the important role of stock selection – the quality of the asset management fund company itself. Cash flow also had an influence on performance. “This is a young industry,” explains Istvan Farkas, managing partner at FI-AD. “The average cash flow compared to initial assets at the start of the year was 40%, so it had a big effect on the results.” Rapid large inflows of funds, especially in the case of recent mergers, are less easy to manage, although this effect will diminish over time as the ratio of the cash flow to asset size decreases.
One factor that did not affect performance was fees, with little correlation between the level charged and the result achieved. Asset management fees for both the voluntary and mandatory sectors average 40–50 basis points, but some charged as much as 150 basis points. Unfortunately the study is published on the basis of anonymity.

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