5 Years On, Mutual Fund Targets 'Mattress Money'

With five years of experience, one of Russia's first mutual funds, Pioneer First, says it's ready to coax into the market some of the estimated billions of dollars stuffed under mattresses by targeting the middle class.

Pioneer First said Monday that it will sink millions of dollars into an advertising campaign featuring educational programs on how to invest that will air on television, radio and the Internet.

Called a unit fund in Russia, Pioneer First, a subsidiary of the U.S. Pioneer Group, set up its first fund, for bonds, in 1996 and then set up another fund, for stocks, in 1997. Last year it bought a mixed fund from Credit Suisse First Boston.

Russian mutual funds, or PIFs, were decimated by the August 1998 crisis -- and currently the entire sector only has $15 million in assets. Owners of several promising PIFs preferred to sell them or pay off investors and shut down when the ruble crashed. But as incomes grow and people look to invest, Pioneer First is eyeing a growing market -- but warily, using a sophisticated marketing mechanism to filter its clientele.

Rogue investors -- who don't have much money or make unpredictable investment decisions -- have been a longtime nuisance to PIFs, said Pioneer First general director Maria Churayeva. A man once came to the office with a tens of thousands of rubles, but when asked where he lived, he said the railway station, she said.

Pioneer First has to be careful about selling services in a city with millions of potential problem investors, she said.

The fund could easily fall into the red, as expenses for a $100 investor are the same as for a "middle-class" individual, which the company defines as someone who invests from $1,000 to $10,000.

The "middle class" has grown considerably, doubling in 2001, and now accounts for about 200,000 investors, said Pyotr Pavlenko, the company's sales and marketing director. This accounts for half of Pioneer's business.

Other unit funds were not enthusiastic about Pioneer's advertising strategy, Churayeva said, even though they stand to gain from it.

This does not bother Pioneer, however. In a market that is still tiny in comparison with the amount of savings, competition is not yet an issue, said company spokesman Denis Cherkasov.

Russia looks like the place to be for mutual funds. Pilgrim Russia Fund -- known as Lexington Troika Dialog Russia before being bought by ING Groep NV of the Netherlands last year -- has been the best-performing fund worldwide, gaining 53 percent so far this year, Dow Jones Newswires quoted the Morningstar Inc. news agency as saying Monday.

Pilgrim invests up to 95 percent in stocks -- which most analysts classify as relatively risky assets -- but Pilgrim's clients are betting on economic growth in Russia as the global economy slows. Russia's benchmark stock index, the RTS, has grown more than 50 percent since the beginning of the year.