Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Investors Discover the Benefits of Sharing Risk

Mutual funds are fast becoming one of the favored places for Russians to stash their cash. Last year the number of investors in mutual funds nearly tripled, thanks to high returns in 2003 and an increasing wariness among Russians of holding their savings in dollars.

Even despite modest returns in 2004, market watchers say mutual funds will continue to draw investors looking for new ways to preserve and increase their wealth.

"To investors, mutual funds seemed like shining gems. ... Maximum annual returns reached up to 80 percent in 2003," said Alexei Pushkov, senior analyst with the NLU, the National League of Managers, an umbrella association of organizations managing 97 percent of Russia's mutual fund assets.

At the end of last year, the money invested in mutual funds totaled $3.94 billion.

Debates over the future of the country's decrepit pension system early last year inevitably focused attention on the scantily advertised alternative of mutual funds, Pushkov said.

Although mutual funds first appeared in the mid-1990s, he said, investors only began to perk up as the dollar continued its plunge against the ruble and a crisis of confidence sent tremors through the country's banking system last summer.

By the end of last year, 68,000 individuals and organizations invested in mutual funds, compared to 20,300 investors at the end of 2003, the NLU's preliminary calculations show.

"The rate of clients' asset allocation to mutual funds is three times higher than the rate of growth of bank deposits," said Andrei Zvyozdochkin, vice president of institutional client relations at Troika Dialog.

The choice of mutual funds also increased, from 154 funds in 2003 to 283 in 2004, according to the NLU.

In spite of their rising popularity, however, mutual funds posted lackluster returns last year.

"Average returns were 13 percent last year, which barely beat inflation," said Dmitry Prytin, an analyst with the RosBusinessConsulting rating agency. Inflation rose to 11.7 percent in 2004, surpassing government projections by almost 2 percentage points.

Furthermore, the dismemberment of Yukos and the consolidation of the Kremlin's power signaled a rise in political risk. Asset managers struggled to make money on the jittery domestic market, which is the only place Russian mutual funds are allowed by law to invest.

Returns from the best-performing mutual funds did not exceed 44 percent last year, Pushkov said. While one asset management company reported 100 percent returns, its end-of-year results were not representative of the market, he said, because they were achieved via accounting mechanisms.

"It is unlikely that this year's returns will beat last year's," Prytin said.

Whether purchasing shares in stocks, bonds or mixed funds, which invest in both stocks and bonds, individuals usually prefer mutual funds that are open to new investors. Shares in these mutual funds can be bought and sold anytime, or at previously specified dates several times per year.

Shares in closed mutual funds, which cater mostly to institutional investors, can only be purchased when the fund is being established. A particularity of the Russian market is that construction companies often use closed funds to raise money for large-scale real estate projects.

Alexander Smetanin, asset manager at Pifagor, a top-performing fund management company, said that bonds funds may not even beat the 2005 inflation rate, which market watchers expect to exceed the official forecast of 8.5 percent.

"Returns from first-tier bonds are already lagging behind inflation," Smetanin said. Average annual bond returns are around 6 percent to 8 percent.

Pifagor's mutual stocks fund of the same name posted a 27.16 percent return last year, earning it a place among the top five best-performing funds of 2004 in RBC's annual rating. By contrast, the company's bonds fund, called Sovershenny, achieved only a 14.24 percent return last year.

Stocks funds are riskier than bonds funds, Smetanin said, but stocks' returns will probably again outpace bonds' returns next year.

"About 22 percent of assets are allocated to bonds funds, which are more conservative," Troika's Zvyozdochkin said.

Mutual funds that invest in stocks or in both stocks and bonds are the most popular in Russia, accounting for 43 percent and 35 percent of total mutual fund investment, respectively, according to Zvyozdochkin. In theory, the longer one stays invested in mutual funds of whatever kind, the greater the returns will be.

"Unfortunately, the Russian market doesn't abide by the rules of economics," Pushkov said. "Political factors have greater influence [than in the West], making future projections very difficult."

Nevertheless, asset management companies do not foresee waning demand from investors, since interest in mutual funds keeps growing, along with the public's awareness.

"We are getting a lot of letters from interested parties," Smetanin said. Pifagor has nine sales locations in Moscow, as well as sales offices in eight other cities, including St. Petersburg, Nizhny Novgorod and Irkutsk.

"We plan to expand more in the regions this year," he said.