A financial services market overview by the Financial Supervision Authority (FI) reveals that the volume of public investment funds, including pensions funds, grew by €679 million or 18 percent to €4.4 billion last year. That would be a pretty figure if not for the fact our investment fund business rests almost exclusively on the shoulders of pension funds.
Second pillar funds’ management fees contributed 78 percent of Swedbank Investment Funds’ revenue last year, with the corresponding figure at 75 percent for SEB Asset Management and 97 percent for LHV Asset Management. Luminor Pensions deals exclusively with second and third pillar pensions funds and Tuleva (allegedly for now) only with second pillar funds.
Second pillar funds made up roughly half of the profit of SEB Asset Management and 83 percent for Swedbank, while LHV’s second pillar management fees turned a greater profit than the entire company combined.
If the second pillar fund business is booming, other public investment funds are struggling.
Data from FI suggests that second pillar pension funds (€709 million) made up only one-third of registered investment funds (€2.2 billion) in 2007.
Stock funds volume cut in half
Second pillar funds made up 82 percent of all investment funds last year. Stock funds that should be most people’s first and only investment object next to pension funds have shrunk by more than half.
If in 2007 the total volume of stock funds managed in Estonia came to €1.2 billion, it was just €0.4 billion last year, whereas the latter figure (volume of €300-400 million) has remained largely unchanged since 2010 even though stock prices have gone up considerably in that time.
The number of open investment funds’ unit-holders has been steadily declining, falling from 32,100 in 2007 to just 7,919 by 2017.
Experts say that investment funds’ business is fading away due to Estonians’ scant savings, new regulations, and the fact local banks intermediate stocks of hundreds of international funds the copying of which in Estonia is pointless.
“The level of our financial savings still falls short of many other Central and Eastern European countries. I do not think the reason is that we have too few options for investment,” said head of Swedbank Investment Funds Kristjan Tamla.
“For years, Swedbank gave people the chance to invest into more than 100 funds offered by nearly ten fund managers. The selection included all manner of regions, sectors, asset classes, fields etc. Investments were very modest and growing regulatory burden made maintaining this versatility insensible,” Tamla said.
He said that several regulations are coming from Europe (Mifid II for example) that are probably sensible considering the market in old Europe so to speak. At the same time, implementing them might simply be too costly in the conditions of Estonia’s few and low-level financial savings.
“We find ourselves in a situation where, pensions funds excluded, solutions aimed at the mass client are offered exclusively by Swedbank,” Tamla said.
“Others have either closed their funds of funds or didn’t open them in the first place. Almost two years ago, we saw how eurofunds (basically ordinary investment funds) regulation UCITS V led to the closing of several funds aimed at retail investors in Estonia,” he said.
Tamla said that Swedbank has managed to avoid cutting the number of funds it offers in recent years, while growing regulatory burden forces the bank to be more effective in other activities.
Member of the board of SEB Asset Management Sven Kunsing said they are one part of SEB Investment Management on the group level and have two local businesses that would not make sense in Sweden.
“We manage our Eastern European stock investments (Luxembourg and Sweden) and Estonian pension funds from Tallinn. The two businesses are more or less equal in size in terms of managed assets today. Other funds (a la global and European stocks) are “manufactured” by the global organization that has been doing it since SEB was created,” Kunsing explained.
Changeable local regulations
“We do not believe it sensible to maintain copies of global products here – it would be inefficient and entirely needless. SEB already intermediates the global SEB IM AB selection of funds, including Eastern European funds managed by AS SEB Asset Management,” he said.
“Pension funds are important for the local client; they’re surrounded by specific, very detailed local regulation; their sales process, competitors, and entire logic is unique; and they only have local clients. Local investments can be used to an extent. That is why it is sensible to manage them locally,” he said.
Asset managers in charge of pension funds continued to do well last year. Total turnover of companies grew by 7.5 percent to €43.8 million; revenue tied to second pillar funds grew by 7 percent to €37 million.
Profits grew by 7.2 percent to €15.4 million and 12.5 percent to €14 million respectively. Growth of revenue was slowest for LHV Asset Management at 3 percent to €13.3 million and the company was the only one the profit of which fell (by 5 percent to €5.8 million).
LHV’s weaker result was caused by a sharp decline in management fees after taking over Danske Bank’s pension funds and the emergence of mutual pension fund Tuleva that probably lured the most clients away from LHV pension funds. Net profit was reduced by income tax on dividends that amounted to €1 million.
Swedbank Investment Funds also paid dividends (€2.9 million), while Luminor Pensions reduced its share capital by €2.5 million and paid it back to the owner. LHV Asset Management paid out €3.8 million in proprietary income.