BUDAPEST, Hungary - The competition to manage Hungary's nascent voluntary mutual benefit fund industry is fierce, with no clear winners so far.
Money managers, primarily commercial and investment banks and insurers, are falling over themselves to win business: they are offering guaranteed returns or low - or even no - fees.
The potential for these funds is sizable. While there were only about $2.2 million in these funds at the end of last year, experts project that in the next few years, VMBFs will become the largest investors in Hungary's capital markets. Some believe the funds will control up to $47 million by the end of this year and up to $1 billion within five years.
Created by law at the end of 1993 as a vehicle to encourage Hungarians to save for retirement, medical or disability expenses, VMBFs are pooled vehicles that can be set up by employers, unions or other institutions. The benefit funds offer significant tax breaks to both individuals and employers.
Most of the 81 existing funds are for retirement savings because Hungarians know the state pension system doesn't provide adequate retirement benefits. Another 126 funds are awaiting government licensing, and new funds are forming at the rate of one or two per week.
So far, only Siemens Rt., Budapest, a subsidiary of the German company of the same name, is the only 100% foreign-owned company to set up a VMBF. Graham Walsh, country manager for William M. Mercer Ltd., said it takes foreign-owned companies longer to set up such funds because any actions must fit in to the parent company's overall benefit strategy.
Moreover, he said many multinationals view Eastern and Central Europe more as a region than distinct countries and want to set up regionwide benefit approaches. The problem is that tax laws differ by countries and some countries have yet to pass legislation to create retirement plans.
Still, commercial and investment banks are eager to establish a foothold in Hungary. In the hunt to win business, some banks are offering to manage funds free of charge for the first year, while others are offering guaranteed rates of return, either at an absolute guarantee or tied to treasury bill rates.
"We won't make money on this for the first one or two years. But we believe we are making a long-term investment," said Karoline Kovecses, project manager for Bank Austria-GiroCredit Investment Ltd., which manages three funds with 15 million florins ($120,000). "Clients are pushing for low fees and guarantees."
Tamas Forgach, chief manager of K&H Bank Group, explained: "It is a way of chaining clients to the bank."
But some experts find the idea of offering guaranteed rates of return unprofessional. "It is irresponsible to give guarantees," said Adam Gere, managing director of Sedgwick Noble Lowndes Ltd., a pension consultant. "I'm advising my clients not to look at such things."
Creditanstalt Securities Ltd. refuses to guarantee returns. Peter Holtzer, an associate at the money manager, tries to lure in clients by stressing the investment's house's experience in managing money and its wide network of brokers. He said the firm has $60 million under management and that it carries a lot of weight at government bond auctions.
"We have good brokers and that is the difference between getting a bill with a 33% yield and a 32.5% yield," he said. Inflation in Hungary runs about 30% a year.
But for now, guarantees are a powerful enticement. Hungarian pharmaceutical company Chinoin Rt. received about two dozen bids from managers when it decided to set up a pension fund for employees.
Vera Rudas, Chinoin pension fund president, said one of the main reasons she chose the Hungarian Foreign Trade Bank to manage the fund was the guarantee offered. She added the bank also offered the lowest management fee, although she wouldn't disclose the fee or guarantee.
Foreign-based money managers are just starting to enter the fray. So far, Bank Austria-GiroCredit and Creditanstalt are the only foreign-based managers. But sources expect other banks with Budapest operations - such as Citibank and ING Bank - to enter the market.
Also, some for-profit insurers are planning to compete by creating non-profit subsidiaries to manage VMBFs. Under Hungarian law, only non-profit insurers - which charge only management and administration fees but do not share in returns - are eligible to manage these funds. But Hungarian for-profit insurance companies are lobbying to offer such funds.
National Nederlander, the Dutch insurance company, plans to set up a non-profit company early next year to manage its own company's pension fund in Hungary and may market its services to others.
Meanwhile, Dutch insurance company AB-Aegon is conducting a feasibility study to see if it should establish a unit to enter the VMBF market. "It will be quite a lucrative business," said Hanno Mijer, marketing manager of AB-Aegon in Budapest.
Also, Hungarian for-profit insurance companies are lobbying to offer such funds. Now, only 20% of premiums paid to these insurers for pension products is tax-deductible - compared with 50% of contributions to a VMBF.
In addition, Hungarian companies don't have to pay social security taxes of 44% of gross salary for employees who participate in the plans.
Currently, fee structures and guarantees are the major way managers can distinguish themselves. That's because VMBFs are loath to move away from three-month treasury bills, given uncertainty over Hungary's inflation rate.
VMBFs enjoy considerable investment freedom. A minimum of 10% of assets must be invested in cash or state-backed short-term securities. A maximum of 30% of assets can be invested in state-backed or international bank securities with maturity of more than one year. Up to 60% of the fund can be invested in stocks or mortgage-backed bonds, while up to 30% may be invested in pooled vehicles such as mutual funds.
But money managers mostly are sticking to T-bills. Long bonds are viewed as too risky, and only three corporate bonds are available. And it may take a long time to move these benefit funds away into stocks and other risky assets.
Stocks are viewed as altogether too risky. There are 39 companies listed on the Budapest Stock Exchange, but only about a quarter offer any reasonable liquidity. The average 5% to 10% average yield on most Hungarian stocks doesn't come close to the rate of inflation.
"The stock exchange is not liquid or active enough right now," said Creditanstalt's Mr. Holtzer. "But stocks are a long-term investment" that are appropriate for pension funds. "Eventually we'll have to invest" in stocks.
