UAIB Analytical Review of the Asset Management Market in Ukraine - Q4 2017 & Full Year 2017 Results
In 2017, Ukraine's financial and economic system demonstrated some signs of stabilization, which has also contributed to the asset management industry. The number of participants - both of AMCs and acting funds under management - has slightly increased for the first time in 4 years, although the dynamics among investors was divergent in different sectors of CII. Assets under management, after reduction in the previous year, returned to growth in 2017.
Number of asset management companiesfor the year increased by one, to 296, with the simultaneous closure of a number of companies during the year and emergence of new ones.
Number of collective investment institutions - those that have reached the normatives for minimum volume of assets - has increased for the first time since 2013 and reached 1,160 funds, against the background of venture CIFs’ popularity. Total number of registered CII, growth of which accelerated in 2017, continued to increase. At the same time, closure of some funds also continued. Number of liquidated venture UIFs was the largest in 2017, as in the previous year; oneopen-ended and one interval UIF, and two closed-end non-diversified CIFs were also closed. In 2017 the first closed-end qualified fund (UIF),which was created in accordance with the Law "On CII", which came into force in 2014, reached the standards, and as a whole there were 10 funds, which reached the standards by the end of 2017, in new categories of specialized and qualified CII.
Aggregate assets under management and net assets ofCII in 2017 rapidly increased and have updated the historic maximum. As at December 31, 2017, total assets of CII industry amounted to over than UAH 263 bln., net assets - almost UAH 213 bln.
As before, venture funds were the engines of industry, albeit growth affected all sectors (except of closed-end CII with public issueby annual result, although they also increased in the fourth quarter). Open-ended and interval funds in October-December added more than 4% of the total NAV, and for the year - 20-30%. Thus, the sector of open-ended CII continued its upward trend for the second consecutive year - it was contributedby net inflow of capital to it, the first for 10years, as well as lively growth of stock indices in this year.
Number of investors in CII in 2017 decreased again, but in open-ended and interval funds their number increased for the first time since the pre-crisis period: in the first ones - mainly at the expense of retail depositors-residents, while in the second ones - at the expense of enterprises-residents.
Aggregate investments of domestic enterprises - the largest investors in CII – in 2017 grew the most in absolute terms among all categories of investors, although in relative terms – their growth was smallest. Finally, their weight in NAV of all funds at the end of the year decreased, but remained at the level of 2/3 of the industry. Citizens of Ukraine accelerated the growth of investments in CII in 2017, and their share in the total NAV exceeded 11%. Foreign investors, in particular legal entities, in 2017 were the second onesbyrates of growth of their aggregate investments in CII, this increased the share of non-residents in NAV of all funds to almost 23%.
CII rates of return in 2017 continued to grow and was amplified by dynamics of the stock market for those funds, which invested a large share of assets in securities.
Open-ended CII, which were leadersby average annual revenue among sectors of CIIby type of funds, were ahead of not only time-based annual banks’ deposits in hryvnia, but also of deposits in euro, which were the most profitable among banks’ deposits in 2017. This year, again, all, except one, open-ended funds provided an increase in value of investments, and two out of 17 even surpassed returnsof the UX index, demonstrating the high result for the second year in a row.
Among diversified CII with public issue - as well as among different sectors of CII as a whole–equity funds had the highest results by rates of return for the second year in a row; they brought more than 30%, and bond funds were leading in the fourth quarter.
Assets of non-state pension funds under management in 2017 accelerated growth, and number of funds and of managing them AMCs further decreased.
Open funds remained the largest segment of NPFs in terms of number and total amount of assets under management (excluding the corporate fund of the National Bank), this year they increased the weight both in terms of quantity and value of assets under management. At that, almost 52% of the whole NPF market was held by the NBU CNPF, limiting the share of open NPF to 35%.
In 2017, the share of NPFs’ assets (without CNPF of NBU) in securities was more than 1/2, and 90% of it were invested in government bonds. At the same time, stock instruments still comprised for almost 2/3 of professional NPFs’ portfolio, at that 22% -were corporate bonds, although the OVDPs’ share here was also the largest. Taking into account the corporate fund of the NBU, the NPF market held a somewhat higher share of assets in banks’ accounts (almost 45%), and in securities - almost half (80% of them in OVDP).
Assets of insurance companies under management in 2017 also increased at an accelerated pace - more than twice, exceeding the size of sectors of open-ended and interval CII, although the number of AMC providing services to the IC, as well as the number of such companies, for the year did not change.
According to data of AMC, which have assets of IC under management, almost all of them were invested in government bonds.
As the whole, results of 2017 were positive and better ones for a larger number of CII and their investors, than in 2016, and for the funds with public issue, in particular for open-ended ones, this year has become especially important, because the annual net inflow witnessed overcoming of at least some of the effects of financial crisis, which lasted for almost a decade, despite rise of stock indexes within some years also before 2017. In terms of return on investments, this year, when dynamics of stock indices was steadily rising, naturally, was the most successful for funds, which were focused on investment in equities.
Some positive regulatory initiatives on implementing existing and creating new opportunities for successful and effective asset management of funds, which have emerged during the year, have yet to be approved and will demonstrate the desired effect in subsequent years.
Among the expected changes in the regulation of the market in 2018 - weakening of requirements for issuers to include their securities in the listing of stock exchanges, admission of foreign issuers to trading there, without restrictions oconcerning availability of assets in Ukraine, along with further currency liberalization and adjusting of the Ukrainian stock market’s infrastructure to the requirements of modern realities of international capital markets. Iplementation of amendments to the legislation on easing requirements for diversification of investment and pension funds’ portfolios is expected to have a positive effect on activities of CII and NPF. As for the "squeeze-out" procedure, its application will have negative consequences, if formation of the buyout price is not based on market principles. Increasing requirements for auditing (and auditors) of funds and of AMCs will also increase expences of business.
Besides this, further regulators’ steps are expected on transiyion to regulation and supervision of the Ukrainian stock market in accordance with EU rules in the context of implementation of the EU-Ukraine Association Agreement on investment funds and asset management, in particular, draftingof the new law on CII activities, as well as review of prudential requirements for AMC and for the rest of professional market participants.
Pension reform also remains the priority area - introduction of the 2-nd accumulative level, with the significant role for asset management companies.
Market participants, as before, will continue to cooperate actively with regulators to develop a common vision for the phased transformation of the asset management industry in line with Ukraine's international commitments and with the needs for development of the domestic stock market and of national economy, and for a systemic improvement of citizens’ welfare.