Domestic market experience, exchange rate volatility and the initially small volumes of capital to be attracted by private pension funds are the three reasons why analysts consider these funds will mainly invest in Romania.
The money to be raised by the mandatory private pension funds (pillar II) to operate on the domestic market starting 2008 will largely stay in Romania, at least during the first few years, specialists believe. The experience of neighbouring states shows pension fund managers prefer to invest domestically, for at least three reasons.
The first reason is the experience of placements in domestic currency and the fact that the investment managers of the respective funds are used to the domestic market and with the opportunities it presents. The same will happen in Romania, believes Lucian Anghel, chief economist of BCR: placements in RON-denominated financial instruments will make the difference between the yields generated by managers.
"The experience and expertise with investments in RON will matter a great deal in the management of the pension funds, because this is where yields come from, particularly because contributions will be denominated in RON for at least seven years from now until the shift to the euro," Anghel says.
Also, other CEE states that started pension reform several years ago show most investments are made domestically. "Most managers of private pension funds in the region show this effect called 'home bias', that is they tend to invest fund assets mainly on the domestic market, where they have a certain experience," says Peter Heim, a CEO with Aegon Hungary Fund Management.
The second reason is exchange rate volatility. In recent years, especially in the case of states that joined the EU, domestic currencies have advanced considerably. Thus, foreign placements have become unattractive for most funds.
Finally, the third reason is the smaller volume of money to be raised by funds in the first years. The small volumes do not justify investments on foreign markets, say fund managers, given that they can be managed domestically.
In Romania, there are practically no legislative restrictions in terms of investments that can be made on foreign markets by pension funds. It is only monetary placements that have to be made with banking entities in Romania, while no other category of assets is restricted to the domestic market. In the region, where there are ceilings of between 5% (Poland, the strictest legislation) and 30% (in Hungary), for foreign investments, data show fund investments do not push these limits.
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