Collective investments (market of Russia): Mutual funds, bonds, ISZh

2019: Waiting of crash in the market of ISZh

The market of investment insurance expects crash in 2019, according to RAEX rating agency (June, 2019). New requirements of the Central Bank of the Russian Federation to sales of policies of investment life insurance will serve as the reason for that. Banks will be obliged to disclose the complete information to clients on ISZh, including that the investment revenue is not guaranteed, means are not insured in DIA, and money invested in ISZh cannot be taken away without loss. As a result the market of ISZh can collapse twice, respectively sales of policies will drop by 50%.

Perhaps such forecast looks too pessimistic, but reflects the current radical changes of insurance market.

According to the results of the I quarter 2019 the insurance market for the first time in 10 years showed falling, having decreased by 5.5% to 94.8 billion rubles. And charges on life insurance already dropped by 26.1% and made 46 billion rubles. Considering that the previous year growth was 32.8% the forecast of RAEX is quite relevant.

It was not obvious to most of investors earlier that they buy. Unscrupulous sellers seldom told clients that ISZh registered as the life insurance, actually is invested in the stock market with all that it implies by risks. Times when clients of banks were in large quantities misled upon purchases of policies leave irrevocably.

2017: The most successful year in the history. 73 billion rub are invested in mutual funds

For the industry of the collective investments 2017 was the most successful in the history. For 2017 private investors invested in retail share funds more, than for all previous years. From first months inflows to open-end funds gained steam, and in May the value unknown before — 6.2 billion rubles was attracted. In the next five months the record was updated regularly and in October reached 8.5 billion rubles. After small calm in December the new record — 10 billion rubles was set. In total for 2017 private investors invested 73.2 billion rubles in open-end funds that more than five times exceeds attraction of 2016 and above the previous historic high of 2006. The record was broken also on net assets values which for the first time exceeded 220 billion rubles.

However the industry should overcome the high competition to other investment products, such as investment life insurance or national bonds. At the same time all these options alternative to bank deposits are in demand only for wealthy clients so far.

Mutual funds

According to Kommersant, the National League of Managing Directors (NLMD) based on data, all for 2017 private investors invested 73.2 billion rubles in open-end share funds that is twice higher than the previous record set in 2006. The net assets value of retail mutual funds by the end of 2017 exceeded 200 billion rubles — also record value for the industry. Last time similar euphoria was observed in 2005-2007 when both market sizes, and the number of shareholders of mutual funds annually doubled. Crisis of 2008 a skating rink walked also on the Russian economy in general, and on collective investment market in particular. Its recovery dragged on almost for a decade — the situation was aggravated by imposition of sanctions against the large Russian companies and banks, drop in oil prices, devaluation of ruble and growth of inflation. Only by the beginning of 2016 the positive spirit in the market was created, and in 2017 it was fixed finally.

Decrease in rates on bank deposits became the main economic engine of recovery of demand for investment products. Maximum rates in the largest banks seldom exceed at this time 8% per annum, having decreased for the previous three years more than twice. The retail clients of banks who got used to two-digit profitability were forced to look for to deposits replacement. Attractiveness to investment products of management companies was added also by the policy pursued by the Central Bank directed to cleaning of the banking sector. In 2016-2017 licenses lost both small banks, and the banks entering in top-50 by the amount of assets. Transfer to new Fund of consolidation of the banking sector of one behind another of the largest banks — FC Otkritie and B&N Bank, and at the end of 2017 and Promsvyazbank added nervousness to investors. As a result they were forced to consider this factor as to place money became risky even in large banks if a deposit exceeded the amount (1.4 million rubles) covered by an insurance.

In the Russian market of mutual funds paradigm shift resulted. According to the CEO of UK "Alpha Capital" Irina Krivosheyeva, for previous years market infrastructure was created, the skeleton of the leading players was created, testing of new products and the innovation sales channels was rather actively held.

"Thanks to it the good base for the next stages of development of the industry was put" — madam Krivosheyeva notes.

Bonds (74 billion rub) and ISZh

However in addition to the offer to private investors of the share funds which already became usual in retail market also new financial instruments began to appear. At the beginning of 2015 citizens had an opportunity to open the individual investment accounts (IIA) which assume tax benefits after three years of ownership. Since April, 2017 for individuals removed a tax on a coupon yield and also exempted from payment of the PIT on a difference between the purchase price and face value of the bond (if to hold paper before repayment). Then the Ministry of Finance started sale of federal loan bonds for the population (Federal loan bond N). After successful placement of national bonds the state banks acting as agents offered a wide range of investors and own bonds with higher yield, than deposits. Insurance companies began to offer actively policies of the investment life insurance (ILI)^[1].

"Any sales of investment tools through banks increase investment literacy of the population, and it is simpler to that to sell then to them all the rest, including mutual funds" — the head of department of sales and marketing of UK "Raiffeisen Capital" Konstantin Kirpichev notes.

However the same tools expected, in fact, the same circle of investors aggravated the competition in the market. Especially as private investors after crises 2008–2009 and prefer to risk 2014-2016 less. If in 2005-2007 the main inflow went to the most risk strategy, then in 2017 conservative products — bonded mutual funds, ISZh, bonds were in the greatest demand. And most strictly the competition was shown between Mutual funds and policies of ISZh. The quarterly volume of collecting of awards on ISZh in 2017 kept near the level of 50 billion rubles. According to these NLU, for 2017 investors invested more than 74.6 billion rubles in bonded funds. From 13 funds to which more than 1 billion rubles came 10 were this category.

"Many banks when forming the product offer to clients became more active to use financial planning, and the share of sales of investments increased" — mister Kirpichev notes.

Investors give preference to bonded funds as based on the ratio of risk and profitability they are the next alternative to a deposit. According to the managing director of UK "Sberbank Asset Management" Vasily Illarionov, after crises of 2008 and 2014 the investor confidence to the stock market is low — the request for reliability of investments was brightly created. Especially as bond funds well reacted to the shock period of the end of 2014 when the ruble was sharply devaluated. Bond funds "won back" the sharp slowdown which occurred more than three years ago for several months, having reached pre-crisis level.

Investor's portrait

As a result, despite record inflows of means to share funds, significant increase in number of clients did not happen. According to the Central Bank, in three quarters 2017 the number of the opened personal accounts in retail mutual funds rose only 5.7%, up to 397.6 thousand pieces. It is record result in the last two years, though loses to an indicator of 2007 when, according to Kommersant, the number of accounts in retail funds exceeded 450 thousand pieces. "We do not notice rapid significant growth of number of unique accounts. The coefficient of penetration of investment services in Russia still remains low though year-on-year digits show growth that is represented impressive because of effect of low base" — Evgeny Romanov notes.

At the same time growth happens not due to broad retail at all. According to Konstantin Kirpichev, the main inflows go from clients of premium and private segments of whom 60% of all clients and 80% of volume of attraction are the share. "They have savings, and the main objective — to save and increase. Therefore on them the main offer of investment products is turned" — mister Kirpichev notes.

According to the Central Bank, the average account in retail funds approaches 500 thousand rubles. In Alpha capital and "Sberbank Asset management" the average account of the new shareholder makes 600–800 thousand rubles, at the same time the average account in "Sberbank Asset management" reaches 1.5 million rubles. At the same time in management companies note that their clients are aged people. In particular, in "Asset management" average age of the client exceeds Sberbank 50 years, in "Raiffeisen the Capital" the main skeleton of investors is made by men 45 years are more senior. Investors of such age purchased national federal loan bonds, and the average account exceeded 1 million rubles. And in this case in fight for wealthy clients they should sustain the competition and to offers of management companies on individual trust management, and to services of private banking from banks. It is indicative that the volume of assets in individual trust management of UK (according to RAEX) for the end of the third quarter 2017 exceeded 300 billion rubles, i.e. by one and a half times exceeded assets of retail mutual funds.

At the same time conservative approach of investors allows to expect the managing director stability of collective investment market even in case of deterioration in market conditions.

"The fundamental difference of a situation of 2016-2017 consists that in the industry money of really conservative investors who made more conscious choice for benefit of bonds began to inflow. Probability that they will be disappointed is significantly less, than it was in 2008 when 80% of all investments went to aggressive fonds of stocks" — Konstantin Kirpichev notes.

At the same time the main factor of risk for the next several years is deterioration in an external environment.

"The world market of actions did not experience seven years serious rollback and in relation to profits of issuers is estimated much more expensively, than in 2007. Though some time it still can hold on at the expense of an agiotage around the American tax reform, sooner or later all bubbles burst" — the chief of the department of analytical researches of UK "Uralsib" Alexander Golovtsov notes.

However before the competitive directions of investments — ISZh and bonds — the market of share funds has an undoubted advantage. According to mister Golovtsov, it is worth waiting for an overflow from the funds working with the Russian papers in global which protect from country risks and weakening of ruble exchange rate.

For lack of external and internal shocks inflow of means should remain.

"If there are no 'black swans', then moods of investors will be approximately same, as well as in 2017 with some gain of appetite to risk and the increased profitability" — Vasily Illarionov considers.

With growth of interest in a product from consumers banks distributors will create the most comfortable conditions for increase in portfolios in mutual funds, Vladimir Potapov considers.

2016: The Central Bank sharply reduces number of categories of funds. Identification through a Unified identification and authentication system is resolved

In 2016 became effective the instruction of the Central Bank which sharply reduced amount of categories of funds. Besides obligations for providing quick assets were entered.

"The regulator brought a theoretical part of the legislation into accord with logic and market practice, having removed those categories of funds which were not demanded by the market" — the head of the department of the portfolio investments of Gazprombank Evgeny Romanov notes.

The amendments in the legislation which allowed to simplify identification of clients became important changes. As a result management companies had an opportunity to use the Unified identification and authentication system (Unified identification and authentication system) applied on the portal of state services.

"Regulatory changes made possible sale of shares of mutual funds online that defined a new vector of development of the industry" — the chairman of the board of directors "VTB Capital Asset management" Vladimir Potapov notes.

For 2016-2017 remote link of sales through a personal account the majority large started management companies. In Sberbank of attraction via online channels in 2017 made nearly 1 billion rubles against 134 million rubles the previous year, in Alpha Capital for last year attracted over 1 billion rubles via this channel.

See Also

• Economy of Russia

Notes