Yelena Myazina
Vedomosti    April 02, 2004

The article was prompted by management companies horizon being clouded by the first challenges when starting to invest 1,6bn rubles transferred under their management by the Pension Fund with the number of stocks authorized as investment securities too restricted to generate an adequate pension accruals. Meanwhile, officials think management companies are laying it on thick.

The officials expanded that non-state financial companies are free enough to diversify investment with Russian government and regional securities, municipal and corporate bonds and companies’ shares and ruble deposited being authorized destinations for investment of cash transferred to non-state management companies by the Pension Fund. Still, the companies have to face a great deal of challenges emerging on restrictions as to investment portfolio structure being so extensive as to hardly be statable on several printed pages.

Addressing the issue, Boris Cherkassky, counselor with Depository operations management department at Vneshtorgbank, reiterated that regulations applicable to investment by non-state management companies include a great number of restrictions, specifically, with management companies being authorized to trade securities only on regulated stock exchanges and essential requirement of shares and bonds they buy being included into regulator’s quotation list. Corporate securities trading was the most challenged one with both share or bond issuer restrictions including 2-year history of operating without losses and number of shareholders exceeding 1000.

Given the restrictions, to identify securities authorized for pension investment was a brain-racking challenge for management companies. Vice-director general at NIKoil Management Company Natalya Plugar said that “management companies have no information sources available with stock exchages being scheduled to track down the amendments only from January 1, 2005”. According to Boris Cherkassky, management companies are challenged when researching the number of shareholders, as despite being bound to disclose the data in quarterly reports, issues often veil them by reporting number of nominee holders. Also unclear what to do with a security being listed on a stock exchange but having core trading volumes generated at other one.

A management company director general cited the list of securities recommended for investment by the Vneshtorgbank Associated depositories as pension funds depository and investment portfolio supervisor, apart from GKO-OFZ, revealing 20 regional and municipal bonds, 17 corporate shares and 5 corporate bonds as authorized investment securities (see the table below).

Management companies’ management are unanimous about the restrictions being so extensive as to create real investment challenge. Indeed, non-state management companies’ investment declaration including more securities than that posted by Vneshtorgbank as state management company was their major bargaining chip when attracting clients. Interfin Capital director general Dmitry Sachin, who is betting on shares as this year’s stock market powerhouse, was startled when he learnt that a core blue chip Gazprom was excluded from the list. He said that “Gazprom is absolutely the only chip able to match pension investment requirements”.

As pension reform was launched, the management identified bonds as safest sector where the bulk of investment would be concentrated. Montes-Auri director general Sergey Stukalov reasoned that “corporate bonds are safer than shares and more profitable than government and regional securities”. The list being imposed by pension regulatory bodies makes initial plans no longer feasible with management companies being authorized to invest not more than 40% of total pension fund’s assets, investment in regional and municipal bonds regulated by the same restrictions, with investment in shares not exceeding 50% of fund’s assets. The challenge here, Ms. Plugar stressed, is restriction of one issuer accounting for not more than 5% of total fund’s assets. It is simple maths that shows a management company needs to invest in at least 10 companies for sufficient investment in corporate bonds.

Sergey Stukalov also said that “we seem to be having narrow escape investing in government securities given that yield on Gazprom bonds approximates that of long government OFZ bonds”. The annual yield of the gas giant’s bonds due 07Jan is roughly 6,7%, 5-year bonds annual yield being 6,1% and 15-year debt by the gas monopoly yielding 7,7% a year. "The new regulations put a muzzle on us as competitive investors with Vnesheconombank having clear advantage given the lay of the land as having regulations providing for investment in ruble and foreign currency bonds” concluded Kapital Management Company director general Alexey Shkrapkin.