Interfin CAPITAL Management Company Profile. What is the bottom line of the pension reform: taking opportunities?
Interview of Director general with Interfin CAPITAL MC Dmitry Sachin to M3-Media Financial Information Agency

Interfin CAPITAL Profile

— Management of assets of which to-be retireds group serving is the management company you run oriented for? I mean what age, income and job of your clients are? What is your rationale here?
I think we can’t choose our clients by just their incomes, ages and jobs. Actually, it all depends on if people think or not about what they are going to be when they retire. We did the research and found out that people below 30 do not think retirement and pension benefits are fact of life, and only people who are 35 or above 35 think of retirement as something real. The challenge here is that pension accruals management results will be much better for 25 to 30-year-olds.

— What are competitive advantages of your company? Are their any groundwork differences with counterparts on the asset management market?

We entered the individuals’ assets management market in 1997 and were among the pathfinders on the market. Our mixed investment fund Partnership was acknowledged by the Russian National Management Association as frontrunner on the mixed investment fund market. I hope that our newly launched energy- and telecom-oriented funds Energy CAPITAL and Telecom CAPITAL are also stick with the strongest performers. We are also a major management company in Russia with assets under our management totaling 1.2bn rubles.

— What do you identify as operating priorities? What destination are your efforts oriented for? Do you try to gain largest possible client base, or work to boost assets under management, or expand geography?

You’ve been absolutely accurate about everything! True, by and large, we use our best efforts to involve as many people as we possibly can.

— What are destinations to invest pension accruals you manage?

We do not offer anything extraordinary, as management of pension accruals is the territory where you should generate a balanced investment portfolio with the greatest share constituted by fixed income instruments.
I’m often asked what is the destination where one could generate the largest returns on investment of pension savings, but the bottom line is that one must not be guided by prospects of highest returns when taking decisions, as highest returns imply largest exposure, while we are pursuing secure pension payments to people after retirement. The modern investment portfolio theory Harry Markovitz put down in words in 1952 says to create effective portfolio we have to combine least market-sensitive securities to reduce exposure without hurting expected returns. In simple terms, the portfolio must be constituted by all types of securities, including various industrial and utilities shares and bonds. Yet our opportunities here are limited with the government restricting the number of portfolio versions to one for one company. The restriction is to become effective in the year to come.

— How do you plan to attract to be retireds? Do you plan to use any specific adverts or information channels?

I believe the ad tools to be used are quite apparent, as, basically, we’ll have to use mass media, billboards and other similar ads.

— On which areas in Russia are you going to focus when attracting new clients? How are you motivated in choosing your strategy? How registrars and advertisers are going to work in areas other than Moscow and Saint Petersburg regions? Are you going to use some special efforts targeting people living in areas far away from Moscow and Petersburg?

Launching information campaign in distant regions is exactly what we are doing, as we see clarifying objectives of the pension reform and opportunities people can use as the major goal to pursue.

— What can you say about your management team? How many people are going to manage pension assets and what professional background do they have? How is the answerability of the asset managers is going to be determined and how they are going to be compensated?

Some people in our management team are professional managers having very good track records. They managed to struggle through the crises that broke out in 1997 and 1998. Activities of employees in charge of management of pension accruals are going to be regulated according to the Corporate ethics code of the company.

— Which mechanism are you going to use to protect pension savings?

As I have already said, basically, we have to diversify investments to create most risk-proof portfolio. I mean, we have to invest in least market-sensitive securities.
If we talk about reducing of exposure to risks and regulating the right of the management company to invest in specific securities, we have multilevel control system constituted by company’s investment fund depository, Russian finance ministry, Federal Securities Commission and Pension Savings Investment Public Council.

— Are you going to offer insurance products to your clients to protect them from possible risks?

Actually, insurance products are not included into pension accruals investment package, as the accruals themselves only form a part of the total amount of the pension payment, the pension being also constituted by labour and insurance accruals. But focusing on insurance issues, it is important to say that our company is going to insure answerability in case of infringement of the agreement of trust management of pension accruals strictly subject to the Russian law in effect.

— What are strengths of management companies compared with non-state pension funds who are to enter the market in 2004?

The question is not quite accurate, as management company and pension fund are essentially different structures. Non-state pension funds are created to accumulate payments forming pension accruals and are in charge of paying pension payments to individuals according to the pension plans they choose. After creating a pool of pension payments, a fund transfers it to management companies who generate investment portfolios. That’s how the reformed pension system works, in a nutshell. And so, from the vantage point of strategy, management companies and non-state pension funds are to cooperate rather than to compete in the context of the system to be launched. It is the state pension management company Vnesheconombank and non-state management companies who will have to compete.

Trust management highlights: how to become management company client and which portfolio to choose.

— What do you think people should be guided by when choosing management company and investment strategy? Are there any specific criteria for different groups like youths, older people, business and other groups of people?

I think, when choosing a management company, one should be guided by the company history, results of management of unit investment during a long space of time, say, 3 years and total assets a company manages. Talking about investment strategies, people who are going to retire in the years to come, should better have portfolios constituted mainly by bonds for the best protection of pension accruals. Younger people could opt for portfolios formed basically by shares as tools to generate higher returns in a large space of time.

— After receiving the pension savings account advise note, what do people who do not live in Moscow, Saint Petersburg or some other big city have to do to become client of a major private management company based in a big city?

When one receives and signs for the note, he or she can fill in an attached application form by which they choose a management company. After that they have to notarize their signature on the application and send the application to the local Pension Fund division. One can either get the address of the division at the company or plant where he or she works or call our management company for information or visit our website. As an alternative, the network of centers for certification of individual signature is being created. The centers act as the Russia’s Pension Fund certifying transfer agents. The Pension Fund is going to publish info posters with names and details of the centers to facilitate choice of management companies by people.

— The law says management companies’ clients have the right to transfer their pension accruals to another management companies? What is your idea of are possible reasons why Russian people will go to other trust managers? How large a scale the move is likely to have?

I think, basically, people will want to go to some other management company after they see the results after the first year. After the first year, clients of management companies will be advised of the investment results by the Pension Fund and will be able to form opinion. The results will be a topic of the year for people throughout the country to discuss. “I had my pension savings managed by so-and-so company and I earned this much”, people will be saying.

— What is your forecast of prospects the pension reform actually faces?

You cannot count on some in-depth changes given a narrowest timeframe proposed for people to choose private management companies for the first time in their life. Of course, the state will remain manager of the bulk of pension accruals this year.
I think trying to tell the future and make forecasts is a waste of time, but is you ask about prospects for the years to come, then my forecast will be somewhat like the figures we saw when Kazakh government launched similar pension reform a few years ago with 10 to 12% of people filing applications to private companies in 2003, 12 to 15% choosing non-state companies in 2004 with private companies clients making up 40% of the total number of applicants after 5 years. At the same time, pension tax constituting pension accruals will be raised from 3% of salaries or wages in 2003 to 6% in 2006, and so every individual will have larger assets with larger potential, which is surely to constitute an impetus for people to get their pension accruals managed unlike now when everybody believes that retirement is something that happens to other people but not themselves. As long as people get more interested in pension reform and pension accruals are boosted, management companies, and specifically our company, will launch various investment portfolios with prevailing either shares or fixed income instruments and constituted by either market-sensitive high-risk securities or by low-risk ones and with different returns depending on goals our clients pursue.