NN Investment Partners is an international fund management company that has been operating in the Czech Republic for more than 20 years. In 2016 it had over 111 billion crowns under management. It’s services are offered to insurance companies, pension funds, as well as individuals.
The investments cover a broad range of products with shares in Czech and wider Central European equities one of the main components. And that’s where Igor Müller steps in as a Prague-based portfolio manager keeping an eye on both Czech, Hungarian, Polish, and Romanian shares. He’s seen a successful last year. And the upbeat story of Czech and Central European shares has been noticed elsewhere with them now catching on with pension funds in far away Latin America. I asked Mr. Müller what his work consisted of.
ʺMost of the work goes into managing equity funds within Central and Eastern Europe. We manage two main funds, a Czech and Romanian equity fund. With the Czech funds, there’s around 500 million euros being managed, predominantly invested in blue chips within the region and in the most active Czech company shares. At least 51 percent of the fund must be invested in Czech equities. And then, of course, we add equities from Poland, Hungary, and Romania.ʺ
And how was the performance both in the Czech Republic and elsewhere over the last year? How were the companies and how were the returns?
ʺBasically, after three, four, or five years of stagnation and not particularly good absolute results, we had a very good year last year because the fund made 20 percent over the year. That’s a very nice figure. Finally, the convergence picture came back to Eastern Europe supported by robust economic growth, not only in the Czech Republic but also in Poland, Hungary, and Romania. This is helping the regional equities a lot. We are mostly exposed to the banking sector. And the banking sector is a proxy to growing retail. The more people are secure about their jobs because of low unemployment and the more they push on their wage increases, the more confident they are about taking new loans. Therefore the financial sector is one where we see quite a lot of potential and that not just because of the [loans] volume growth but also because of the expansion of the margins.ʺ
ʺWe had a very good year last year because the fund made 20 percent over the year.ʺ
Looking at the banking sector, just the Czech one, interest rates are likely to go up over the next year here and probably in most of the region. That should be good or bad, in your opinion, for the banking sector?
ʺWhen the interest rates rise moderately from very low levels this is obviously a very supportive factor for financials and their operating margins. Why is that? It’s because they are passing on the higher interest costs onto their customers and this is boosting their margins. This means that the net interest income, this is what we are predominantly looking at, is on the upward trend. Basically, the market is estimating a 10-15 percent rise in earnings for the banks in the region.ʺ
Some people talking about the Czech market look at the real estate market, the mortgage market – one of the main aspects of the banking market. And they are talking about a bubble, a real estate bubble. Do you have any fears about that?
ʺAt the moment we are not worried. We have seen or we have experienced a real real estate bubble in 2008 where mortgages were granted of 100 and more than 100 percent of the equity value of the underlying assets that people were purchasing. We are seeing a much more prudent and conservative approach from all of the banks. That’s one thing. Secondly, banks are very well guarded in terms of any market volatility. There requirements of the regulators are very strict, even stricter than we would be comfortable with. This means that even if there is a slight pull back of the real estate market and prices would drop in certain locations like Prague. We don’t expect this would distort the ability of those who take up mortgages to pay them back. So, no.ʺ
We talked about last year, this overall 20 percent from Czech companies. How did these returns compare with the rest of the region? Were they performing better, worse, or were on a par with the rest of the region?
ʺCzech companies in relative terms are not performing as well as Polish or Romanian stocks. The reason for that is that you have a so-called low Beta market. That means that these companies are not leveraged, they are more conservative, or they are simply from industries where the growth was not so big. For instance, for the utilities when we talk about ČEZ, electricity prices did not shoot up that much meaning that there was no reason for the shares of ČEZ to appreciate as much as, say, the shares of Polish banks. But in general we do not see this as something that is negative for the shareholders because on the other hand, in the Czech Republic you have one of the highest dividend yields in the world. It means that shareholders can participate and have it as a conservative part of their portfolio and they can find more risky assets to buy in Poland or Romania. So these regions compliment [each other] and it actually depends on the actual listings [on the exchanges] and we all know that the Prague Stock Exchange has much fewer shares to invest in than let’s say Poland.ʺ
Let’s come back to the broader picture. Basically, you are providing investment services, funds, advice etc to insurance companies and pension funds. That’s where you are. So how do you see that market evolving in the Czech Republic given the general talk now about changing pension funds, the role of the government and, eventually, the role of private people in covering their old age.
ʺCzech companies in relative terms are not performing as well as Polish or Romanian stocks.ʺ
ʺI would separate the two parts. One is mutual funds where you have long term investors. The ones we appreciate the first are the ones who put aside their money on a monthly basis, meaning that they are buying constantly not only on peaks where they could be entering into overvalued territory. Basically the most gain you can get is when you are a long-term investor and avoid any volatility in the investments and returns. Within the mutual funds and retail side we actually experience that people are looking around where to invest because interest rates are so low that the usual products like savings accounts don’t yield anything. Bond funds don’t offer that much gain. So there is this constant yield search where people try to buy corporate bonds. This market has been really active in the past two years in the Czech Republic especially. And then you have people looking at equity markets because in time of high economic growth the best way to earn money is to invest in equities.
ʺThat’s one part, that’s the retail part. Then from the institutional side, we are seeing high demand, or high focus, increased focus, from everywhere in the world. For instance, we have recently obtained a new investor which is a Latin American pension fund. They had been looking at our space for a long time but finally decided that the macro economic environment was robust enough or attractive enough to invest. I believe they made a good bet in this case. We are seeing much more demand from international institutional investors for our funds and I guess that just underlines the fact that the regional has just shot up from the perspective on international global equities investments. So, we are happy about this.ʺ
There has been talk for how pension funds should operate and government reforms and they really haven’t happened. It’s being talked about again now. Do you see that this will have to take place in the future and that pension funds and their investments in funds locally will in some way take off perhaps in the same way that this happened in Slovakia?
ʺWe have recently obtained a new investor which is a Latin American pension fund.ʺ
ʺI don’t have high hopes that they will reinitiate talks about the second pillar, the compulsory private pensions system. I don’t think this has wide political support in the Czech Republic. They just abolished the second pillar a few years ago so I don’t expect them to come back and reinstate it. Where I see potential is the third pillar, which is the voluntary saving for pensions where you have a contribution from the state/employer where the contributions are tax deductible and therefore you are getting this benefit. And secondly, this really has to take some time and people have to realise that if they are saving each month they have a contribution from the employer and they are seeing an appreciation of their investments in more than five or 10 years. Then, they really start to realise that they are saving up for the future. This needs to grow in the minds of people and it’s a very long process but definitely there must be a bigger push from the government to tell people that they have to take care of their future and not just rely on what the state will pay them after they retire.ʺ
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