Pioneer cuts an easterly path into new europe

In the 76 years since its creation, Pioneer Investments has built up E125bn in customer assets, with 70 per cent of this coming from Italian investors. The company really came of age in 2000, when it was acquired by UniCredito Italiano, following the merger of the Europlus Italian organisation with Pioneer of the US.

It has since established a strong cross-border franchise, running most product lines required by European investors in a E42bn Luxembourg open-ended funds range. Hedge fund structured product capacity was acquired through the purchase of Momentum in 2002. The European operation has been further boosted by the acquisition of a charismatic, ambitious Italian-American chief executive, Matteo Peruccio.

But while Pioneer has been making these inroads into western Europe, it has also been working – and not receiving quite as much recognition – on the colder front further east, under its Prague-based New Europe boss, Daniel Kingsbury.

Oldest player

Pioneer was involved in setting up Poland’s first mutual funds in 1992 and the Czech Republic’s first products in 1995. “We are the oldest player in central Europe, but we are not part of a big domestic banking group,” says Mr Kingsbury, whose clients’ assets have surged from E600m in 2000 to more than E3bn today.

UniCredito has its own retail branch network made up of local banks, used for distribution in the region, boosted by the Italian bank’s purchase of Poland’s Pekao Bank in July 1999, and helped by further acquisitions since.

“We had already made a substantial investment in eastern Europe, and now another seven banks have been added, converting traditional institutions, which just make loans and take deposits, into modern banks,” says Mr Kingsbury.

Pioneer’s product push through these newly acquired channels is based on the euro convergence story of the so-called “Visegrad Four” countries: the Czech Republic, Slovakia, Poland and Hungary. As interest rates have come down from their long-term high, customers used to high deposit rates are seeking real returns elsewhere, and increasingly looking to investment products.

“We have the largest capital distribution platform in central Europe,” says Mr Kingsbury, whose empire also encompasses Turkey, Bulgaria and Croatia, where fund of funds products are being launched. “Many people only started to talk about the region after EU enlargement on May 1. But the time to come to central Europe was four years ago, when commitment was made by governments to bring down inflation and interest rates. May 1 was just an affirmation of a process which started a long time ago.”

With the exception of Poland, all of the 10 new EU states have opened up to foreign funds, allowing Luxembourg and Dublin Ucits-registered funds to be marketed across their borders, even before they joined the club. The Czech Republic and Slovakia, in particular, enjoyed huge inflows into Ucits funds in the three years leading up to accession.

Local opportunities

Pioneer registered 45 Luxembourg domiciled sub-funds in Slovakia in November 2003, to be targeted at over 5m retail customers of UniBanka, one of the country’s largest banks, which is majority-owned by UniCredito Italiano, Pioneer’s parent company.

But before Pioneer’s competitors get too carried away with borscht-belt opportunities, most of the products actually sold are not normal euro-denominated products manufactured in London, Paris and Milan.

They are typically denominated in local currency, such as Czech or Slovak crowns and invested in local instruments. Products such as Slovak Short Term and Slovak Bond, part of the New Europe Funds umbrella, are competing with those created by local institutions, but dressed up as pan-European Ucits in order to receive tax advantages for investors. “The positive fact is that at least they can be freely sold,” says Mr Kingsbury, who says that in the Czech Republic and Slovakia, up to 40 per cent of funds are now invested in foreign assets.

The secret behind this success has undoubtedly been the ability to embrace changing distribution models. “In Poland in 1992, funds were being sold through broker-dealers,” reveals Mr Kingsbury. “These were professional stockbrokers, not ‘knock on the door’ types who sit at the kitchen table with customers.

‘Three years ago, mutual funds were just a hobby in central Europe. Now they are a serious business’ Daniel Kingsbury, Pioneer

“But as a 20-year veteran of emerging mutual fund markets, I know that the business never enters a serious phase until banks get involved.”

This happened in Poland in 2001, says Mr Kingsbury. “When banks got themselves interested, we saw a tremendous acceleration in the market. Three years ago, mutual funds were just a hobby in central Europe. Now they are a serious business.”

Non-bank distribution is responsible for just 10 per cent of business, and most of this is in the Czech Republic, where independent financial advisers (IFAs) have a small market share.

Pioneer’s main Polish distribution channel, Pekao, has more than 800 branches with 3.5m clients. It boasts a 14 per cent market share. Although each branch has a different type of customer, depending on the town and region, initial investments seldom exceed E200.

Polish model

Pioneer is the market leader in Polish mutual funds, according to Mr Kingsbury, with 35 per cent of its clients’ funds invested in non-zloty strategies, predominantly fixed income, with the remainder in balanced equity.

Mr Kingsbury says Poland is the “classic emerging market model,” where markets went up by record increases in 1994, and then dropped like a stone. “Everyone redeems and then the public misses out on the next rally. That’s why I would prefer closed-ended funds, though we don’t have those yet.”

The main risk for investors moving from deposits to fixed income funds is that investments are not guaranteed. “They have discovered, both in Hungary and in Poland, that they can lose their principal,” says Mr Kingsbury. “Fixed income funds are not the same as bank deposits. This is an investor education issue.

“Investors buying into government bond markets have no need to sell their funds and crystallise a loss unless they believe their government will defraud people,” says Mr Kingsbury.

Pioneer has already moved into Turkey, which will be a larger market than Poland for the group, according to Mr Kingsbury.

Russia, where the Pioneer name is already well known, could be next on the list. Pioneer had the PIO Global brand there, with a 20 per cent market share, but this business was not bought by UniCredito when the other transfers took place in 2000.

“As a public policy issue, there is too much liquidity in Russian banks and under the mattress,” says Mr Kingsbury, who believes the installment of a new regulatory structure in Russia will make it easier for bona fide foreign firms to do business. “Both the securities regulator and the central bank would be much more open to the concept of a portion of that money going into equity and fixed income, and a portion going into foreign investments.”

Russia, says Mr Kingsbury, has the problem of too much money chasing too few opportunities, and is therefore very keen to allow quality investment management by foreign firms.

Market oriented

There are also encouraging signs for mutual funds distribution in Ukraine, where Pekao has a subsidiary operation, says Mr Kingsbury. “Ukraine is showing a lot of signs of rejoining the rest of central Europe in putting together changes to bring the market oriented economy to life.”

The fact that Moscow research house Renaissance Capital – Mr Kingsbury’s former employer – has opened a base in Kiev is evidence that serious players are becoming interested, he adds.

But Ukraine and Russia share a problem which undermines funds distribution – they are seriously underbanked. “There are interesting opportunities, because of the under-developed banking sector, for investment funds to be distributed differently in Russia and Ukraine,” says Mr Kingsbury.

“It is possible for funds to be gathered through non-traditional methods, such as direct sales forces, independent advisers and hypermarkets, because banks are not present in their normal, central role. It is still premature, but it is appropriate to talk about it, as money has to come out of the stockings, into the banks and then eventually, into investment funds.”

Most of the products sold in countries such as Poland are typically denominated in the local currency