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Buyer beware steep discounts on Romania's investment funds, investors say
April 21, 2017 / 12:51 PM / 7 months ago

Buyer beware steep discounts on Romania's investment funds, investors say

PRAGUE/BUCHAREST, April 21 (Reuters) - When Romania listed five investment funds in 1999 as part of a mass privatisation drive, millions of citizens received a little portion of what many hoped would one day grow to become a lucrative big pie.

Twenty years on, however, and the listed closed-end funds with combined net asset values of 7.65 billion lei ($1.8 billion) have failed to live up to market expectations due to inefficient management, the slow pace of further privatisations and the exclusion of big investors due to ownership limits that have left shares in the funds trading at steep discounts to their net asset values (NAV).

But now the government is mulling the creation of a 10 billion-euro sovereign wealth fund and Romania’s share market is on the cusp of being upgraded by international market index compilers such as FTSE Russell and MSCI from ‘frontier’ to ‘emerging market’, increasing the attractions of the listed funds.

“It can provide further support to the status of the Romanian equity market and may have a positive effect not only for the (closed-end funds) but all liquid Romanian equities,” said Alex Bebov, managing director of Balkan Advisory Company, a Sofia-based investment banker and bourse member.

But while foreign investors might be tempted by the steep discounts if the BSE market gets upgraded, investors and market participants warn that they would still face the same problems that have for years beset existing shareholders and which can only be solved if the fund companies are restructured.

The share prices of the five - SIF Banat Crisana, SIF Moldova, SIF Transilvania, SIF Muntenia , SIF Oltenia currently trade at NAV discounts of between 36 and 50 percent, reflecting problems with the way they are managed, rather than simply lack of demand. They offer a dividend yield range of 3.16-8 percent.

“It is a widespread problem and it needs to be solved,” a Romanian broker said.

Few expect the steep discounts to shrink any time soon without legislation changing the structure of the funds and thereby attracting more outside investors - something which the government has shown little appetite for.

“Whether we want to or not, narrowing the discount is limited as long as the market we operate in does not expand,” said former finance minister Bogdan Dragoi, manager of SIF Banat Crisana.

The big problem, investors and analysts say, is an ownership structure limiting stakes to 5 percent, making it hard for shareholders to push for more robust corporate governance and hold fund managers to account.

“This has been one of the main impediments for any significant outside interest in the SIFs,” another local market participant said. “This ownership level gives you no control over corporate governance.”

Officials have said the cap was enforced to protect the small shareholders which the SIFs were created for, but many have since sold their stakes since the funds were listed.

In contrast there is no ownership limit for Fondul Proprietatea, a separate closed-end fund created in 2005 to compensate Romanians for the seizure of their property under communism.

The $2.1 billion fund is managed by Franklin Templeton, which has aggressively sold portfolio assets to buy back its own shares and sharply lower their discount to NAV to around 26 percent, largely at the urging of activist investor Elliott Associates, which holds a 20 percent stake in the fund.

“We have an investment fund with no ownership ceiling and then we have the SIFs where the state, through an old law, is blocking shareholders’ decisionmaking,” said Mircea Ursache, vice president of Romania’s financial supervision authority ASF. (Writing by Michael Kahn; Editing by Greg Mahlich)

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