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Vienna-based asset managers dominate central Europe, exploiting the bank branch network that Erste, Raiffeisen and Bank Austria built straight after the collapse of communism in 1989.

“We have a very good network in this region,” says Michael Höllerer, managing director of Raiffeisen Capital Management. “This is our main asset.”

Heinz Bednar, chief executive of Erste Asset Management, estimates that over the past 18 months 40 per cent of his funds’ new money came from Austrian investors, some 10 per cent from Germany and elsewhere, and about half from central Europe.

Raiffeisen Capital’s Michael Höllerer

Funds are usually designed centrally in Vienna, though often tailored for different markets, to be sold via bank branches and third parties across the region. As with their parent banks, much of the back office work is still done in Vienna, though more is being devolved to countries themselves.

Pioneer Investments, a global firm, also uses Warsaw as a regional hub, where its owner, Italy’s UniCredit, which owns Bank Austria, controls Pekao Bank. Raiffeisen Capital Management uses Tatra Asset Management, a unit of Raiffeisen’s Slovakia subsidiary Tatra Banka, which co-ordinates its central and eastern Europe (CEE) asset managers. “We are growing together,” says Mr Höllerer. “Bratislava [Slovakia’s capital] is a very good place to do this.”

Werner Kretschmer, head of Austria and CEE for Pioneer, says: “The big challenge we face is that in reality these are different countries where we face quite different requirements.” Balkan countries, for example, are at a much earlier stage of development than central Europe, he says.

The other main complexity is that Austrian, German and northern Italian investors seeking higher yields in Vienna-based CEE funds behave quite differently from CEE investors. This divide has been highlighted by fund flows since the global financial crisis.

Mr Höllerer says: “Before 2007 we really had a party atmosphere. Then the party was over. The next two to three years were really very hard for our business.”

Despite attractive (though narrowing) bond yield spreads compared with western Europe, rising share prices, strong economic growth and falling inflation, foreign institutional investment into CEE remains weak, says Mr Bednar. Worries over the Ukraine crisis have deepened this difference, he says. Local inflows into funds have remained strong, while investors outside the region have held back.

According to data provider EPFR Global, investors into all Emerging Europe funds have continued to withdraw cash, pulling out $823m up to the end of April, even as fund net asset values rose 17.5 per cent year-on-year.

Nor does the short-term outlook offer any respite, as fears over monetary tightening by the US Federal Reserve led to a sell-off in emerging market bonds in May. “This is our big challenge today,” says Mr Bednar. “This is one of the reasons why we try to increase the equity part of our client portfolios.”

Meanwhile, Austrian and central European flows into funds have come back strongly over the past two years, according to all three big asset managers, though growth has yet to reach pre-crisis levels. According to the Financial Market Authority, inflows finally turned positive last year.

Longer term, they expect this growth to continue, propelled by low bank deposit rates, growing wealth, ageing populations (together with low state pensions) and increased financial sophistication. At the moment regional, as well as Austrian and German investors remain conservative in their choice of products, though this is changing slowly, with equity and actively managed funds drawing more interest.

“In all these countries we see a shift into more balanced products and away from [pure] fixed income,” says Mr Bednar. But more exotic offerings, such as funds focusing on regional property or corporate bonds, or those putting money into private equity or hedge funds, remain off the menu.

Looking ahead, Mr Kretschmer sees the need for more long-term investment products, to try and ensure wealth is more evenly spread between the generations in CEE because of the strong rise in incomes since 1989. “This is challenging, but in a positive way, as we are forced to find a way,” he says.

Copyright The Financial Times Limited 2017. All rights reserved.
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