MOSCOW (RIA Novosti economic commentator Nina Kulikova). Although unit investment funds (UIFs) are a young instrument on the Russian stock market, they are becoming increasingly attractive for Russian depositors.
With this in mind, the government approved a bill in early June on amending the laws "On the Securities Market" and "On Investment Funds" to reduce the administrative burden on securities market operators and consolidate the institution of mutual investing.
Until recently, Russia did not have a securities market at all. However, when it did emerge, the general weakness of the financial system, the lack of household confidence due to financial crises in the 1990s, high risks on the stock market and the absence of extra funds for risky operations held back its development.
However, as the economy began to stabilize, the stock market also started growing. An increasingly large number of companies looking to raise money are now thinking about placing shares on Russian and international bourses.
Households also have to start understanding how the stock market works. Russians have traditionally kept their savings in foreign currency, but the fluctuations of the dollar and euro exchange rates have made these savings increasingly less profitable lately. The banking sector offers deposit interest rates that cover official inflation at best, which has prompted people to look for new ways to invest their savings. Today investors are increasingly turning to mutual investments, primarily to unit investment funds.
According to data of the Russian Trading System (RTS) stock exchange, mutual investment instruments have already accrued 200 billion rubles ($7.02 billion, or �5.75 billion). The volume of assets managed on the mutual investment market increased threefold in 2004 alone. The head of the Federal Service for Financial Markets, Oleg Viyugin, says the Russian mutual investment market is developing well. This is largely because the yields of unit investment funds considerably exceed the yields of the banking sector. The yields of about 20% for shares and about 15% for bonds are considered to be good for UIFs. But the yields of the best performing UIFs have reached 50-60% in the past twelve months.
Young people with considerable accrued revenues are major individual clients of unit investment funds, but there are few such clients so far in Russia. It is well known that incomes in Moscow exceed regional indices several times over. Correspondingly, according to data of the National League of Managers, a depositor buys a unit worth about $2,000 in Moscow and about $1,000 in St. Petersburg, but the average unit in Russia is even smaller. Nevertheless, households are becoming increasingly solvent and experts expect managing companies to expand more aggressively into the regions. While promoting UIFs as their major product, managing companies normally target people aged between 25 and 45. In their opinion, younger people simply do not have the necessary money and older age brackets do not trust the new instruments and it is impossible to persuade them otherwise. UIFs invest money in the shares and bonds of Russian companies and, as market players say, are gradually giving up investing in raw material sectors as a priority due to the high political risks in these branches. The funds are increasingly investing in the retail trade, telecommunications and other papers of second and third tier companies, which means they could become a stimulus for investment projects in non-commodity sectors, provided that the funds post more significant growth.
However, the main problem of mutual investments is that UIFs do not guarantee anything to investors and depositors have to assume all the risks. The desired effect may never be achieved. Moreover, as compared to the banking sector with its deposit insurance schemes, other financial companies simply lack compensation mechanisms for clients.
The government-backed bill will not solve these problems. It is only expected to relax supervision on the securities market and in the sphere of mutual investment. The authorities are intending, in particular, to reduce the number of regulatory acts and rules mandatory for the issuers of securities. According to Vyugin, the Federal Service for Financial Markets already has enough powers to regulate this sphere. The law removes other excessive and overlapping functions of the FSFM in the regulation of the stock market.
However, the FSFM draft Strategy for the Development of Financial Markets until 2008 prescribes the idea of introducing compensatory mechanisms. If they are created, this measure will boost the development of the market: the availability of certain guarantees against losses will prompt new sections of society to join the financial market. However, it is still unclear which financial resources will be used to finance the establishment of compensatory funds. According to Vyugin, the best option would be if self-regulated organizations, brokers and other financial institutions should set up this fund themselves.
