| PRAGUE/BUCHAREST, April 21
PRAGUE/BUCHAREST, April 21 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
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
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)