Mutual fund management has become a business that generates significant revenue and profits, while the brokerage market has visibly shrunk, losing the top spot on the capital market.
On the one hand, mutual fund managers benefited from the increase in the value of the assets they manage mainly because of the aggressive promotion of mutual funds by banks as an investment option, while brokers had to cope with the stock market plunge in 2008 and the serious decline of the value of the stock transactions.
The developments on the two markets were brutal and that shows best when looking at the financial groups that own both a brokerage firm and an asset management company such as Raiffeisen and Banca Transilvania.
Raiffeisen Capital & Investment’s revenue, for instance, fell by 82% from RON18.6 million in 2007 to RON3.28 million in 2011, while Raiffeisen Asset Management’s revenue went up by 5.7 times from RON4 million to RON22.56 million.
“The massive growth on the asset management market came from the risk-free funds and was because the banks were much more aggressive in selling investment funds as an option to keep one’s savings in. This growth has nothing to do with the capital market, on the contrary it is proof of the increase in the risk aversion of the customers,” explained Radu Hanga, chief executive of BT asset management, the asset manager of Banca Transilvania group. “Many of the large banks brought brokerage services back in house to cut costs.”
BT Asset management posted RON4.4 million revenue last year, up 56% on 2007, while BT Securities, the brokerage firm of the group saw its revenue shrink 76% from RON17.4 million to RON4.14 million.
“I think the asset management trend will continue and asset managers will still generate higher revenue and profits, even though the growth rate will slow down. Brokerage firms will continue to experience problems and the number of players will probably go down quite a lot over the coming years. Asset management generates higher revenue than brokerage on foreign markets, too (…),” Hanga added.
Brokerage firms nose-diving
Generally, all the big brokerage firms with revenue of RON10 million to RON25 million and hefty profits in 2007, had to do with RON2 million to RON6 million in fees in 2011. Many of them had to fire people, close offices throughout the country that no longer had a reason to operate and sell some of their assets such as the shares they had in the Bucharest Stock Exchange (BVB). Even so, more than half of the brokerages posted losses in 2011. The 50 brokerage firms posted RON36 million in losses together, even though the market leader, Swiss Capital, made RON6 million profit.
Brokerages’ profits exceeded RON100 million in 2007, while revenue stood at more than RON250 million.
Under the circumstances, it is no wonder than only about 800 people are still working for brokerages now out of the about 1,600 in 2007. Broker Cluj, the largest retail broker on the stock market was employing 145 people in 2007; last year only about 76 were still working there. Revenue dropped from RON25 million in 2007 to RON3.07 million in 2011.
The brokerage firms’ results and headcount trend are tightly connected and have several very specific causes.
First of all, the decline in the value of the transactions in shares on the stock market, caused by the decline in the share prices, then the departure of investors and the reduction of trading fees and last, but not least the reduction of activity of the mass-privatization coupon holders.
In 2007, more than 100,000 such people every month were selling the shares they got in the nineties via the mass privatization programs, in form of the so-called privatization coupons. Such transactions, for which brokers charged fees of 7% to 8% were the bread and butter of many brokerages. Once this stream of income gone, some offices were left without any business to do and were closed and their employees lost their jobs.
The decline of fees collected by brokerage firms made many of their employees look for work in other industries. Last but not least, the migration of retail investors to online trading platforms made brokerage firms give up part of their brokers. Most firms charge 0.3% to 0.5% for transactions conducted online, while in 2007, most clients would go for traditional services and were charged 1% to 3% for them.
The increasingly more difficult market drove many brokerage firms out of the business. Only 58 are still operating now compared with 73 in 2007. Another trend was to integrate brokerage departments into banks to cut costs. Some of those that did it are BCR, BRD, ING, Piraeus Bank; UniCredit is getting ready to follow suit.
In the absence of floatations to give brokerage firms something to do, put fresh companies on the stock market, and bring investors and more transactions, the decline of the brokerage business will most likely continue over the next few years.
Fund managers, the new capital market stars
While brokers fell with the stock market, mutual fund managers rose precisely because of the migration of investors to less risky investments. The significant growth of the market was because of Erste-BCR and Raiffeisen, which aggressively promoted money market and bond funds as an alternative to bank deposits to keep one’s savings in.
The assets of mutual funds rose from RON950 million in 2007 to almost RON7 billion in 2011, with Erste and Raiffeisen as growth drivers.
The revenue of the two managers increased five-fold in 2011 compared with 2007. BRD Asset Management’s revenue, too, rose by more than 3.5 times.
New companies entered this market, as well, such as Carpatica Invest and OTP Asset Management, which launched the first funds in 2008 and reached millions of lei in revenue after four years.
On the other hand, the old independent fund managers, which entered the market in the nineties and survived the scandal of the crash of the FNI (a pyramid scheme disguised as an investment fund i.e.) have been unable to keep up with the banks and their fund sales force. Asset managers like Globinvest and SIRA posted revenue decline in the last four years. Certinvest is the top performer among independent managers, having boosted its business by launch of new funds.
Unlike brokerage firms that closed, the asset management market welcomed newcomers such as Intercapital Investment Management and Atlas Asset Management, considering mutual funds have been in higher demand than stocks in the past few years.
(English version by Loredana Fratila-Cristescu)