As mutual funds grow in popularity among Bulgarian retail investors, so do the options available to them. A 19 per cent rise in assets during August saw the total mutual fund market in Bulgaria surpass the billion lev mark. New funds are preparing to enter the market and on October 3, five new funds received the necessary licences from the local financial regulator to begin share offerings within a month.

At the moment, locally-owned funds are dominant, accounting for $627 million of total assets. Of the five funds to be introduced in October, three are run by FFBH Asset Management, a division of First Financial Brokerage House, a Sofia-based brokerage house, and two will be launched by Varna-based Real Finance Asset Management.

Kamen Dimitrov, the executive director of United Bulgarian Bank (UBB) Asset Management, which runs three mutual funds of varying risk levels, told the Oxford Business Group (OBG) that the recent strong growth in mutual funds was the result of a maturing stock market.

"Although the Bulgarian Stock Exchange (BSE) has been around since the early 1990s, it didn't really become a true exchange until about three or four years ago," said Dimitrov. "The BSE has suffered in the past from the usual problems that emerging exchanges regularly face: low liquidity, a lack of transparency in companies' financial information and a weak regulatory authority, but the situation has improved in all areas and now the time is right for mutual funds to grow," he said.

Although mutual funds are showing strong growth, they remain only a small part of the Bulgarian banking sector, accounting for 3.6 per cent of bank deposits. Krassimir Tahchiev, the head of research at First Financial Brokerage House, told OBG, "Mutual funds in Bulgaria are equivalent to only 2.2 per cent of gross domestic product (GDP), one of the lowest rates in the EU. There is a huge potential for growth in the a over the next five years."

Dimitrov agreed that current penetration in the market is minimal and said that mutual funds are dominated by retail investors.

"We have customers investing anything from 100 leva to a million leva, but at the moment all the mutual funds combined have less than 20 000 customers. We are some way off reaching the scale of pension funds, which have millions of customers, so there is clearly potential for much deeper penetration."

Dimitrov said the higher risk funds were the most popular. The UBB Premium Equity fund that manages equities has 40 million leva under management. The The UBB Balanced Fund that manages equities and bonds has 12 million leva and the UBB Platinum Bond Fund has less than three million. The UBB equity fund performed best in the past year, registering a 106.47 per cent rate of return. Dimitrov explained that high bank interest rates made it difficult to sell the bond product. There is no income tax on capital gains in Bulgaria at the moment, which is why Bulgarian mutual funds do not pay dividends and reinvest the gains.

With so many new funds opening, Tahchiev told OBG that the funds would use direct marketing techniques to attract customers. "The new funds do not have performance histories so they will need to reach out to retail investors through strong customer relations and infrastructure. With a strong network of branches, big funds run by companies such as Karoll Capital Management and Elana Fund Management are well placed to meet the new demand."

Dimitrov urged an element of caution, however, saying that investors need to be aware that the BSE, which has performed strongly in the wake of the global credit crisis, has not had any significant corrections. "In the past we had some short-term downturn periods which were very mild. We've had a major rally for the past five months now and there is no capital market in the world that can carry on like this."

Many business analysts expect to see a string of high profile IPOs before the end of the year and Dimitrov said that while the growth in the number of listed companies was a positive sign, doubts over the BSE remain. "The question is what will happen when the BSE shows the first sign of weakness. The BSE is due for a correction in the next two or three years, how will people behave then? I don't know."

Nevertheless the growth in mutual funds and mutual fund investors shows no sign of abating. Yanko Nikolov, CEO of KD Investments, part of the Slovenian KD Group that runs three Bulgarian mutual funds, told local press that he expected to see more than three billion lev ($2.16 billion) invested in mutual funds by the end of 2009. Dimitrov said that while the mutual fund market was currently fragmented, regulation was being introduced to make it more coherent, encouraging more foreign funds to enter the country. As he told OBG, "The easier it is to sell mutual funds across borders, the more mutual funds will be coming to Bulgaria."