Bulgarian mutual funds, which have benefitted the most from the stock market boom in 2007, are also among the biggest losers of the 2008 collapse on the Bulgarian Stock Exchange. In October, the worst month for global markets for the past 21 years, the value of assets managed by Bulgarian funds fell by 21.8 per cent, according to data compiled by Dnevnik daily.

In nominal terms, their assets fell by 146 million leva to about 524 million leva, a drop of 57 per cent since peaking at more than 1.2 billion leva in October 2007 - a far cry from the optimistic 1.72 billion leva forecast made by the Bulgarian Association of Asset Management Companies (BAAMC) in June 2007. It was the third two-digit drop posted over that period, following the 15.9 per cent (180.5 million leva) drop in January and the 11.7 per cent (88.7 million leva) in September.

"In October, there were days when all indices were losing 10 per cent," the executive director of Karoll Capital Management, Daniel Ganev, was quoted as saying by Dnevnik. "It was the worst and bloodiest month for capital markets as a whole and mutual funds were no exception."

Ganev estimated that two-thirds of the drop was caused by the dropping stock valuations and the other third by small investors withdrawing their money by selling shares in the mutual funds. The stock market's strong growth in recent years drew investors in - to the extent that 12 per cent of Bulgaria's population had investments in stocks, mutual and pension funds, according to research by think-tank Industry Watch from July - but the same small-scale investors were now fleeing the markets.

Foreign funds operating in Bulgaria, whose assets dropped to about 140 million leva at end-October, according to Dnevnik, were hit worse than their local peers after some large-scale investors exited their investments.

Already some asset management companies have begun re-shuffling their portfolios, raising the amounts held in short-term deposits and current bank accounts from the mandatory 10 per cent of total assets closer to 20 per cent, Ganev said. Pension funds also upped their investments in corporate bonds and bank deposits, dropping stocks and shares in other funds, according to Dnevnik. Yet it was too early to talk about a long-term shift in investment strategies, rather that funds were being more cautious, Ganev said.

The drop in the value of assets has pushed some funds dangerously close or even below the 500 000 leva threshold that funds are required to make within the first year since launch if they are to continue operations. The law, however, does not stipulate what is to happen when funds that have successfully negotiated that requirement see the value of assets under management fall under that threshold.

In recent weeks, BAAMC and its members have stepped up its calls for the provision to be struck out of the law. "Even without that threshold, there is no business logic in managing a fund with assets under several million leva," Krassimir Atanassov, portfolio manager at Elana Fund Management, was quoted as saying by Kapital weekly. "With an annual fee of two per cent and a portfolio of 500 000 leva, the revenue is just 10 000 leva, nowhere near enough to allow such a company to continue operations for long."

By law, funds that fail to make the threshold in their first year have to be shut down and their assets sold off to pay back investors, but only after the Financial Supervision Commission (FSC) rules so. Yet the very crisis that has cut into the assets managed by funds makes it less likely that they would be shut down, one portfolio manager said.

"It is very unlikely that FSC would allow [shutting down a fund] during such a risky period for the sector," Petar Vassilev from Alfa Asset Management said, as quoted by Kapital. "Even if the law stays as it is, we will not see a fund forcefully shut down."