Last year was a spectacular year for the Bulgarian mutual fund industry.

Both the number of collective investment schemes (CIS) and assets under management of mutual funds grew substantially. As of end-2007, the total number of mutual funds managed by Bulgarian asset management companies amounted to 58, whereas net assets under management was about 863 million leva (compared to 45 funds and 315 million leva in assets under management at the end of 2006). The growing economy and increased personal income, combined with the strong performance of the Bulgarian stock market, were among the main reasons for the increase of mutual funds assets. In terms of achieved return, CIS results were also impressive – balanced funds managed to achieve returns between 18 per cent and 80 per cent, whereas equity funds yielded between 20 per cent and 110 per cent on an annual basis. Results were even more impressive before the correction hit the Bulgarian stock exchange in late October.

Both the impressive growth of the equity market and the performance of CIS increased investors’ appetite for a quick profit, and even generally more conservative investors started investing in risky assets without fully assessing their risk exposure. Thus, stock prices were additionally fuelled and market values of many companies reached levels that could hardly be justified either by their current or expected performance.

The risk reassessment process, however, did not begin until the sub-prime crisis in the US struck, followed by turmoil in global stock markets and fears of global economic slowdown (even recession fears about the US economy). This greatly increased the risk aversion of both Bulgarian and international investors. The correction that followed whipped about 20 per cent of the market capitalisation of the Bulgarian stock market for the period October 2007 – March 2008 (in October the stock market reached its all-time high, whereas in March the market registered another one-year low), whereas main benchmarks decreased between 35 and 40 per cent for the same period.

Inevitably, the worsened market sentiment took its toll on the Bulgarian mutual fund industry. Mutual funds lost between two per cent and 40 per cent of their net assets value since the beginning of the year and only some bond and money market funds managed to increase their assets under management. Total CIS net assets decreased by more than 23 per cent since the beginning of the year (and more than 30 per cent from their high in October 2007, when they reached about a billion leva) or more than 300 million leva.

Part of this decrease, however, was because of the declining stock market. Most CIS assets are concentrated in balanced and equity funds, whose performance track closely that of the equity market. Of course, withdrawals were also present, as investors were locking profits (or losses) and were switching from investment with high exposure to the stock market to less riskier investments, which is a normal process when equity markets make a downturn.

Part of the withdrawals from balanced and equity funds, however, remained in the industry, as investors switched to more conservative funds, such as bond funds and money market funds. Nevertheless, most investors returned to bank deposits, which are still traditionally preferred by Bulgarian households. At the back of the underperforming stock market, bank deposits that offer about eight to nine per cent interest (though only few institutions offer such rates) appear more attractive than equity investments. On the other hand, bank deposits are considered safer than equity investments as there is almost no chance to lose your money in the bank. This relocation of assets can be observed in mutual funds industries across countries, though the intensity differs.

Despite the recent downturn in the CIS industry, prospects before Bulgarian mutual funds remain positive and present a good investment opportunity in the long term. The industry is still underpenetrated as CIS assets as of March-2008 were about 1.5 per cent of 2007 GDP (for example penetration ratio is about eight cent in Croatia and Poland). The potential of the segment is also seen by foreign asset management companies, which started offering funds under their management on the Bulgarian market.

Moreover, the Bulgarian mutual fund industry is constantly diversifying its products as asset management companies are trying to capture every niche and satisfy any taste of the investors. For example, just recently a fund that invests primary in commodities entered the market, whereas a fund that invests mainly in companies that performed IPO was found in end-2007. Also in 2007, the number of funds that diversify their portfolio among various countries increased (mostly emerging market in the Balkan region or Russia and former Soviet Union).

However, we should not expect the revival of the Bulgarian mutual fund industry to take place before the equity markets return on an uptrend. Moreover, the switch from bank deposits to mutual funds will probably appear with some delay after the recovery of the market.