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Mutual Funds in Russia: Developments and Prospects

Mutual Funds in Russia: Developments and Prospects. April 23, 2003. PIOGLOBAL Asset Management. Mutual Funds in Russia: Developments and Prospects. PIOGLOBAL Our Success in the Russian Market. Established Financial Services and Real Estate operations

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Mutual Funds in Russia: Developments and Prospects

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  1. Mutual Funds in Russia: Developments and Prospects April 23, 2003 PIOGLOBAL Asset Management

  2. Mutual Funds in Russia: Developments and Prospects PIOGLOBALOur Success in the Russian Market • Established Financial Services and Real Estate operations • Disciplined institutional strategies that capitalize on internal skills, experience, and research capabilities • More than $100 million in assets under management in PIOGLOBAL funds • Controls 20% of the Russian open-end unit fund industry • Proven Russian performance and the best customer service in the market • Extensive nationwide network of contacts • Over 60 highly qualified Russian and Western employees • Named #1 Asset Management Company in 2002 by rating agency RosBusinessConsulting, Business Open and Euromoney PIOGLOBAL Asset Management

  3. Mutual Funds in Russia: Developments and Prospects Russian economy todayStrengths and concerns Positive developments Possible concerns • Political stability, previously undreamed of • Improving fundamentals (stable exchange rate, reduced inflation, budget surplus, trade surplus) • Unprecedented pace of structural reforms • Growing domestic and foreign investment, capital flight curtailed • Growth in real earnings and increased consumer confidence • Foreign debt repaid ahead of schedule • Global slowdown, significantly reduced demand for energy and metals, expectations of declining oil and metals prices • GDP growth slowdown • Weak banking system • Although maturing, the Russian political system remains very dependent on personalities PIOGLOBAL Asset Management

  4. Mutual Funds in Russia: Developments and Prospects Russian Reforms in Progress Comprehensive tax reform • Flat personal income tax at 13% • Simplified corporate profit tax at 24% • Jump in profit tax receipts, reflecting reform in force Restructuring natural monopolies • Gas and electricity markets to be liberalized • Establishment of Electricity Trading System Administrator • Tariff hikes up to 35%, and repeated policy commitment to at least the same level of real increases in 2003 and beyond Pension reform • Pension reform introduced in 2002 • Law on Investing Pension Reserves effective from 2003 • Establishment of individual pension accounts PIOGLOBAL Asset Management

  5. Mutual Funds in Russia: Developments and Prospects Russian Reforms in Progress Financial changes • Stable growth in currency reserves • Currency regulation will be liberalized • Opportunity for the Russian citizens to invest in foreign assets and open accounts with foreign banks WTO and deregulation • Faster WTO acceptance is the main benefit to be reaped • Small business licenses and regulations simplified • Improved rate of small business creation • In June 2002 Russia was awarded the status of market economy by the US • In November 2002 Russia was awarded the status of developed economy by the EU Corporate governance • In 2003 corporate governance is expected to continue to improve • We expect to see further developments in areas such as disclosure and appointment of independent directors PIOGLOBAL Asset Management

  6. Mutual Funds in Russia: Developments and Prospects Russia Stands TallSelected GEM Indicators PIOGLOBAL Asset Management

  7. Mutual Funds in Russia: Developments and Prospects RTS Market in 2001-2002 and 1Q2003 PIOGLOBAL Asset Management

  8. Mutual Funds in Russia: Developments and Prospects Market for Great Business Opportunity • Russia was the world’s second best performing market in 2001-02 • Sovereign discounts are set to decline further • Stocks are still inexpensive compared to GEM • Growth is yet to be priced into the markets • Further re-rating is inevitable • Corporate governance is improving • Smart managers and stakeholders will need and want to open up to capital markets PIOGLOBAL Asset Management

  9. Mutual Funds in Russia: Developments and Prospects Stocks are still cheap compared to GEMsRussian valuations relative to global emerging markets PIOGLOBAL Asset Management

  10. Mutual Funds in Russia: Developments and Prospects Growth is yet to be priced into the marketsRussian growth relative to GEMs PIOGLOBAL Asset Management

  11. Mutual Funds in Russia: Developments and Prospects Mutual Funds in 2002International Comparisons Source: Investment Company Institute. International Mutual Funds Survey PIOGLOBAL Asset Management

  12. Mutual Funds in Russia: Developments and Prospects Mutual Funds in Russia: On the Road to Success • Overcoming of 1998 financial crisis • Robust sales growth • Improved attractiveness of mutual funds • New law on investment funds and regulations • Association of fund managers is playing a very active role PIOGLOBAL Asset Management

  13. Mutual Funds in Russia: Developments and Prospects Mutual Funds in Russia: Favorable Tax Regime • Mutual funds do not pay profit tax • Mutual funds do not pay tax on dividends received • Unit holders do not pay taxes on unrealized capital gains • Income tax of individual unit holders is collected and paid by the Management Company • Legal entities are allowed to reduce taxable income by the cost of the units purchased PIOGLOBAL Asset Management

  14. Mutual Funds in Russia: Developments and Prospects Mutual Funds in 2002-1Q03 • Fragmented industry: out of 92 management companies in Russia 42 were registered in 2002 and 10 in 1Q2003 • Low barriers to entry: 19 unit funds were registered in 2002 (3 closed, 4 interval, 12 open) – compared to 14 in 2001 and 11 in 2000 • Assets are highly concentrated: top 5 companies occupy 91.5% of assets, compared to even higher concentration of 94.29% in 2001 • Around 11,100 investors in all funds by the end of 2002 compared to around 6,300 at the end of 2001 • Individual investors are still “trading funds” Source: National League of Fund Managers, 2003 update PIOGLOBAL Asset Management

  15. Mutual Funds in Russia: Developments and Prospects Industry: Assets Under Management Source: National League of Fund Managers, April 17, 2003 PIOGLOBAL Asset Management

  16. Mutual Funds in Russia: Developments and Prospects Open-End Funds AUMMajor Competitors in $80 million Universe Source: National League of Fund Managers, April 17, 2003 PIOGLOBAL Asset Management

  17. Mutual Funds in Russia: Developments and Prospects Independent Qualitative Rating of Management Companies Source: National League of Money Managers, “Your Money” magazine, April 2003 PIOGLOBAL Asset Management

  18. Mutual Funds in Russia: Developments and Prospects Significant Increase in the Average Purchase Size(in USD) Source: PIOGLOBAL Company Data PIOGLOBAL Asset Management

  19. Mutual Funds in Russia: Developments and Prospects Average Purchase as Function of Investor Age (in RUR) 100 000 90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0 Under 18  18, <30 In their 30s In their 40s In their 50s Over 60 All Source: PIOGLOBAL primary research. PIOGLOBAL Asset Management

  20. Mutual Funds in Russia: Developments and Prospects Most “Reasonable” Guarantee of Success According to Russian Investor “Hard to answer” – 6% “Foreign Roots” – 5% “Other” – 12% “Past Performance” – 30% High reputation and good brand name – 47% Source: PIOGLOBAL primary research. 4052 respondents. PIOGLOBAL Asset Management

  21. Mutual Funds in Russia: Developments and Prospects PIOGLOBAL Index FundA unique product in the Russian Market • The first index-based interval mutual fund in Russia. Registered by FCSM on January 22, 2003 • A successful combination of two widely-recognized brands of PIOGLOBAL and MICEX • A unique opportunity for investors to enter and exit the market at a low cost • High transparency and diversification • Passive management, free of individual bias • Low costs: management fee 0.5%, overall costs below 1% • Expected dividend yield in the range of 2.0-3.5% PIOGLOBAL Asset Management

  22. Mutual Funds in Russia: Developments and Prospects MICEX IndexA widely recognized market tracker • Index - developed and administered by the Moscow Interbank Currency Exchange (MICEX). • Comprised of 18 stocks of the 12 most liquid companies, which represent 90% of the total market • Market Cap weighted • Adjusted for Free Float and Liquidity - two parameters crucial for the Russian market, dominated by closely-held and partly government-owned companies • Calculated on-line and overseen by the MICEX Index Committee which includes members of investment community and PIOGLOBAL representatives. Restated quarterly • The Fund’s portfolio will track the Index and will not deviate from it by more than 3% PIOGLOBAL Asset Management

  23. Mutual Funds in Russia: Developments and Prospects PIOGLOBAL Index FundSources of liquidity • The Fund will be open for purchases and redemptions 4 times a year • The Funds units will trade as individual stocks in the secondary market (MICEX and OTC) • Available to a wide range of investors • Accessible in the regions • Lower service fees charged by National Depository Center (in comparison to stocks) • Daily liquidity maintained by market makers • Units will not sell short or be bought on margin PIOGLOBAL Asset Management

  24. Mutual Funds in Russia: Developments and Prospects Mutual Funds: Further Developments • Pension reform • Education of general public • Increasing horizon for individual and institutional investors • Growing distribution network PIOGLOBAL Asset Management

  25. PIOGLOBAL Asset Management ПИОГЛОБАЛ Эссет Менеджмент PIOGLOBAL Asset Management

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