mutual funds in russia: developments and prospects

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Mutual Funds in Russia:

Developments and Prospects

April 23, 2003

PIOGLOBAL Asset Management

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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


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Positive developments 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

Possible concerns 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

Russian economy today Strengths and concerns


4

Comprehensive tax reform

Restructuring natural

monopolies

Flat personal income tax at 13% Simplified corporate profit tax at 24% Jump in profit tax receipts, reflecting reform in force

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

Russian Reforms in Progress



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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


Russian Reforms in Progress


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Russia Stands TallSelected GEM Indicators

Brazil South Africa Poland Russia

GDP growth 3.4 2.9 2.1 4.3

Domestic Investment (% growth) 4.6 7.0 3.0 14.9

Curent account balance -5.5 -0.4 -6.1 11.2

Reserves (% of Imports) 30.2 15.6 45.3 72.0

External Debt (% of GDP) 47.6 31.3 38.3 44.0

External Debt (% of exports) 351.9 89.0 158.3 132.0

Debt Service (% of GDP) 9.3 4.3 4.1 4.2

Debt Service (% of exports) 69.1 12.3 16.8 13.0

S&P Rating (November, 2002) B+ BBB- BBB+ BB



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RTS Market in 2001-2002 and 1Q2003

0

10

20

30

40

50

60

70

80

90

100

Volu

me,

US$

mln

50

100

150

200

250

300

350

400

RTS

Inde

x



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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



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Stocks are still cheap compared to GEMsRussian valuations relative to global emerging markets

Hungary

Turkey ArgentinaMalaysia

Singapore

Taiwan

Hong Kong

India

Russia

South Korea

Poland

Czech Republic

Brazil

Mexico

Chile

Peru

China

Philippines

South Africa

Israel

5

10

15

20

25

30

2 4 6 8 10 12 14 16 18 20

EV/EBITDA 2002E

P/E

20

02

E



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Growth is yet to be priced into the marketsRussian growth relative to GEMs

Russia

South Africa

Israel

Indonesia

Brazil

Poland

Czech Republic

HungaryGreece

Turkey

Malasya

South Korea

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5

2003E GDP growth, %

2002E

GD

P g

row

th, %



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Mutual Funds in 2002International Comparisons



Assets under Management

Number of Funds

United States 7,062,027 8,381

Luxem bourg 773,732 6,766

France 734,823 7,682

Italy 352,135 1,060

United Kingdom 346,494 1,844

Japan 310,808 2,805

Germ any 212,887 1,072

Ireland 209,222 1,650

Brazil 155,506 2,551

Korea 129,250 7,058

Mexico 35,217 355

Greece 20,819 266

Portugal 16,773 199

South Africa 15,550 434

Poland 3,213 93

Hungary 2,934 91

Czech Republic 2,177 77

Russ ia 374 51

Rom ania 17 22

Source: Investment Company Institute. International Mutual Funds Survey

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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



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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



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Mutual Funds in 2002-1Q03

Source: National League of Fund Managers, 2003 update


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”


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Industry: Assets Under Management


Source: National League of Fund Managers, April 17, 2003

Closed2%

Interval77%

Open21%


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Open-End Funds AUMMajor Competitors in $80 million Universe

DIT9%

UFG3%

Regiongazfinance11%

Pioglobal20%

Pallada3%

Other13%

Optimum Capital M anagement

1%

Nikoil1%

Troika39%


Source: National League of Fund Managers, April 17, 2003


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Independent Qualitative Rating of Management Companies

Assets

Acitity in attracting investors

Market presence

Management fees Own equity Profitability

Overall rating

PIOGLOBAL AM 8

Troyka 8

NIKoil 7

MenedgementCenter 7

AlfaCapital 5

MontesAuri 4

Pallada AM 4

UFG 4

Monomah 3

AVK 3

DIT 2

Optimum CM 2

Capital AM 2

Source: National League of Money Managers, “Your Money” magazine, April 2003


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Significant Increase in the Average Purchase Size(in USD)

1999 2000 2001 2002 1Q2003

INSTITUTIONAL CLIENTS 7,926 6,855 15,131 17,574 43,069

INDIVIDUALS 881 1,157 1,015 1,986 2,292



Source: PIOGLOBAL Company Data

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Average Purchase as Function of Investor Age (in RUR)


18, <30 Under 18 In their 30s In their 40s In their 50s Over 60 All

Source: PIOGLOBAL primary research.

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

100 000


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“Foreign Roots” – 5%

“Past Performance” – 30%

High reputation and good brand name – 47%

“Other” – 12%

“Hard to answer” – 6%

Most “Reasonable” Guarantee of Success According to Russian Investor

Source: PIOGLOBAL primary research. 4052 respondents.


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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%



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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%



M

i

k

i

M

ii

k

i

kk

Cap

AdjCapDMICEXMICEX

1

1

11

)*(

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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



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Mutual Funds: Further Developments

Pension reform

Education of general public

Increasing horizon for individual and institutional investors

Growing distribution network



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mutual funds in russia: developments and prospects

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