Wednesday, November 28, 2001

Where to invest in troubled times Crown-denominated bonds provide safety and high returns By Kip Bauersfeld Central banks across the globe are cutting interest rates, Germany faces recession and the crown is reaching all-time highs against the euro. For the average investor looking for a reasonable return and moderate risk, finding a safe harbor on the stormy seas of the global economy is a daunting task. Knee-jerk reactions to troubled times -- like stuffing your cash under the mattress, or betting it all on that high-growth tech stock you read about on the Internet -- are not recommended. For the small investor, with a no more than 100,000 Kc ($2,600) in the bank, collective investing in crown-denominated mutual funds that favor bonds offers safey and a reasonable return. Mutual funds are, at the least, better than letting your money sit in the bank. Deposits currently bear about the same interest percentages as the rate of inflation -- you earn nothing by keeping your money in the bank. A Prague Post survey of local analysts and portfolio managers revealed that funds with a strong bond-to-equity (stock) ratio were unanimously seen as the best bet under current market conditions. On average, returns on bond-based funds are high than the inflation rate. Conseq Finance portfolio manager Martin Zezula recommended small investors seek "a mixed bond and equity fund with a ratio of 80 percent bonds and 20 percent equity." While he acknowledged that a few weeks ago he would have been even more conservative, recommending a 90 percent to 10 percent bond-to-equity ratio, positive developments on the world's equity markets have led him to believe that "equities are offering a relatively good investment opportunity at this time." The off-exchange RM-System reached a five month high in the week ending Nov. 24. Still, for the risk-wary, it is best to hedge any bets on the stock market with more secure financial products such as bonds. Jan Schiesser, an analyst with Atlantic Financni trhy, recommended bond-based funds with 10 percent to 15 percent of the fund in equity. In particular he singled out "closed funds that will go through the opening process" as "low risk but with a good return." A closed fund issues a fixed number of shares in an actively managed portfolio of securities (bonds, stocks, etc.). The shares are traded on the market like a stock and the price of a closed fund is determined by the supply and demand of the number of shares offered and not by the net asset value of the portfolio. Some closed funds are trading on the Czech market at a discount of up to 17 percent of their net asset value. Schiesser points out that when these funds open and the "discount" disappears as the price aligns with the value of the portfolio, investors can earn a rate of return nearly equal to the previous discount rate. Set up by banks such as Ceskoslovenska obchodni banka and Zivnostenska banka, at least seven of the closed funds currently on the market are set to open in the next six months. For those who must keep their assets in cash, the crown, as opposed to the dollar or the euro, provides the greatest peace of mind, analysts said. With the Czech economy largely out-performing Eurozone members and with significant sums of foreign capital poised to enter the country through further privatization, the crown is set to grow even stronger. "Generally the crown will appreciate relative to the euro in the next six months because of privatization revenues," Schiesser said. "In a Czech household with 100,000 Kc that doesn't travel much and spends money in the Czech Republic, it's far too risky to think about investing in a different currency," he said. Those keen on stocks despite the high risk should consider "investing through investment funds, which would be better for individuals who otherwise may not be able to monitor daily news and transactions," Zezula said. On the other hand, he notes, building your own portfolio means no management fees, while "investors might get above-average gains but also above-average losses." Kip Bauersfeld's e-mail address is kbauersfeld@praguepost.cz More business stories Working for less The gap between expat and Czech pay is slowly shrinking Falling oil prices to benefit economy Lower costs steady inflation, trade balance Reviving the CD business Will new label 's low-cost recordings sell? Tourism down, but hope shines through Industry expects revenue boost as season starts Zeman courts U.S. investors Military technology seen as sector with most potential Spaces & Places Fantasy, heraldry and realty Movers & Shakers Hamill to manage Antal International