Investors with a high risk-return preference may wish to take note. Uncertainty about the future regulatory regime for investment funds (IFs) has led to a big drop in trading of shares owned by IFs on the Sarajevo Stock Exchange (SASE). A new draft Law on Companies for Managing Funds and on Funds in the Federation of Bosnia and Herzegovina (FBiH) has been in parliamentary procedure for over a year.
In the meantime, the Security Exchange Commission of FBiH (SEC) has published interim instructions pending the adoption of the law. Fund managers are not impressed. Rather than anticipating the new law, the Commission's instructions hark back to provisions from the Law in 1998.
For example, the instructions limit how much IFs can own in any one company. The limits apply in stages: by December 31 2007 an IF will be able to own up to 5% in another fund and up to 10% in any other company or related companies. These limits are more rigid than those in the anticipated law, which would permit up to 30% investment into another fund and up to 20% in another company. IFs face having to off-load shares in accordance with the SEC instructions, only to be chasing these shares again if the thresholds rise under the new law.
If the new law continues to languish in parliamentary procedure, investors might find opportunities to acquire shares as IFs are forced to prematurely reduce their portfolios.
The risk is in determining the quality of a fund's portfolio and its real value. The methodology used for expression of NAV is painfully inadequate. The base for calculation is the book value of companies, which is far from the true asset value. Certain companies are grossly overvalued, while really valuable shares may be undervalued. The investor will have to do a fair amount of investigation before making a purchase.
Research is no easy task. Financial transparency is a problem in Bosnia. Although all joint stock companies are required by law to send their annual reports to the SEC (which should publish them on its web site) only a handful of companies comply. There are no sanctions for ignoring this obligation. Also, Bosnian companies do not often prepare management accounts and it is not clear that the concept is widely understood by accountants. International Accounting Standards are only gradually being adopted, although legally they are already meant to apply.
Tellingly, the financial blackout even applies to highly traded companies. This suggests that local knowledge about investment opportunities is key. Foreign investors may wish to seek out persons on the ground to sound out latent opportunities on their behalf.
Renuka Kukanesen in association with Drazen Simic