Guy Norton in Zagreb -

The past few years have been tough ones for the mutual fund industry in Croatia, but better times could lie ahead. That at least is the belief of Mario Staroselcic, president of the management board at Allianz Invest, the fund management arm of the German insurance titan.

Ensconced in brand spanking new offices in downtown Zagreb, Allianz Invest is banking on a turnaround in the fortunes of the Croatian capital markets that it hopes will spark a strong upturn in the country's mutual fund industry. But as Staroselcic freely admits, things have not been easy of late. "In 2007, mutual funds in Croatia had around €4bn in assets under management, but that has now dropped to just €1.7bn." And as he adds, more than 50% of those assets are invested in money market rather than equity funds.

Given the performance of the Croatian stock market of late, that's perhaps no real surprise. From a peak of 5,393 in October 2007, the Zagreb Stock Exchange's headline Crobex index slumped to 1,313 in March 2009. Although the market has rallied somewhat in the last couple of years, as of mid-May it was trading around 1,750 - roughly a third of the level of 2007.

Back then, the stock market was the talk of the town in Croatia, with thousands of Croatians eagerly queuing up to participate in landmark IPOs for the likes of Hrvatska Telekom and retailer Magma. While Staroselcic concedes it will likely take a few years, he nevertheless believes that that the Croatian equity markets can once again capture ordinary Croatians' attention. "We see huge potential in the retail investor market," he says explaining why the company launched a new open-ended investment fund, the Allianz Equity Fund (AEF), at the start of this year, which he confidently expects will benefit from an expected increase in interest in all things stock-related in Croatia.

The AEF is the first new mutual fund to be launched in Croatia for several years and is one of only a handful to have a major focus on Croatia - some 85% of the attracted funds will be invested in the country, with the balance earmarked for investment in neighbouring EU countries. "In 2011, we started to think the timing was right to launch a new fund given the low valuations on the Croatian market. We believe there are good investment opportunities in the market right now and we want a strong presence through instruments such as the AEF to benefit from that," says Staroselcic. "We believe the transition from a depressed to a healthy market could be very rapid."

Spare cash to invest

Part of the reason for Staroselcic's optimism about the AEF's prospects lies in the fact that despite Croatia being mired on recession since 2009, there are still plenty of Croatians with spare cash to invest. "There's around €20bn held as bank deposits, but less than €400m invested in balanced/equity funds," he says, adding that at less than 2% of total savings the balanced/equity fund industry in Croatia has plenty of room for growth.

Whether risk-averse Croatian depositors can be persuaded to shift their hard-earned cash from the relative safety of bank deposits into the potentially much more risky realm of the Croatian stock markets remains the key question.

Staroselcic, for one, believes that given the right confluence of factors the AEF could attract far more than the €1m it has initially garnered in the first few months of its existence. "We would expect to see a 10- to 20-times increase in the size of the AEF if we have the positive outcomes we hope will happen. We always tell people that there will be volatility, but on a three- to five-year perspective, we believe the Croatian equity market will be much stronger and if we can beat the benchmark with our investment performance, then the fund will sell itself."

Among the positive outcomes that Staroselcic expects is the fact that after an almost five-year hiatus in new stock offerings, the Zagreb Stock Exchange may finally see some new issue activity in the next 12 months. Among the IPO candidates are Hrvatska Postanska Banka, the last major lender still in Croatian hands, and insurer Croatia Osiguranje. Both are set to be privatised in the coming year and Staroselcic believes both companies could prove to be attractive investments if the government opts to float part of its stake on the Zagreb bourse. A number of privately owned companies could also launch secondary offerings as part of efforts to strengthen weakened balance sheets or raise expansion capital. "The market desperately needs some fresh blood which could trigger an upturn in investment and liquidity."

Other potential positives include the recently infrastructure development and refurbishment projects announced under the Croatian government's "New Deal" programme that could give a boost to Croatian construction companies, whose financial fortunes and stock prices have slumped in recent years.

Another bright spot has been the robustness of the country's tourism industry that accounts for 15% of Croatian GDP. "In 2011, we saw an 8% increase in arrivals, which is a very good figure compared to the rest of the region," says Staroselcic, adding that a similarly good result this year could help boost valuations not only of tourism stocks, but also the rest of the market in general.

In addition, there are a number of potential merger and acquisition deals at both home and abroad involving Croatian corporates, which could help shine the spotlight on the investment potential of the Croatian equity market.

Finally, Staroselcic claims that as a result of the global credit crunch and the subsequent economic downturn Croatian corporates have smartened up their act. "We're seeing good progress in corporate governance," he says, explaining that whereas once Croatian companies were very bank-centric in their search for capital, they are now reaching out to equity investors as an alternative source of funding.