Nadia Damon in Sofia -

Following what can only be described as a stampede in the Bulgarian stock market over the last 12 months, fund investors will have to play the long game in 2008.

With Bulgarian Today reporting that the total value of financial assets managed by mutual funds listed on the Bulgarian Stock Exchange (BSE) dropped a further 10.9% in March to €344m after the one-off correction of 2.73% a month earlier, the IPO-led boom that boosted the funds market in 2007 is now a distant memory.

Recent figures from Profit.bg now put the total asset value of Bulgarian collective investment schemes at the end of March 2008 at €355m, compared with €455m at the end of 2007. It reports that DSK Growth and Capman Max are currently operating the biggest mutual funds in Bulgaria - with assets of €26.3m and €22.8m, respectively.

With stock depreciation levels for the first quarter at around the 30% mark, Daniel Ganev, portfolio manager at Karoll Capital Management, concedes that this will be a tricky year for the Bulgarian market, but he insists it still possesses excellent long-term potential. "Investors should proceed with caution in 2008," he states, "but long-term investors shouldn't worry about short term uncertainties. We expect at least a portion of these losses will be recovered by the end of the year. We think the market has found its bottom right now - at least in the short-term - and judging by the last few trading sessions, we've seen some positive signs, so hopefully there will be some recovery in the market over the next few months."

In step with the dynamic IPO climate of 2007, a host of aggressive equity funds appeared on the market last year. Ganev claims some generated returns of more than 100% in 2007 alone. Confidence was further bolstered by the news that the BSE would begin operating Deutsch Boerse's Xetra trading platform in June 2008. However, in the wake of the US - and now global - credit crunch, to quote Ganev: the domestic IPO market has now ground to a "full stop."

Despite subsequent investor interest being geared towards the more balanced products, Ganev admits that equity funds continue to pull the biggest weight. "I believe this will be the case in the next few years to come," he continues, "since the Bulgarian and Eastern European equity markets have an excellent long-term potential - and most money will continue to go into stocks and stock funds."

As with other Eastern European countries, low liquidity remains the biggest cause of the Bulgarian market's woes in 2008, but Ganev claims its stable political situation and economy - one of Bulgaria's particular advantages is that, unlike the Romanian leu, the Bulgarian leva is pegged to the euro - make it stand out from the Balkan crowd. The decision last year to reduce taxation levels to a flat 10% for both the corporate and personal sectors has also added to its attractiveness.

In 2008, Ganev recommends investors hold at least a quarter of their portfolio in cash - even if stocks seem cheap - and warns that with everybody (especially institutional and international investors) watching their liquidity, it will be difficult for short-term investors to catch the bottom of the market and trade within that range.

According to Ganev, infrastructure companies - notably some of the energy names - should offer some good investment opportunities this year, with real estate investment trusts (REIT), particularly the ones that focus on the notably under-valued agricultural land in the sector, representing good defensive stocks.

Karoll offers a closed-end REIT known as the Advance TerraFund, with institutional investors making up two-thirds of its shareholder base (around half of these are international firms). Under Bulgarian legislation, REITs are exempt from corporate tax (on the proviso that at least 90% of the fund's profits are distributed in the form of dividends), investors do not have to pay capital gains tax when trading REIT shares and dividend tax is 5% - as opposed to the 10% flat taxable rate attached to corporate and personal incomes.

Scant offerings

In spite of the sluggish IPO market, Ganev believes there will still be opportunities for investors in this market further down the line, which should boost confidence in the company's latest offering - Advance IPO. Launched just five months ago, Advance IPO is a dedicated open-ended IPO fund that takes in everything east of Austria - some 15 markets in total. Ganev claims the fund is unique within the region and one of just six available internationally.

Although he admits that 2008 may not see much activity in this area, with some 50 postponed IPOs in Bulgaria alone and over 150 waiting to debut in the region, Ganev believes that the Advance IPO fund will continue to be one of Karoll's most successful products. While movement in this sector may remain static for most of this year, Ganev expects the market to gain momentum in early 2009, with some excellent opportunities on the long-term horizon.

The Karoll Asset Management portfolio also includes the Advance Invest fund, an open-ended equity mutual fund focused on stock-picking in Bulgaria and Romania. It ranked number six in Profit.bg's market report - with assets of €19m.

The company also operates a private Advance Equity Holding fund and the open-ended Advance Eastern Europe equity fund. Some 75% of the fund's portfolio focuses on the index stocks of six regional markets: Russia, Ukraine, Bulgaria, Romania, Croatia and Serbia. The company is also reviewing some additional markets - the Czech Republic, Hungary and the Baltics - which could join the portfolio in the near future.

"Our decision will be based on the future prospects of these markets, their size and liquidity, and very importantly - their correlation with the markets in the portfolio at present," explains Ganev.

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