FUNDS: Lithuania's JT Investments takes diversified approach

By bne IntelliNews October 8, 2008

Mike Collier in Vilnius -

Any fund manager will tell you the importance of a diversified portfolio, but at Lithuanian brokerage JT Investments, they have taken the principle one step further and built a whole brokerage that could be described as diversified.

Even though some of its Baltic funds were in virtual freefall when bne spoke to JT (the Fund of Funds shed a catastrophic 53% during July alone), fund manager and company co-founder Marius Dubnikovas was able to point to a profitable IT department, a strategic foray into newsgathering and the relative strength of the Lithuanian economy as reasons why JT should weather the credit crunch better than some of its competitors.

As is the case with several Baltic success stories such as internet telephony service Skype and electronics retailer ELKO, JT has its origins among young IT programmers with a bright idea. "We started as a brokerage in Lithuania in 1993 - just one of many. The company had no real development for five or six years until we established an IT department and hired some programmers to build an online trading system," explains Dubnikovas. "At first we started with a semi-automatic online system, which meant brokers had to sit at their computers and press 'enter' when an order from the client came; then after a year we presented a fully automatic system, which meant traders using our broker services could trade directly with the stock exchange."

They were the first trading systems of their kind in the Baltics, giving JT a crucial five-year head start over Scandinavian bank SEB, which came up with an alternative in 2004. Meanwhile, JT was attracting clients in such numbers that handling them all became a real problem. "We had brokers, but we also managed about 200-300 different portfolios ourselves. We started to think about how to manage them with less effort, as it was hard to manage so many individual portfolios. Also, conflicts of interest started emerging - when you start to buy something for one portfolio, another has to buy at a higher price," says Dubnikovas.

The solution was to merge the portfolios into two funds, Baltic Equity Funds (BEF) I and II, built with exclusively Baltic shares, as JT still didn't have access to foreign markets. But the move coincided nicely with the Baltic states' accession to the EU in 2004 and the consequent introduction of new legislation regulating the mutual fund market in Lithuania. Soon a third BEF was added along with a Fund of Funds and a Banks Fund.

By any standards the returns JT generated were impressive. The BEFII fund, which Dubnikovas manages, gained 200% in three years until the credit crunch hit home in September. "Now we are feeling it, but still if we count the average over the last 4 years the movement of the fund is quite good," he says.

News hits home

Luckily, fat returns didn't dampen JT's spirit of innovation. Two years ago, it introduced its own Lithuanian-language newswire, JT News, to fill a gap in the market, which now supplies financial news to the country's largest daily newspaper and web portals. "It isn't particularly profitable - we even make a small loss on it - but we get to use our analysts twice and we get lots of CEOs and top level managers logging onto our website, so it works as a kind of marketing," says Dubnikovas.

Continuing the work of the IT department has proven crucial. Before long, Bankas Snoras was sniffing around and in August it bought a majority stake in JT. But Dubnikovas is careful to describe the deal as a merger rather than a takeover. "We gave them two thirds of our capital, leaving us with one third and a blocking stake, but all the founders of the company are still with us," he says. "One of the major requirements was that we should have a blocking stake so we could participate in management at the top shareholder level. We still work the same way."

The reasons for Snoras' interest aren't hard to spot. The bank had no capability for stock trading. Now it does, and is getting the IT brains to work on developing a worldwide trading system that will take advantage of the reach made possible by Nasdaq OMX's ownership of the three Baltic stock exchanges.

Other projects being developed include working on Snoras' infrastructure links to Russia and exploiting a new niche - margin trading. "Here in the local market we have margin trading, but it is based on [repurchase agreement] transactions. We think we have an opportunity to establish marginal trading by using cash from banks and IT solutions. We can give this solution as a technically advanced system. At the moment no one has it in Lithuania," says Dubnikovas.

JT has also started to license its trading system more widely - even to rivals. "We thought - we have a system that is stable and works fine, so why can't we sell it? So we started selling the system to other market participants such as DnB Nord and Icelandic MP Investment Bank. Local bank Ukio Bankas bought part of the programme, and other local brokerage houses including Finhill also use it. This IT department grew into a separate company. At the moment, in the financial crisis, it is the best company in our group!" Dubnikovas says with a smile.

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FUNDS: Lithuania's JT Investments takes diversified approach

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