We understand our depositor’s concerns about the results of the fund in January. Therefore, we want to comment on the situation and explain why its assets went in red. The assets of OTP Pension are invested in low-risk instruments with minimum risk of default and high yields, permanently relevant to the market, which best describes IGLBs. Their share in the OTP Pension portfolio is about 50% of the fund’s assets thus influencing the fund’s performance significantly.
What happened in the market in January?
Two significant events negatively affected the price of IGLBs. First, the threat of war with Russia. The opposition reached its peak in January. The Ukrainian news revealed the backdrop of the expected crisis in Ukraine, the consolidation of Russian troops near the borders, the discussions of the invasion triggers and forecasts of the cities seizures, the diplomats’ withdrawal, the defence strategy development, the alertness of the Ukrainian army, and the following comments of the world leaders. Such an information negatively affected the sensitive financial market. The
sale of Ukrainian assets, mostly government bonds, accelerated in all market segments, which resulted in their price drop. One more disruptive event was the high inflation. Under the pressure of the crisis and inflation, the National Bank decided to raise the discount rate to 10% revising it for the future to be raised to 11%. That influenced the market and IGLBs prices lowered more.
How are the assets of the pension fund accounted for?
According to international standards and world practices, the fund’s assets are valued at their market value, usually the stock exchange price. Unfortunately, in Ukraine most IGLBs transactions are OTC, which makes it impossible to obtain the daily exchange value of IGLBs. In order to keep the price of IGLBs relevant, we line them towards the price of bonds at the NBU website “reporting the true value of IGLBs “.
Find more at the link: https://bank.gov.ua/markets/ovdp/fair-value.
In January, the yields on the IGLBs secondary market increased from 12.3% per annum at the beginning of the month to 13.8% -14.3% per annum as of January 31, 2021. The bond yields increase tends to lead to a fall in their price, and the longer the maturity, the greater the fall in the price. Therefore, in January the value of bonds lowered by 1% -1.4% over the month. As the OTP Pension Fund portfolio is mostly consists of the government bonds (IGLBs), a significant drop in the value of bonds negatively affected the fund’s assets.
Will I lose my money?
No. Although the assets have cheapened, the yields on them has increased. That is, your assets are growing faster, because they are now yielding at 13.8-14.3% per annum instead of 12.3%. Accordingly, everything will return to normal or from the revaluation (when the rates go down again), or from the redemption of IGLBs (if you keep the bonds to maturity, we will get the planned yield).
Is it possible for IGLBs to default?
No. Default is impossible.
The economic indexes in Ukraine show the strength of the economy despite the crisis. In particular, a high market for the Ukrainian export has a positive impact. After a short-term devaluation of the hryvnia, the supply of the dollar on the interbank market exceeded demand over the past week, which led to the strengthening of the hryvnia to the level of 27.97-28.05. Inflation growth is declining for the third month in a row. In addition, enhanced cooperation with the IMF and other global donors is expected.
Will the NBU revalue the current low price?
Yes. The drop in price was a temporary setback caused by the Russian claims against Ukraine airing in the world’s media and the monetary policy restrictions by the NBU.
When will the situation improve?
After the Russian government rejects the invasion claims and withdraws the troops to their home country, the secondary market is most likely to revive, and the value of IGLBs to increase. We expect the situation to improve in March-April, and the assets to return to their early January 2022
prices and value.
Which profit is expected of the OTP Pension Fund by the end of 2022?
Given the above, the OTP Pension Fund is expected to bring its depositors more than 8% -9% per annum by the end of the year.
