(JPMNT) Journal of Process Management – New Technologies, International Vol. 7, No 2, 2019.

INVESTMENT FUNDS AND PRIVATIZATION PROCESS IN

Nataša Simić1, Vesna Petrović2, Dušan Aničić3

1,2,3 University Union -Nikola Tesla, Faculty of Economics and Finance, , Serbia [email protected], [email protected], [email protected]

Original Scientific Paper doi:10.5937/jouproman7-21283

Abstract: Both existence and efficient functioning a high level of security illiteracy, unreliable of economic systems, which enable a greater, financial and business information of cheaper and quality production of material goods and services, rely, as a rule, on a relatively free companies, a lack of legal sanctions for the market and private property as two inseparable non-signing of the small stockholders free assumptions of their efficient functioning. The trade management prospect, a low construction of such systems can not end with level of knowledge and professionalism of ownership transformation and liberalization of broker-dealer and investment consultants, a internal and external economic flows. It is an important precondition for the functioning of such lack of effective practice in resolving systems, but at the same time, just the beginning of financial disputes, etc. That is why the role their construction. The decisive role in raising of the Stock Fund in attracting foreign efficient capital allocation at all levels has the , especially the financial ones, was construction of a sophisticated, open and incomparably more difficult, since it has a competitive market which should be adjusted to the country's financial system. This implies the key role in the investment decision of a construction of a whole series of new financial potential for each in institutions and fundamental reconstruction of the the emergence of liquidity. The appearance existing ones, the introduction of a large number of of the Stock Fund in the stock trading on the new financial instruments, especially in the form of Belgrade also meant a lot securities, a thorough personnel reconstruction and innovation of educational institutions, but also the of reactivation of the stock exchange and change of awareness of the broad social layers on the creation of capital markets. That was a the assumptions and modes of efficient operation. In parallel process of privatization and capital that respect, investment funds play an important market development. Namely, as a single role. largest stockholder in privatized companies Key words: privatization, investment funds, under the previous regulations and with the regulation, financial instruments, capital legal provision on time deposit (from 2008), the Stock Fund started stock trading The privatization process itself was as one of the methods in the privatization followed by a series of legal and process and it contributed to increasing the institutional constraints. Laws in this field volume of turnover on the stock market did not have the adequate support of the with its permanent presence from month to necessary legal solutions in the sphere of month. financial and judicial regulation. The beginning of privatization took place under Share trading from the privatization the following limitations: a lack of process on the Belgrade Stock Exchange institutional framework for the thus gave way to the development of the implementation of laws from this field, a capital market. lack of corporate governance in companies, a lack of shareholder culture and tradition,

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The basic role of the development financial markets. Furthermore, the Law on of the stock exchange business and the Business Companies, the Law on capital market is for the companies to Investment Funds and the Law on Pension appear on the official stock exchange listing Funds additionally accelerated the where the liquidity of trading in qualitative and quantitative development of would be established and the financing of the capital market. companies would be enabled through the collection of free capital on the market, In accordance with the goals of the which is in direct correlation with the privatization process acceleration and principles of the Stock Fund in the further development of the capital market, privatization process (inflow of amendments to the Law on the Stock Fund investments, development of the financial and the Law on Privatization (2005) have market - capital markets, maximization of been implemented, which, in a preventive privatization revenues). The stock market manner, achieve the following goals: has been established through the sale of  achieving a higher level stocks from the Stock Fund portfolio, of publicity in the businesses of which improves the depth and breadth of the companies in which the Stock the market in an adequate way and Fund has stocks, which is in the contributes to the development of gradual function of the privatization liquidity. process acceleration; namely, in Also, in accordance with the order to increase the protection of accompanying developments on the stock state capital, accelerate the market in the phase of capital market privatization process and develop formation, the Stock Fund, in cooperation the capital market, the Stock Fund with the Belgrade Stock Exchange, has acquired stockholder rights participated in adapting the stock trading which is important for the methodologies from the privatization preservation of the property or the process with the goal of overcoming the value of the shares; observed anomalies and practical  ex ante, but not the ex experiences in the realization of the stock post operation of the Stock Fund sale and the development of the capital in the implementation of the market. In that sense, certain stock trading protection of the state property methodologies have been complemented in value, and indirectly protection of the way of enabling the prevailing price the assets of minority method, in addition to the method of Stock stockholders, Fund minimum price, which allowed the increase in the volume of turnover by  acceleration of the selling smaller quantities of stocks in privatization process in several several transactions, on the one hand, and ways (amendments to the law the prevention of the trend of reducing the predict several methods of selling number of listed companies on the Stock stocks), Exchange.  the obligation to submit "the Prospect" for stock trading at In addition to the organized market at the Stock Exchange, with the application the Stock Exchange. of the Law on the Market of Securities and Other Financial Instruments in the beginning of 2004, it became possible to trade with an off-exchange method, ie, take over, as an integral part of the developed

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The effects of privatization are every company that decides to offer their manifested through a change in the stock stocks there. Companies that choose to list market structure, increased liquidity, their stocks in this official capital market broadcasting and sale of the stocks, starting are becoming interesting for attracting the process of corporate governance, powerful institutional, portfolio investors improvement of the overall investment that are prevented by regulations from climate, so that these effects are just as investing in unofficial markets. important as direct effects (increase in investment, production, export of Investment funds represent one of employment ...) to the privatized company. the most important types of financial A successful realization of privatization institutions in the world. They will certainly and achievement of a higher level of capital play a key role in the creation, development market development represent one of the and affirmation of the portfolio foundations on which the future growth of management functions as the basis for the Serbian economy is based, and at the efficient capital allocation in our country. same time, with parallel processes of In order to achieve this, there is a need for privatization and capital market quality financial assets, primarily the development the maintenance of the emergence of a number of different ones, internal and external macroeconomic primarily -term government and stability will be enabled. corporate securities in the . The parallel process of privatization Considering the fact that according and capital market development in our to the basic rules of the portfolio theory, a country started in 2002 with the first sale of portfolio consisting of twenty stocks stocks of the companies from the Stock through diversification provides protection Fund portfolio in the privatization process from a so-called unsystematic risk, on the Belgrade Stock Exchange, as before investors in such portfolio, which matches the stocks were traded sporadically and the investment fund portfolio that invests in with the stocks of a small number of stocks (property growth fund), enjoy the companies on the Stock Exchange. Since same protection against risk. then, a large number of domestic If an active portfolio management, companies have been included in the stock or an active investment strategy, is market, which, in that period, managed to conducted, it would imply that, on the basis significantly increase the level of corporate of the performed analyzes, periodic governance, business and financial corrections are made, i.e. purchase and sale performance and to meet the strictest of stocks, and in this way the structure of international accounting standards for stock the portfolio is changed. listing. Also, the privatization of public companies in the coming period will make Hemofarm from Vrsac is a very Serbia's capital market respectable and send illustrative example of the growth in the a message to potential investors for making stock price of certain companies in the long-term investment decisions and their privatization period in our country. presence on it. Namely, the stocks of this company first appeared on the Belgrade Stock Exchange In particular, the A listing of the in early February 2002, when the price for Belgrade Stock Exchange should be noted, one stock was 450RSD, while on July 18, because it is a listing whose conditions for 2006 one stock was worth 12,000RSD. the stock listing are in line with those that are valid in the developed markets and which are the strictest in the region, so listing A is a kind of business prestige for

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The example of Hemofarm is not to achieve a total price of $ 750 million for lonely in the privatization process in our all the companies. country; on the contrary, there were a Salford and other investment funds number of successful domestic companies are coming to transition countries to earn from all economic sectors, from production money. Earnings in the West are about 10 to service ones, whose owners became to 12 percent per year. By arriving at risky foreign investment funds, or foreign markets, funds may lose but they can also companies, as well as domestic companies earn much more than in the west; Salford with capital of unknown origin. The accounts for an annual profit of between 20 privatization process often took place in a and 25 percent in our market. This fund non-transparent manner, and the invested significant funds in the participants in it, especially small restructuring of purchased companies with stocklders, did not know enough about the the aim to bring the quality of raw materials regulations in this field, so the change in and finished products closer to the ones of ownership in companies was very often the European Union. carried out at book values that were far below the market ones. And while the results in the production and marketing of milk can be All these facts point to one question: somewhat challenged by the monopoly why were the laws in this field late, of this fund, the results achieved in especially the Law on Investment Funds the confectionery industry are in favor of and the Law on Voluntary Pension Funds? the proper orientation of this fund. Namely, by merging Bambi and Banat and Strategy of foreign investment funds in reconstructing them, a growth of 40% was Serbia achieved in 2007. Before the fund took over, the total income of both companies Since the beginning of the was 32 million Euros, and in two years it privatization period in our country, the first reached 70 million Euros. foreign investment funds, which started buying in our capital market, appeared. The business strategy of this fund in Their business philosophy is mainly as our country was defined the moment they follows: buy, restructure, sell at a higher entered our market, and it foresees the exit price and make a profit from the difference period during 2008 and 2009, i.e. the sale of in price. most of the purchased companies. The plan is to keep the minority share in some of the Illustrative example of their companies, to increase it and to sell it in the business strategy is the one of the next three years. In the long-term plans of investment fund Salford, which came to this fund, there is an intention to reinvest Serbia in 2001 and since the following year part of the money in Serbia. The achieved has had an open office. The fund bought results in this business are the best five dairy companies (Imlek, Impaz, reference for the arrival of new investors in Zemun, Subotica and Novosadskaya) in our country. Serbia through the recapitalization process, except for Zemun, which was purchased on It is obvious that foreign investment the stock exchange, and two confectionery funds have great experience and knowledge industries (Bambi and Banat), as well as a in the field of investment and performance significant participation in the ownership of in new markets that are much more risky Knjaz Miloš. Total investment of Salford in but also bear a possibility of high growth in Serbia is approximately $300 million, and the value of the fund. in 2008, they started with sales, expecting

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Investment rules can be best studied on the Financial rules example of Warren Buffett, who was named the best investor of the 20th century. 1- Focus on the stock capital income, not on earnings per Buffett set himself a difficult goal: stock. to surpass the Dow Jones Index by ten 2- Calculate the "owner’s percent a year. That is what he achieved, earnings". even more than that. In the period from 3- Look for a company with a high 1956 to 1969, Buffet achieved an average profit . annual profit by 22% higher than Dow 4- Make sure that the company Jones. At that time, he took control of the makes at least one dollar of small textile company Berkshire Hathaway market value for each retained and in a 35-year period he raised the book dollar. value from $ 19 to $ 37,987 per stock, which represents a growth rate of 24% per Market rules year. 1- What is the value of the V. Buffett believes that, basically, business? there is no difference between a purchase of 2- Can you buy a business at a a business as a whole (the company) and a lower price than its real value? purchase of securities of that business (company). In both cases, the same strategy is applied: businesses that are understood Buffett rules for managing a are chosen - companies with long-term portfolio of securities: prospects, which are managed by honest and professional people and which are 1- Manage a focused portfolio available at attractive prices. with low turnover volume. 2- The key thing is to choose the Business (company) buying guide right moment to deliver a blow – Buffett’s 12 Golden Rules: 3- The best way to achieve extraordinary results: don’t Business rules swing at everything, wait for 1- Is the business simple and the best pitch understandable? 4- The best way to outsmart the 2- Does the business have a stable market: do not rely on history? everything the market offers; 3- Does the business have good wait patiently for the right prospects in the long run? opportunity. 5- You should use index funds to Management rules calculate the average value of your purchases. It's a simple 1- Does management make technique; however, the index rational decisions? investors have actually 2- Is the management honest with surpassed most professional its stockholders? investors. 3- Does the management resist the 6- Do not measure the success of institutional imperative? a company on the basis of the price change of its securities in a term. Instead, analyze the economics of the business.

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7- Imagine yourself in the role of investment needs through appropriate the portfolio owner of a placements. specific business, not of a securities portfolio. The joint intention of the 8- Learn to distinguish between investment fund management companies is investments and to form and manage a number of different and make sure you never investment funds on the investment market exceed the thin line that of Serbia in the coming period, and thus separates the two. profile and adjust their services to the needs of their clients in the best possible way. In addition, the absolute respect of the highest Buffett's investment strategy rules: professional standards and the ensurance of lasting satisfaction of all the members of 1- Analyze securities as a real the funds that the companies manage, have business behind them. been and will remain the backbone of the 2- Require a security threshold for entire future business. each purchase. 3- Manage a focused securities Literature: portfolio of small number of clients. 1. Robert G. Hegstrom Voren Bafet 4- Protect yourself from the za sva vremena: principi stari, speculative and emotional forces ekonomija nova (The Essential of the market. Buffett: Timeless Principles for the New Economy) Plato, 2006.

2. Dejan Šoškic Securities: Conclusion Portfolio Management and Investment Funds, Faculty of The strategic determination of Economics, Belgrade, 2006. investment fund management companies in 3. Aleksandr Živković, Gradimir Serbia is to contribute to the further Kožetinac, Monetary Economics, development of the investment Faculty of Economics, Belgrade, environment in Serbia and more profitable Belgrade 2016. exploitation of all its potentials through 4. David Hyman, Public Finance - their innovativeness and experience of their A Contemporary Application of Theory to Policy, Thomson, teams. The establishment, organization and 2008. management of investment funds represent a response to the growing need of both 5. (2018) International Investment domestic and foreign investors to meet their Position of the Republic of Serbia, Belgrade

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