Pension Funds Sell Končar Shares: Who and Why Should Know?

The months-long sales of Končar Elektroindustrija shares owned by mandatory pension funds have begun to attract the attention of domestic analysts who believe that in such cases, other investors lack essential information. The entire ‘problem’ arose due to the legal provision that an individual share position in the portfolios of mandatory pension funds must not exceed five percent of total assets. Due to the rapid price increase in the last two and a half years – from the beginning of 2023 to today, the price of Končar shares has risen from 115 euros to 670 euros, or by 482 percent – pension funds must sell parts of that position.

Among pension funds, the largest shareholder in Končar is the AZ fund category B, which holds 15.5 percent of the shares in the domestic industrial leader. This makes it the second-largest shareholder, after the state Capital Fund. With just under 400,000 shares, at the end of June, Končar EI accounted for 2.6 percent of the net assets of that AZ fund.

Among equity investments, this is the second highest exposure of AZ category B – only more has been invested in Slovenia’s Krka, at 3.28 percent. In third place among Končar’s shareholders with 14.1 percent is PBZ Croatia osiguranje fund category B. At the end of June, Končar accounted for 5.22 percent of the net assets of that fund, which is beyond the allowed limit. Additionally, PBZ/Croatia osiguranje slightly ‘stands out’ with Krka, at 5.03 percent of assets.

Information Important for Investors

The same problem is faced by Erste Plavi category B, which holds 12.9 percent of the shares in Končar. At the end of August, these shares accounted for 5.1 percent of the assets of that fund. According to available reports from pension funds and data from the Central Clearing Depository, during this year, PBZ/Croatia osiguranje sold just under 100,000 shares while Erste Plavi ‘cut’ its stake by nearly 50,000 shares. However, the sell-off by pension funds is a kind of Sisyphean task as the price of Končar shares continues to rise, thus maintaining their share in their assets around the threshold of five percent.

Some analysts therefore believe that the information on how many shares pension funds must sell and when is very important for the investment public, considering the fact that Končar is currently the most liquid stock on the domestic stock exchange. This issue was highlighted by economic analyst Velimir Šonje on his blog Ekonomski lab in a post titled ‘Končar, Pensions, and Transparency: What Connects Them?’ where he stated that all information relevant for trading Končar shares comes under scrutiny.

– Given the aforementioned legal limit of five percent, this group of information includes the method used by the Croatian Financial Services Supervisory Agency (Hanfa) when implementing the legal provision regarding the five percent limit. The regulator thereby conditions the pace of share offerings. The exceedance above the five percent limit in two OMFs is currently greater than at the end of last year despite this year’s share sales, but I cannot know if there was any day this year when the concentration fell below five percent, thus starting the legal adjustment deadlines anew. In any case, it is extremely important for the capital market to know when and how the five percent limit is calculated and enforced, and this should be known at the level of technical details; e.g., how certain adjustment deadlines are set for individual OMFs, and so on – wrote Šonje.

Everything is Prescribed

In this regard, we sent an inquiry to Hanfa regarding how the details are determined and in which act those provisions are stated. From that institution, they say that Article 135, paragraph 2 of the Law on Mandatory Pension Funds (ZOMF) stipulates that if there is an exceedance of the limits defined in Articles 125 to 134, which is a result of circumstances that the pension company could not influence (such as a price increase on the stock exchange, ed.), the company is obliged to align the investments of the pension fund within a reasonable time, not exceeding three months, and to conduct transactions primarily for the purpose of aligning the investments of the pension fund’s assets.

– Article 135, paragraph 3 of the ZOMF also stipulates that Hanfa may exceptionally, at the request of the pension company, extend the aforementioned deadline for an additional three months if it is in the interest of the members of the pension fund – states the response.

The financial regulator further emphasized that pension companies are obliged to actively work on reducing exposure to the issuer in the event of exceeding investment limits, while taking care to minimize the impact on the market, adjust the dynamics of sales, and protect the interests of the members of the pension fund.

From circles within pension funds, it can be heard that everything is prescribed, one just needs to read. In Erste Plavi, they emphasize that the limit is calculated on a daily basis in accordance with the Regulation on Determining the Net Asset Value and the Value of the Accounting Unit of the Mandatory Pension Fund, and the adjustment deadlines are prescribed by the aforementioned article of the ZOMF.

In the financial community, it is unofficially considered that the information about the sales of large quantities of shares owned by pension funds is important for the market, but that does not necessarily mean that the exact date when they decide to sell must be known. Moreover, if investors follow, they can see from the reports of pension funds which share positions exceed the limit. The selling pressure that follows such a ‘flood’ of shares is not unusual, as it also happens in much more liquid markets when large institutional investors decide to ‘unload’, says a representative of the financial community.

Better Solution

Our interlocutors believe that a much better idea was recently proposed by financial analyst Hrvoje Fajdetić, about which Lider has already written. According to him, the impression is that investors with information about the deadline by which pension funds must sell Končar shares were in a privileged position, which raises questions about the transparency of the entire process. – The sudden price increase after the funds’ sale showed that the market, and primarily citizens, were willing to pay a higher price than that obtained in block transactions – writes Fajdetić, who offered a better solution for the future, which is ‘Accelerated Book Building’ (ABB). This is, writes Fajdetić, a transparent and efficient way of selling a larger package of shares that has already been used in Croatia and is common in the region. The financial community agrees that ABB would be a better way to unload shares owned by pension funds instead of slowly selling them on the market. Otherwise, the price achieved in an ABB transaction usually includes a certain discount compared to the market price, although this was not the case in this week’s transaction of shares of Nova Ljubljanska Banka sold by the European Bank for Reconstruction and Development. The package was worth 30 million euros, and the market swallowed it as if ‘there is no tomorrow.’