The 2016 Lithuanian Investment Index compiled by INVL Asset Management, one of the country’s leading asset management firms, reveals that investments last year in Lithuanian company shares, government bonds and real estate earned a positive return, while the return on deposits was nil. The return on the Lithuanian Investment Index last year was 6.7 per cent. Investments in stocks in the country stood out with a gain of 14.9 per cent. Meanwhile, the return on rental housing was 9.7 per cent, while long-term bonds returned 2 per cent – slightly more than the inflation rate of 0.7 per cent.
Considering long-term returns, for 1996-2016, investors in this period would have been able to achieve gains in all the country’s asset classes: stocks had a return of 9 per cent, rental housing 14.6 per cent, long-term bonds 7 per cent, and deposits 5.1 per cent. Inflation for the period was 3.3 per cent. And the return on the Lithuanian Investment Index for this period was 10.5 per cent.
For 2007-2016, all investments generating interest, rental or dividend income had a positive return, even taking the period of global financial crisis into account. The return on long-term bonds over this period was 4.4 per cent, while rental housing had a gain of 3.7 per cent. Returns on deposits (at 2.7 per cent) and stocks (at 1.3 per cent) were positive, but less than inflation which was 3.1 per cent. Investments in housing, considered separately, had a negative return (-1.3 per cent).
“In retrospect, we see that investing in Lithuania was worthwhile, though you have to take the risks and short-term fluctuations into account. That’s why a balanced portfolio composed of safe investments in bonds and risky investments in stocks and real estate offers a chance for big gains and significantly reduces the risk,” said Vaidotas Rūkas, the Head of Funds Management at INVL Asset Management.
He said the dynamics of the Lithuanian Investment Index again confirm the benefits of diversifying investments, since variations in the index were smaller than those of its separate components while its return was near that on the best performing component. The Lithuanian Investment Index, which INVL Asset Management introduced in 2016, comprises equal proportions of money market instruments (deposits), long-term bonds, rental housing (as of 2016 calculated net of expenses) and stocks. The company assessed the returns on asset classes in Lithuania, Europe and globally since 1996.
The best-performing investments were most volatile
The best-performing asset classes also showed the most variation in their returns. Lithuanian stocks, which outperformed European and global stocks in 2016 and in 1996-2016, had a lower return for 2007-2016. In 2008 alone, Lithuanian stocks lost 65 per cent of their value. But even a one-year drop like that did not mean losses over the 10-year period.
Looking at Lithuanian, U.S. and German bonds, the best performers in the period 1996-2016 were Lithuanian long-term bonds. For the past 10 years, German long-term bonds – considered the safest investment– performed best, with a return of 6 per cent, while the return on Lithuanian long-term bonds was 4.4 per cent. In 2016, the latter brought investors just 2 per cent, while German bonds yielded 4.3 per cent. Experts say that for bonds it’s no longer possible to predict similar historical returns over the short-term and medium-term.
In forecasting future trends, Vaidotas Rūkas noted, the profit potential remains in riskier investments like stocks and real estate. But can people in Lithuania also take advantage of opportunities for extra earnings by investing, given the change in their income and ability to save in recent years as well as how people themselves view their financial situation?
More people are working and wages have risen
In recent years the number of employed persons in Lithuania has nearly reached the pre-crisis level and in 2016 exceeded 1.21 million. The average wage before taxes in the last quarter of 2016 was up 38.4 per cent compared with 2007, and in the year through till the last quarter of 2016 rose 8.7 per cent to EUR 822.80. Data from the state social insurance fund Sodra show that in December 2016 most employed persons had monthly earnings of EUR 401-700. The number of such persons increased by 12 000 in the year to 342 000.
Meanwhile, the number of people earning less than EUR 400 decreased significantly to 270 000 in December 2016, falling by 66 000 in the year. The number of people in the country earning EUR 701-1000 increased by 18 000 during the year and at year-end totalled 212 000. Those earning EUR 1001-2000 increased by 34 000 in the year to 214 000 at year-end. There were 54 000 people with monthly income of more than EUR 2001 in December 2016, 7 000 more than a year earlier.
Income to the government budget confirms the growth trends in wages and employment. According to data from the State Tax Inspectorate, personal income tax payments increased 41.7 per cent between 2011 and 2016.
Wage growth was not uniform across all sectors
Still, not all residents in fact felt the statistical growth of wages, since it was not significant in all sectors or the increase was not enough to guarantee high income. The average wage for those working in general secondary education in the public sector was EUR 660.40 in the third quarter of 2009 and EUR 671.40 in the fourth quarter of 2016 – an increase of just 1.7 per cent. In comparison, the overall average wage in Lithuania increased 27.9 per cent in the same period. In the area of accommodation and food services, the average gross salary rose 52.4 per cent, but was still only EUR 553.30 on average.
Statistics Lithuania reports that wages and employer social contributions in 2016 were equivalent to 43 per cent of the country’s GDP. The proportions of GDP allocated to wages in different sectors differed markedly, ranging from 76 per cent in the defence, education and health care sector, 58.8 per cent in the information and communication sector, 56.8 per cent in construction, 50.6 per cent in manufacturing, 44.5 per cent in financial and insurance activities, and 42.6 per cent in wholesale and retail trade, to 8.4 per cent in the real estate sector.
According to Vaidotas Rūkas, some of the earnings variations across different sectors are due to capital requirements. In real estate operations, for example, most earnings go to the provider of capital. In recent years, though, there have been changes in this area in some sectors. The information and communication sector, for example, was previously dominated by capital-intensive telecommunication companies, but now has been joined by service centres whose arrival and new investments helped achieve a breakthrough in the labour market. As a result, the share allocated to employee wages in the sector has increased significantly.
People in the country are not especially optimistic
Nonetheless, although investing offers good earnings potential, residents of the country are making only limited use of that opportunity due to rising prices and weak personal financial planning. How do people themselves see their financial situation and their ability to invest and save?
A representative survey of Lithuanian residents conducted for INVL Asset Management in February 2017 by Spinter Tyrimai revealed that the number of people who are saving fell a bit this year: in 2017 there were 63 per cent of respondents who said they set money aside for savings and 66 per cent – in 2016. Among those who save, more are women, and more are representatives of average and higher income groups.
Those who do save set aside somewhat larger amounts than last year. Thus 33 per cent of them saved EUR 51-100 a month, up from 30 per cent last year, while 27 per cent saved EUR 21-50 a month, down from 29 per cent. Another 16 per cent of savers set aside EUR 101-200 a month. Groups which overall said they save more include people aged 26 to 55, those with a higher education, those with the highest levels of income, and people living in larger cities.
In assessing their financial situation, Lithuanian residents are not especially positive. The survey showed 29 per cent said their financial situation improved over the last three years, while 56 per cent said it worsened. People said their financial situation benefited over the last three years from increased wages, but was hurt by rising prices.
Among respondents whose financial situation improved, 58 per cent said their own wages increased, 33 per cent said another family member got a job or a higher wage and that improved their financial situation, and 19 per cent said they themselves started working. Wages increased more often for representatives of average and higher-income groups.
Of those whose financial situation worsened, 62 per cent said their income remained unchanged while prices increased, 18 per cent said their income increased by prices rose even more, and 13 per cent said their income remained the same but their needs increased.
Reluctance to make a financial plan
“It’s only natural that a person’s financial situation may fluctuate and change in the course of their life. That’s why regular financial planning is essential, to help avoid financial “potholes” and not be unsettled by the loss of a job, a wage reduction or other unfavourable circumstances that may arise. Unfortunately, 78 per cent of people in Lithuania have not made a financial plan for themselves or their family, and only 15 per cent have such a plan,” said Dr Dalia Kolmatsui, the Head of Pension Funds & Retail at INVL Asset Management.
Nearly a third of those who plan their finances have made a 2-year investment and savings plan. More women and residents of larger cities have a plan of that length. Another 26 per cent of those who plan said they have a plan for up to 5 years, 16 per cent have a plan for up to 10 years, and one-fifth have plan for longer than 10 years. Groups that are more likely to plan their finances include women, respondents aged 26 to 55, and representatives of higher income groups. Dr Kolmatsui said financial experts recommend having a financial plan for at least 10 years.
She noted that government measures to promote saving among residents have a positive impact on people’s finances, as for example with the constant increase in the assets residents have accumulated in pension funds. “Still, this positive change could be even bigger if people themselves actively planned their financial future,” she added.
Financial assets entrusted by Lithuanian residents to professionals – in pension and mutual funds as well as life and non-life insurance and annuity commitments – have increased by EUR 1.3 billion or 52 per cent in the last 3 years and reached EUR 3.9 billion in the third quarter of 2016. The amount of money invested in mutual funds in this period reached EUR 411.2 million (EUR 144.31 per capita), while EUR 2.44 billion was accumulated in pension funds (EUR 855.90 per capita), and investments in insurance and annuity products were EUR 1.02 billion (EUR 358.87 per capita). Comparing investments in these instruments, the amount accumulated in pension funds made up 63 per cent of the total and grew the fastest over the last 3 years.
INVL Asset Management is part Invalda INVL, one of the Baltic region’s leading asset management groups. Companies in the group manage pension and mutual funds, alternative investments, private equity assets, individual portfolios, and other financial instruments. As of the end of 2016, they had been entrusted with over 500 million euros of assets by more than 170 000 clients in Lithuania and Latvia and international investors.
Lithuanian Investment Index
Average return by asset class
| Asset class | 1996-2016 average, per cent | 2007-2016 average, per cent | 2016 return |
|---|---|---|---|
| Housing prices and rental income (net of expenses starting in 2016) | 14.6 | 3.7 | 9.7 |
| Housing prices in Lithuania | 6.6 | -1.3 | 5.5 |
| Lithuanian stocks | 9.0 | 1.3 | 14.9 |
| European stocks (EUR) | 7.5 | 3.5 | 2.1 |
| Global stocks (USD) | 6.5 | 4.2 | 8.5 |
| Lithuanian long-term bonds | 7.0 | 4.4 | 2.0 |
| US 10-year bonds | 5.2 | 4.6 | 0.7 |
| Short-term debt securities and money market instruments (deposits) | 5.1 | 2.7 | 0.0 |
| Gold (USD) | 5.3 | 6.1 | 8.1 |
| 2nd pillar pension funds | 4.9* | 3.4 | 4.4 |
| Inflation | 3.3 | 3.1 | 0.7 |
| Lithuanian Investment Index | 10.5 | 4.5 | 6.7 |
* since creation in 2004.
Information is provided for information purposes and cannot be construed as a recommendation, offer or invitation to invest in funds managed by INVL Asset Management or other financial instruments. When investing, you assume the investment risk. Investments can be both profitable and loss-making, you may not obtain financial benefits and you may lose some or even all of the invested amount. Past results of investments do not guarantee future results. When making a decision to invest, you should assess all the risks associated with investing and the key investor information documents. INVL Asset Management shall not be responsible for any inaccuracies or changes in the information or for losses that may arise when investments are based on this information.