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Trust Insider: top trusts for the brave in Eastern Europe
by James Carthew on Jun 11, 2014 at 13:48
Both of the regional funds use the MSCI Emerging Markets Europe 10/40 Index as their benchmark. Russia dominates, accounting for almost 50% of the index, and in GDP terms it is by far the largest country in the region. Poland and Turkey each account for almost 20% of the index, Greece is about 7% and the Czech Republic and Hungary make up the balance. None of the other countries in the region are represented.
Even with the weighting restrictions imposed by the 10/40 methodology, a few large stocks dominate the index including Gazprom, Lukoil and Sberbank (the top 10 are about 42% of the index’s market cap). The Barings fund operates with a portfolio of 50-60 stocks, while the BlackRock fund is much punchier – running with less than 30 holdings.
The Baring fund is a little larger than the BlackRock one (£132 million market cap versus £92 million), they trade on roughly the same rating – currently around an 11% discount – and, although the Baring fund has a better long-term track record, generally, since 2009, when Sam Vecht and David Reid took over the management of the fund from Pictet, the BlackRock fund has outperformed.
Matthias Siller, manager of the Barings fund, has probably been let down recently by his higher weighting in Russia; he had been anticipating a resurgent Russian economy in 2014 but was sideswiped by the events in Ukraine.
Russia has seen enormous capital outflows since the start of the crisis and its external debt is now close to losing investment grade status. All sorts of accusations are flying backwards and forwards about the current situation. Russia must recognise that the longer it drags on, the greater the risk it faces of causing long-term damage to its economy, especially if Western Europe steels itself to finding permanent alternatives to Russian gas imports.
Realistically, I think both funds need to see an improvement in the Russian situation before they come back into favour with investors.
JPMorgan Russian is really the only fund that is a pure play on the Russian stock market; Prosperity Voskhod , which specialised in small and mid cap stocks, is in the process of winding up. I wrote about the JP Morgan fund in September 2012. I cautioned then that an investment in The trust was always going to be a rocky ride. The fund did quite well from the end of 2012 until March 2013 but gave up most of its gains over the next few months and has lurched downwards again this year.
Russia looking cheap
Superficially, Russian stocks now look inexpensive and Oleg Biryulyov, manager of JPMorgan Russian, says his base case is that the tensions between Russia and Ukraine persist for some time but do not escalate and that there is no step up in sanctions. On this basis, he believes the depressed valuations in Russia may represent ‘an important buying opportunity’.
The three funds I have mentioned so far are probably the best known and safest ways to play Emerging Europe, but there is a raft of other funds specialising in the region – most of which are property funds. I will have a look at some of these another time but I thought I might finish up this week by mentioning the private equity funds investing in Eastern Europe.
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- Baring Emerging Europe (Ordinary Share)
- BlackRock Emerging Europe (Common Stock)
- JPMorgan Russian Securities (Ordinary Share)
- Prosperity Voskhod (Ordinary Share)
- Aurora Russia (Ordinary Share)
- Ukraine Opportunity (Ordinary Share)
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