Investment in Eastern Europe has been a hazardous business over the last three years. This is reflec...
Investment in Eastern Europe has been a hazardous business over the last three years. This is reflected in the performance statistics of the Micropal universe of offshore funds, with relatively few managers achieving positive returns over that time period.
The mean average three year return for the 74 funds investing in the sector has been -24.58%. This breaks down as -9.01% over one year, 16.66% from December 1998 through November 1999, and -8.75% from December 1997 through November 1998.
Top performer in the sector over the three-year period is the CB Fund European Emerging Market vehicle. This has achieved a return of 44.47% over three years to the end of November 2000, breaking down as 13.55% over one year, 33.25% from December 1998 through November 1999, and -4.52% from December 1997 through November 1998.
The fund has been run by Jupiter fund manager Elena Shaftan since September 2000, following the departure of Simon Pickard who had managed it since inception.
Shaftan said: "The style involves a balanced approach, starting with a top-down assessment of the countries in the region. While sectors are clearly becoming more correlated in global markets, we think the country decision is still more important than the sector call for emerging markets.
"We look at a number of factors including economic growth, inflation trends, and current account deficit and the government's commitment to structural reform.
"Having assessed the country factors, we look at sectors to find where there is sustainable non-cyclical earnings growth momentum.
"After that we look at company level, aiming to find market leaders with strong and sustainable margins as well as a strong balance sheet and committed management. We also pay close attention to valuations, to ensure we are not over-paying for growth."
The strength of the individual company is all-important, however. "Often I do a country and sector assessment and am unable to find a good enough company in which case the bottom-up factor takes precedence."
At present, on a macro view, Shaftan is positive on Poland and Hungary. "These countries have suffered during the past year because of the strong oil price both are net importers of oil and the weak euro, which has hurt them because they both export to Europe.
"This resulted in the widening of current account deficits and a pickup in inflation. Now these trends are reversing, there is the potential for momentum in these economies going forward.
"Russia has benefited during the year from the strong oil price, and although it has outperformed in relative terms, the absolute gain has not been that strong because it has been perceived as a high-risk investment area.
If the Fed cuts interest rates, Russia could benefit even though the decline in oil prices is negative for the economy."
Favoured stocks include Surgutneftegaz and mobile operator MTS, while holdings in Poland and Hungary include Polish media company ITI holdings, while in Hungary she favours OTP and Gideon Richter in Hungary.
One of the few funds to have achieved positive returns is Baring Eastern Europe. The fund has been managed by Klaus Boxstaller since August 2000. However, prior to this it was run from its inception by Rory Landman and Martin Taylor, who left Barings in August 2000 to join Thames River Capital.
At Thames River the pair now run a long-only Dublin-based vehicle as well as a hedge fund. Landman and Taylor's style uses intensive bottom-up research, reflecting the former's background as a private equity investor in the region, with the addition of a strong top-down macro-economic element.
Landman says: "While we do a lot of fundamental research on companies, we also take a view on the direction of markets. Overall we are looking for surprises relative to the consensus estimate at company level this would mean growth surprises, while at the market level it would mean the cost of capital essentially a macro call."
Landman's major theme at the macro level at present is the trend reversal going on with regard to the weakening oil price and the strengthening of the euro relative to the dollar. "Both these phenomena stem from a change in US growth expectations and should have a significant positive impact on central European markets.
"In addition, the Nice conference has been a net positive for expectations of the central European countries joining the EU. While this has been on the cards for some time, the reality of the situation that these countries will eventually join is reaching an ever-wider audience."
The same factors that are boosting the central European markets are, however, having a detrimental effect on Russia, particularly the reversal of the oil price trend. Landman also believes the market has been hurt by the general increase in risk-aversion evidenced by the underperformance of Nasdaq.
Despite the strategic underweighting of the Russian market, Landman favours Surgutneftegaz. "It is a highly cash-generative company with a good cash pile and is well-managed. There have been some questions about the relative tardiness of the management to take account of minority investors, particularly with regard to dividend payments, but we believe they will deliver."
Robin Geffen, manager of the Orbitex Eastern Europe and Russia fund, has a different view on the top-down allocation level, believing Russia offers the best value in the region at present.
"Russia is almost a warrant on Nasdaq at present. The volatility of the oil price and problems in Turkey have seen it de-rated, and it is now the cheapest market in the region.
"With regard to the convergence plays Hunga
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