Schroders Emerging Europe fund may have a relatively short track record under the present team but a...
Schroders Emerging Europe fund may have a relatively short track record under the present team but an assessment of its longer-term performance can be bolstered by the fact that the lead managers, Stefan Bottcher and Gabor Satanyi, previously worked together at Flemings running a similar mandate.
The pair moved to Schroders around a year ago. Bottcher said: "Although we are the lead managers on this fund we are part of a large and global team. The company's global emerging market investments total around $15bn. We have over 50 analysts covering global emerging markets and the emerging europe team is integrated into the global investment process. This gives us the ability to compare sector trends across global markets via a proprietary database. For example if we are looking at a telecom company in the Czech Republic we can compare EV/EBITDA ratios with similar companies in Europe and Latin America."
The emerging Europe team consists of five senior executives and two junior executives. Bottcher said: "We take a matrix approach, placing equal weighting on sector and country coverage. We also use a style that is a combination, aiming to add value both from the top-down and bottom-up angles."
The process begins with a liquidity screen, Bottcher said. "The biggest risk we face as investors is liquidity. For this reason, although there are around 2000 companies in our universe, our liquidity constraints bring the universe down to around a quarter of that. Our core of investable companies is around 120."
Partly as a result of this the fund runs a relatively tight portfolio, typically containing around 35 stocks. "With our actual investable universe so small there is no point trying to over-diversify. This has worked in our favour recently. We focus on large cap stocks and these have outperformed their smaller counterparts. The focus on size and liquidity has also worked for us at the country level. We look at the main countries such as Russia, Turkey, Poland and Hungary while avoiding the smaller states such as Estonia and Slovenia."
The stock-picking process is based on company visits and in-depth analysis. "We focus in particular on six elements: strength of management, top-line growth, earnings growth, cashflow generation, strength of balance sheet and valuation. "Ideally it would be possible to tick all of these off but in practice it is rarely possible. The key factor, of course, is management, but this is also hardest to analyse. This is why it is so vital to spend a lot of time doing work at the company level. We visit the companies we invest in at least once per quarter."
Bottcher is fairly positive on the prospects for the region going forward. "We have recently had some German business climate figures which showed confidence at an eight-month low. Nevertheless there is still some growth momentum which should be positive for central Europe."
The two largest markets in the region, Russia and Turkey, together account for around 60% of the fund's benchmark, the MSCI Eastern Europe Index. As Bottcher points out, these are not much correlated to European growth. "Russia is very dependent on commodity prices and if there is a soft landing in the US oil prices should stay where they are. As long as oil remains above $20 per barrel Russia will remain a good story.
"Turkey is very dependent on domestic developments. Interest rates have come down from around 110% to under 30% and the IMF program is being implemented. The market has performed very well over the last 12 months but has recently declined. There are a few persistent problems - inflation remains stubborn and some privatisations have been delayed. If the fundamentals turn more positive there could be significant upside. However if the news is bad we could see some downside."
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