Baring Emerging Europe, managed by Matthias Siller (pictured), has announced its interim results for the six months ended 31 March 2016. During the period, it provided an NAV total return of 18.2% beating its MSCI EM Europe 10/40 benchmark index, which returned 14.3%. The share price total return was 12.2%, slightly underperforming the benchmark, which reflects a widening of the discount from 8.9% to 13.8% during the period. The company has also announced that the performance fee component of the management agreement was discontinued from 31 March this year. The base management fee remains unchanged.
In a period that its chairman describes as being full of volatility and surprise, the company’s NAV outperformance of the index was influenced by the use of gearing and by the weakness of sterling. Overall, the company says that the period up to the end of January was very weak with a parade of terrible news, but this reversed sharply and allowed the lost ground to be more than made up. In terms of individual country performances, the managers say that these delivered very different investment results during the period, which they say reflects the fact that the economic cycle is at different stages across the region. However, they say that they can identify a broader trend of improving domestic demand and investment activity across the region and highlight that Central European states such as Hungary, the Czech Republic and Poland have continued to benefit from solid export performance, improving domestic consumption and investment in infrastructure projects.
The managers also say that Russia is slowly emerging from a protracted recession and has navigated economic sanctions stemming from the annexation of Crimea and a sharp fall in the price of oil better than originally feared. Economic growth in Turkey has accelerated for the last couple of quarters, helped by the fact that the country is one of the world’s largest beneficiaries of lower energy prices. The managers say that, as the import bill for oil keeps falling and the current account deficit shrinks, they see potential for lower inflation expectations thanks to the effective leadership of the Central Bank and continued progress towards economic reform.
In terms of portfolio activity, Rusagro, a long-term portfolio holding and key beneficiary of the demand for domestic goods in the Russian agricultural sector, was sold. The managersa say that thei was after substantial outperformance which took the stock beyond their price target. Similarly, the position in Kernel, a leading Ukrainian agriculture producer, was sold after a strong run. The managers say that markets had fully acknowledged the firm’s export potential and balance sheet strength. As a counter, ahares in The Moscow Stock Exchange were added to the portfolio. The managers say that this reflects the company’s key position in Russia’s developing financial infrastructure.
In Central Europe, the managers sold Polish companies Uniwheels (automotive industry) and Eurocash (consumer staples) as they strongly outperformed and reached price targets. The managers also chose to participate in the IPO of the Czech water and soft drink producer Kofola as they believe in its potential to grow across the region. The managers also added to existing positions in low-cost airline Wizz Air, shoe retailer CCC and Cyfrowy Polsat, the largest Polish media, telecoms and internet operator.
The managers say that the Polish financial sector underperformed substantially as the newly elected government increased the tax burden on banks and insurance companies. The managers saw this as a tactical opportunity to increase the position in Alior Bank, as they believe in the potential for consolidation in the banking sector. In Turkey, one of the best performing markets globally over the period, the substantial weighting in banks was reduced as valuations moved closer to fair value. At the same time, the managers added Dogus Holding, the Volkswagen car dealer, which they say is one of the main beneficiaries of solid domestic demand.
The managers say that the portfolio’s exposure to Greece remains very limited. They invested in the National Bank of Greece when the Greek banking sector was recapitalised in December. The recent sale of the lender’s Turkish subsidiary, Finansbank, at more than book value, provided the National Bank of Greece with additional equity.
In terms of outlook, the managers say that, after a challenging few years in emerging market equities, Emerging European markets have seen a dramatic shift in investor attitude, accompanied by substantial inflows to the asset class. Furthermore, they believe that the region’s stock markets stand out on valuation measures, and the growth and operational performance of companies has been impressively resilient in face of often challenging economic, regulatory or political developments. At the company level, the managers say it is encouraging to see corporate governance levels improve steadily, which they think is a key contributor to increasing investor demand in the region.
Baring Emerging Europe NAV outperforms whilst its performance fee is cancelled : BEE