08.09.2011

Investment Manager: Raiffeisenbank a.s.

Portfolio Manager: Martin Zezula

(September 2011)


How has the Fund performed recently compared to its peers and are there any particular stocks or areas where the Fund is doing well?

Funds focusing on Emerging European stocks typically have a majority of assets allocated in Russia and Turkey, following their biggest market cap in the region. The focus of the WIOF Emerging Europe Performance Fund is different - namely Central and South Eastern Europe with a maximum 10% investment in Russia and none in Turkey. It is a niche product and the unique nature of the Fund makes peer comparisons rather unrepresentative. But looking at performance from the beginning of the year to the end of August, the Fund lost 17.7% versus a median fall of 18.1% of the peer group under our monitoring (individual fund performances in EUR ranging from -11.7 to -27.0%).

 

Some analysts have recently drawn attention to the fact that emerging markets do not face the same kind of fiscal problems that developed Western economies do. Is this the case also in Emerging Europe and does this automatically make it a good place to invest in?

With the exception of Hungary, Poland and Croatia, countries within Emerging Europe have debt-to-GDP ratios below 50%, whereas the same figure for Germany is 79% and, for example, Greece and Italy’s figures are way above 100% at the moment. Hence, the need for austerity measures is not as urgent as in Western Europe, leaving better prospects for further economic growth. But since many Emerging European countries are export-oriented, back-pedaling in the developed world has of course had an impact on their economic performance.

 

What are the specific characteristics of Emerging Europe markets compared to other emerging markets e.g. Latin America, Emerging Asia, etc.?

The key theme of the region for the past approximately 20 years is convergence, i.e. transition from centrally planned economies to a functioning market economic system and developed countries’ standards. Furthermore, Russia, with its vast commodity reserves, directly influences the global economy and capital markets.

 

Many funds focused on the Emerging Europe region have significant exposure to Russia and Turkey. Your fund does not follow this strategy. Could you explain this?

Our intention was to make the Fund unique. There are a large number of funds investing predominantly in Russia and Turkey, but few opportunities to participate in growth in Central Europe, the Baltics, countries of the former Yugoslavia, Romania and Bulgaria.

In terms of sector exposure, banks are by far the portfolio’s biggest holdings. What is so attractive for investors about the region’s banking sector?

Banking stocks currently form more than 30% of the Fund’s NAV, in line with their share of market capitalisation and representation in stock indices. For example, in Poland, the Czech Republic, Romania and Serbia, the financial sector’s weighting as part of local indexes is more than 40%. Regional banks are relatively healthy and well capitalised and exposures to peripheral debt problems are small. For example, according to the results of Czech National Bank stress tests announced at the end of August 2011, local banks would survive even an extremely negative scenario involving, among other things, a complete write-off of PIIGS (Portugal, Ireland, Italy, Greece and Spain) bonds held. Given these facts and current valuations we see Emerging European banks as attractive.

 

Some of the region’s markets are classed as “advanced emerging markets” by the FTSE group. What significance does this term have for investors looking at these markets and does this classification influence your stock selection?

Such a classification takes into account primarily national income and development of market infrastructure. Within Emerging Europe, Poland, the Czech Republic and Hungary (which together accounted for more than 50% of the Fund’s NAV at the end of August) are classed as “advanced”. Nevertheless, we look much more at market liquidity, which is much higher in the above mentioned Central European countries in comparison to South Eastern Europe or the Baltics, than at whether we are investing in an “advanced” emerging market or a “secondary” one.

 

To what extent are Emerging Europe’s markets affected by events and developments on developed markets e.g. the Eurozone debt crisis, QE1,2?

Given that we live in a globalised world as well as the relatively strong economic ties between Emerging Europe and the Eurozone, events on developed markets do influence regional stock exchanges. However, the competitive advantage of Emerging European countries is their local currencies, whose depreciation could support economies in instances of faltering growth, market turmoil etc.

 

Looking ahead, what are the economic and market prospects for the region for the rest of this year?

Since the current market development is to a large extent dependent on politicians and investor sentiment, it is quite hard to formulate an outlook for the months ahead. Our baseline scenario remains bullish, because macro data still points to a continuation of weak growth rather than a recession, which has already been massively priced-in by the market. Within the region, we favour Russian stocks, due to very attractive valuations and their commodity-linked nature. We are also strongly overweight in South-Eastern European stocks, which we expect to be dragged up by an improving macroeconomic and political outlook, evidenced by sovereign rating upgrades, progress in EU accession etc.

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IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 20th December 2002 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WIOF is a suitable investment for them.