Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by David Reid, Manager of the BlackRock Emerging Europe Trust (BEEP).
Hello David.
David Reid: Hello.
Wall: So, emerging Europe, the biggest component of that part of the world is, of course, Russia. Russia has had a pretty difficult 12 months. Your fund has gone down a bit in the last 12 months and then up again. How much has Russia played a part in that performance track?
Reid: Well, Russia is the most significant part of our universe, but it's not the only part of our investment universe. We have other countries such as Turkey, Poland and Hungary which are also really significant.
Russia, of course, has suffered as a result of the fall in the oil price and then benefited from the subsequent rebound. I think it's important to point out that the other countries in the region, particularly Turkey and Poland, are actually net importers of oil and oil products and as a result, the overall effect on the asset class from oil is actually reasonably balanced in terms of the economic impact.
Wall: Having said that, you are underweight in energy, aren't you? You've made that tactical decision not to have that much money in the stocks that can be affected by the oil price?
Reid: Yes. Well, I this is an important point to make about the nature of the benchmark. We moved a couple of years ago to a focused and unconstrained investments approach in the Trust and one of the main reasons we did that is because the sort of traditional legacy sectors of energy, financials and materials, which are normally a very large part of emerging markets' benchmarks, those are very large parts of the benchmark and we felt that they didn't fully represent the opportunity set.
So, whilst in the emerging Europe space those sectors would account for about 60% of the benchmark, if you include all the other companies, which for technical reasons excluded, perhaps because they are listed abroad or incorporated abroad, then those three sectors fall to around 40% of the opportunity set and there are many other very interesting areas, one of those being technology, which don't appear at all in the benchmark, but we think are very exciting.
Wall: And you've got 8% in technology, haven't you?
Reid: Yes, slightly less.
Wall: What sort of opportunities are you seeing there and what's driving those? Is it very much company-specific or is it changes in demographics, changes in the macro picture?
Reid: Well, I think the human capital in emerging Europe is a really key feature for technology. A lot of the global technology firms were actually started by Eastern Europeans and increasingly over time we've seen that intellectual capital come up with domestic firms which are very capable and very strong.
A couple of highlights I would give you. One would be Mail (MAIL) which is essentially the Russian version of Facebook and that is the dominant social network by far in the region and yet has a market cap of only about $4 billion which compared to the Facebooks of this world is incredibly tiny and it grows at a very fast rate.
Wall: To that end to the fact that your benchmark unconstrained, what then would you say to the point you have 49% in Russia? It still is a very much a large part of your fund, isn't it?
Reid: Yes. Well, it's the largest market and so naturally there are going to be a greater number of opportunities there on average over time. The other thing that's very attractive about Russia is that it does show an incredible amount value at the moment.
A lot of the Russian blue-chip companies are paying dividend yields of 5%, 6% and these are very, very sustainable even despite the lower oil price because many of these companies they may have revenues that depend on commodities to a certain degree but their costs are denominated in rubles and the ruble actually fell further than the oil price did. So, as a result, their profitability has been maintained and so actually those companies despite what you may read in the headlines are in a reasonably healthy state.
Wall: And I suppose politics isn't PLC?
Reid: So, yes, there is obviously – politics is a feature of emerging markets across all emerging markets, not just Russia and it's something which is an important part of our investment process. We do try to understand it and understand the risks around it.
But in terms of the situation with Russia specifically, things have been on a fairly stable track over the past few months compared to where we were previously. And I think it's important to note that the U.S. and the European governments do have now an open dialogue with Russia over Ukraine.
Wall: David, thank you very much.
Reid: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
