This article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.
BlackRock Emerging Europe
This is the only fund in the Morningstar Emerging Europe Equity sector with a positive analyst rating. The Bronze Rated fund is run by emerging markets specialist Sam Vecht, who has worked on the emerging-markets desk at BlackRock for the past 17 years, specialising in Europe, Middle East and Asia stocks.
Morningstar analyst Lena Tsymbaluk says she has a high opinion of Vecht’s knowledge of the Emerging European market and his ability to consistently apply his well-defined process.
The investing process blends top-down and bottom-up research. With the input from the team’s macro economists Gordon Fraser and Denis Kalugin, Vecht decides on the fund’s country allocation at weekly meetings where they establish a country’s relative attractiveness based on its macro factors.
Macro analysis is a more dominant factor when the outlook is negative. The macro process is composed of three parts: political assessment, macroeconomic analysis, and appraisal of the valuation of a country’s market.
Once the general country weights are decided, the team identifies stocks with growth opportunities, with an emphasis on cash flow growth, as they believe this is ultimately the driver of share prices over time. They seek to identify companies that can translate top-line revenue growth to free cash flow and invest in these companies when they deem that their cash flow stream is undervalued.
Invesco Perpetual Emerging Europe
This fund earns a five-star performance rating, with a three-year annualised return of 17%. The fund is 62% Russian stocks, compared to the benchmark of 57%. The second highest country allocation is Poland at 13%, and Greece, Hungary and Turkey all have 4% a piece.
The largest holding in the fund is Sberbank of Russia, which has held the fund back – losing 18% in value year to date. The second largest holding has fared considerably better, Lukoil is up 17% since the beginning of the year and still looks cheap at a price/earnings multiple of 6.4%.
Unsurprisingly for an emerging Europe fund, the largest sector in the portfolio is oil and gas, at 35% of stocks, followed by commercial banks at 15% and metals and mining shares at 11%.
The fund is run by Nicholas Mason, who joined Invesco in 2006 as a senior analyst within the Emerging Markets Equities team, specialising in Latin America, taking on fund management responsibilities within the team in August 2008.
Schroder Emerging Europe
This fund earns a five-star performance rating, with a three-year annualised return of 17%. Fund managers Mohsin Memon and Rollo Roscow has chosen to underweight the benchmark when it comes to allocation to Russia – although at 50% of the fund, it still makes up a sizable proportion.
The pair allocate 14% to Poland, 9.5% to Turkey, 8.3% to Hungary and 7.3% to Greece, with small investments in Romania, Ukraine, Czech Republic and Kazakhstan supplementing the portfolio.
As with both the previous funds, the largest sector weighting is oil and gas companies, which make up just over a third of the portfolio, with commercial banks making up another third.
The largest holding is Lukoil, followed by Sberbank and Tatneft which is an oil and gas company which has returned an impressive 27% year to date.
The co-managers took over the fund in January 2014. Memon has worked at Schroders since November 2010, while Roscow joined the asset manager in August 2008.
