Quick Take:With a significant exposure in Russia and Eastern Europe, the Driehaus European Opportunity Fund (DREOX) has been outperforming its European stock fund peers by a wide margin. Managed by Ivo Kovachev, the fund delivered an average annualized return of 13.7% for the three years ended October 31, versus a loss of 11.3% for stock funds that invest specifically in Europe.
Year-to-date through November 15, the fund has edged down just 0.30%, while its benchmark, the MSCI Europe Index, has lost 18.9%. In calendar 2001, it dropped 21.5%, just about paralleling the index, which gave up 21.2%. The $26-million portfolio typically holds 70 to 80 stocks.
Kovachev has managed the fund since April 2001. A Bulgarian by birth, Kovachev is based in Prague, Czech Republic, the geographical heart of Europe. The fund began operations on Dec. 31, 1998, and is rated 5 Stars by Standard & Poor’s.
The Full Interview:
S&P: How do you select stocks for the fund?
KOVACHEV: We are bottom-up growth investors, seeking stocks with such classic growth characteristics as accelerating sales and earnings growth and upward earnings revisions, etc. It has been difficult to find such stocks in this current climate, but we have had some success in finding high-growth companies in certain niche industries.
S&P: Can you invest without regard to cap size?
KOVACHEV: We are an all-cap fund, but based on our investment criteria, it is easier to find `growth’ among the smaller and mid-cap sectors, so we tend to be focused there. However, we do contain such notable large-cap stocks like Vodafone Group (VOD) and Koninklijke (Royal) KPN.
Our focus on small and mid-cap stocks has helped our performance in 2002. During the first half of the year, small and mid-cap stocks outperformed their larger-cap counterparts. This was partly because large caps were fully or over valued, forcing investors to look elsewhere for growth, namely in the smaller-cap arena.
S&P: What are your top country allocations?
KOVACHEV: As of Sept. 30, 2002: Great Britain, 28.2%; France, 9.0%; Russia, 6.8%; Spain, 6.1%; Netherlands, 5.7%; Italy, 5.3%; Germany, 4.5%; Switzerland, 3.9%; Israel, 3.4%; Finland, 3.3%; Austria, 3.2%; Belgium, 2.9%; and Sweden, 2.8%.
Although Britain is our largest allocation by far, our exposure there actually represents a slight underweight relative to our benchmark, the MSCI Europe Index. However, we think the U.K. economy is quite strong, especially compared to France and Germany, each of which are underweighted in our fund. In Britain, the currency is robust and retail sales numbers are impressive. We have performed very well with some small and mid-cap British retailing names.
S&P: Relative to your benchmark, in what countries are you significantly overweighted?
KOVACHEV: Given that Russia and Eastern Europe are not components in the index at all, we are most overweighted in these regions.
S&P: Russia has a small stock market, but it has performed well.
KOVACHEV: The recent success of the Russian stock market has been based largely on its oil economy. The price of oil has been high since they emerged from their economic and currency crisis of 1998. Thus, with a relatively cheap ruble and high oil prices, a lot of hard cash has entered the country, creating a very attractive macro-economic backdrop. Russian energy companies have benefitted greatly from high commodity prices, radical restructuring, and increased production.
In addition, the Russian president Vladimir Putin has successfully persuaded Russian corporations to adopt Western-style business management practices, such as restructuring, corporate governance, and accounting policies — that is — everything that is designed to improve earnings and to attract the interest of foreign investors.
Even more important, as the Russian economy has appeared to stabilize, Russian consumers have started to show some confidence in their country. We also like Russia’s burgeoning telecom sector, which can be viewed as a `consumer play.’ In fact, telecoms represent our largest industry exposure in Russia.
S&P: Tell me about the emerging European countries like Poland, the Czech Republic and Hungary?
KOVACHEV: The fundamental premise of investing in these countries is that they will soon be allowed entry into the European Union (EU). In fact, these countries are already benefiting tremendously from the convergence of their economies with those of the EU. Officially joining the EU will continue to be a positive development for them.
Hungary, Poland and the Czech Republic, which will likely join the EU in 2004, are enjoying a low interest rate environment, low inflation, high equity valuations and increased foreign investment. We have already seen how convergence with EU has helped the markets of Spain, Portugal and Greece.
S&P: Do you consider Turkey and Israel as part of your investment universe?
KOVACHEV: Yes, we do. In 1999, Israel was a great place to invest, particularly their high-tech stock sector. But since then, they have faltered badly, partially due to their deepening political situation as well as the blow-up of technology.