Quick Take: While investors remain wary of the volatile emerging markets, the performance of Russia and Eastern Europe cannot be denied. Julian Mayo, investment director of Charlemagne Capital Ltd., a London-based asset manager specializing in emerging markets, sees compelling reasons to invest in these blossoming countries.
For the one-year period ended in March, the $222-million US Global:Eastern European Fund (EUROX), subadvised by Mayo’s firm, soared 109.9%, versus a robust 77.1% for the average regional market/emerging market portfolio. For the three-year period, the fund gained an average annualized 48.8%, versus 16.7% for the peer group. Andrew Wiles and Stefan Bottcher serve as the fund’s portfolio managers. Charlemagne has overseen the fund since its inception in March 1997.
Though the portfolio has exhibited somewhat lower volatility than its peers over the past three years, risks still remain. The fund invests only in a handful of transitional countries that can still be subject to political risk and market selloffs. As a result, it behaves differently than a diversified Europe or emerging markets portfolio. While performance has been impressive, turnover is significantly higher than the competition, and expenses run at 2.90%, versus 2.13% for its peers.
The Full Interview:
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S&P: Can you describe your stock selection process?
MAYO: We are bottom-up stock pickers with heavy emphasis on fundamental analysis and risk-reward profiles. Although there are thousands of public companies trading in Eastern Europe and Russia, the universe of stocks that can be invested in is considerably smaller, given the illiquidity of many equities. We select stocks from a pool of about 150 names.
We are primarily value investors. We like buying stocks that are trading at a 30% to 40% discount to full value. We visit companies in the fund four times a year. The bulk of our investments are in Russia, Hungary, Poland and the Czech Republic. We consider macroeconomic factors, including currency rates, GDP growth, interest rates, and political stability.
S&P: When do you sell a stock?
MAYO: We typically sell or trim back a holding when we think its price has reached full value. We will likely dispose of a stock entirely when its fundamentals deteriorate, or something happens to invalidate our original investment premise.
S&P: What are your largest holdings?
MAYO: As of March 31, our top ten holdings are Cesky Telecom A.S., the principal telecommunications operator in the Czech Republic, 6.8%; CEZ AS, a Czech electricity generation company, 6.7%; JSC MMC Norilsk Nickel, a Russian nickel mining firm, 6.5%; Sberbank RF, a Russian savings bank, 5.9%; OTP Bank Rt., the largest retail bank in Hungary, 4.8%; Bank Austria Creditanstalt AG, an Austrian bank, 4.4%; Vimpel Communications (VIP), a Russian wireless telecommunications provider, 4.3%; Mobile TeleSystems OJSC (MBT), a Russian mobile cellular communications services provider, 4.2%; Sibneft, a Russian integrated oil producer, 4.1%; and Sibir Energy PLC, a U.K.-listed oil and gas company with all of its operations in Russia, 4.0%.
These ten holdings represent almost 52% of the fund’s assets. They reflect our willingness to place big bets on our favorite picks.
S&P: What are your top sectors?
MAYO: As of March 31, our top industries were integrated telecom, 12.4%; diversified financial services, 11.8%; banks, 10.9%; integrated oil & gas, 10.6%; metals & mining, 9.5%; wireless telecom services, 8.4%; oil & gas exploration & production, 7.1%; electric utilities, 6.6%; and consumer finance, 5.9%.
S&P: What are your top countries?
MAYO: As of March 31: Russia, 43.5%; Czech Republic, 16.4%; Poland, 11.3%; and Hungary, 6.7%.