Oct. 4, 2004 — Unlike most funds that invest in the nascent markets of Eastern Europe, the T Rowe Price Emerging Europe & Mediterranean Fund (TREMX) includes such outlying countries as Turkey, Egypt and Israel in its mandate. London-based Christopher Alderson and his team of six analysts invest in stocks of these regional companies, regardless of market-cap size, using a bottom-up, growth-at-a-reasonable-price (GARP) methodology.
Alderson has delivered impressive returns during his tenure. For the one-year period through August 31, the fund gained 28.9%, versus 25.5% for the average emerging markets stock fund. For the three-year period, the fund climbed 28.0% annualized, versus 16.1% for its peer group. In short, this portfolio has beamed as developing markets in the regions it invests in were strong in 2003.
However, investing in emerging markets is tricky, with high volatility and questionable liquidity more the norm than the exception. To illustrate the volatile nature of these markets, consider that the portfolio is up 2.7% year-to-date through August 31, after soaring 69.2% in calendar 2003, and rising a tepid 3.7% in 2002. The variability of returns among emerging markets funds, generally, means that they should be approached with caution.
Alderson says he seeks to control risk by keeping a concentrated portfolio of his ‘best ideas’ generated from in-house research and meetings with company managements. The fund currently has only 33 positions out of a universe of investible stocks that numbers around 250. Highly concentrated offerings, however, can carry a lot more risk. It should be noted that the fund is more volatile than its peer group based on its higher three-year standard deviation.
As of August 31, the fund’s top ten holdings are Lukoil, the Russian oil giant, 10.5%; Teva Pharmaceutical Industries Ltd. (TEVA), an Israeli drugmaker, 9.2%; AO VimpelCom, a Russian wireless telecommunications provider, 5.1%; Bank Hapoalim, an Israeli bank, 4.9%; Orascom Construction Industries, an Egyptian building contractor, 4.6%; Mobile TeleSystems OJSC (MBT), a Russian mobile cellular firm, 4.5%; PetroKazakhstan Inc. (PKZ), a Kazakh oil and gas company, 4.4%; Orascom Telecom Holding, an Egyptian telecommunications firm, 4.3%; MMC Norilsk Nickel, a Russian mining concern, 4.1%; and Makhteshim-Agan Industries Ltd., an Israeli agrochemicals business, 3.5%. These ten stocks represented more than 55% of the fund’s total assets.
As of August 31, the fund’s top sectors are telecommunication services, 21.9%; financials, 19.8%; energy, 17.7%; information technology, 10.3%; health care, 10.2%; materials, 7.6%; industrials and business services, 4.6%; consumer discretionary, 3.3%; and consumer staples, 1.4%.
The countries Alderson can invest in present a variety of economies in various stages of development. Israel and Russia currently dominate the fund, accounting for 32% and 27%, respectively, of the its assets as of August 31. However, Alderson is quick to move money around if he sees better opportunities. Indeed, one year ago, Russia (36.6%) and Turkey (23.1%) owned the lion’s share of the fund’s assets.
Alderson’s exposure to Israel has more than doubled over the past year. The country is enjoying a boom in the domestic economy, despite the pervasive threats of political chaos and terrorism. An “emerging market” in name only, Israel boasts an array of well-run companies, particularly in the high-tech sector. Given that many Israeli stocks are dual-listed on NASDAQ, corporate governance is impeccable here.