In the search for to diversify assets in clients’ portfolios, some advisors look to overseas investments that may provide exposure to markets that do not typically correlate with other portfolio allocations. These advisors may allocate a portion to emerging markets, or to broad international funds. Many emerging markets or international funds will select investments from markets on any continent, but the $63.5 million Eastern European Equity Fund (VEEEX ) concentrates on Eastern Europe only. This fund had been known as Vontobel Eastern European Equity Fund until November, 2004, but was reorganized under The World Funds, Inc. of Richmond, Virginia. Commonwealth Capital Management is an advisor for the fund, and Vontobel Asset management is a sub-advisor.
Eastern Europe is attractive versus Western Europe because in Eastern Europe taxes are lower, and because unions are not as strong labor costs are lower and more flexible, says Guenter Fashang, portfolio manager for the fund at sub-advisor Vontobel Asset Management in Vienna, Austria. For example, in Russia the flat tax on personal income is 13%; “in Romania there is a new government since the beginning of the year that has introduced a flat tax of 16%, where in Germany or Austria we have top income tax rates of 50%. In countries like Romania, Bulgaria, and Ukraine you can hire industrial workers for between $100 and $200 per month,” according to Fashang, adding that “Eastern Europe is growing at between 5% and 10% GDP growth per year, depending on the country.”
Fashang makes the case for investing in Eastern Europe versus other emerging markets, pointing out that there is infrastructure in place, a very good education system, a young, educated workforce in place that is still quite poor and very motivated to work. He compares post-communist Eastern Europe to Western Europe after the war, where everything had to be rebuilt. Industrial investment is heavy in Eastern Europe as well, with Peugeot, Renault investing in plants in the region.
This fund typically holds about 40 stocks, providing investors with a very rich slice of stocks and sectors in Eastern Europe. It is not for everyone, though. Investors in this fund need to feel comfortable with a portfolio where the top 10 stocks make up 60% of the portfolio, and with sectors that are highly invested in telecommunications (35.21% as of September 30th), and banking (21.61%). “We really want to focus on the stocks that we cover and on our expertise, we don’t want to spread into too many stocks because if you have 60 or 80 stocks, you spend a lot of time on small positions and the impact on the performance is really limited, so we try to focus on a smaller number of positions, but those stocks are followed in detail,” says Fashang. “Eastern Europe has about 100 liquid stocks, and out of that 100, there are probably 40 or 50 where you have daily trading of between 500,000 to 1 million Euros and we cannot build huge positions in such stocks where the liquidity is limited.”