The £119m Pictet Eastern Europe fund aims to invest at least two-thirds of its portfolio in shares of companies whose main business or headquarters are in eastern Europe. This includes Russia, Turkey, Poland, Hungary, the Czech Republic and Greece.
The portfolio was launched in November 2007 and is managed by Hugo Bain and Klaus Bockstaller, with holdings in approximately 64 names with a bias towards Russia.
Mr Bain notes the investment process of the fund has remained relatively unchanged since its launch, with the managers taking a value-biased approach. He explains: “We try to focus on asset valuations. There is a particular part of the process called Pictet Value, which is a proprietary database Pictet uses within its emerging market team that focuses on the replacement cost of assets. This has been one of the focus points of the fund since inception.”
The macroeconomic environment can affect the process, with the manager noting that during the course of a business cycle roughly 70 per cent of the process is bottom-up stock picking and 30 per cent is top-down. But, “that varies enormously from year to year”, he points out.
Perhaps unsurprisingly the fund sits at a six out of seven on the risk-reward scale in its key investor information document, while the ongoing charges are 2.3 per cent.
The fund has struggled in terms of performance in recent years. For the five years to November 20 it recorded a loss of 12.32 per cent compared with a 1.88 per cent loss for the MSCI Emerging Markets Europe 10/40 index. However, in 2013 it managed to beat its benchmark, albeit while still recording a loss of 3.22 per cent.
Mr Bain explains the big drag on performance has been geopolitical factors, in particular the situation between Russia and Ukraine. “There have been some changes to the portfolio in the past six months that are predominantly to do with the Russian side of the portfolio,” he says.
“Because we are very much value biased, it means we are predominately overweight Russia, but for periods this year we’ve been close to neutral on Russia, which is quite an unusual situation. During the past few years we have very much seen it as the best value market, with some of the most interesting stocks in our universe.
“But the geopolitical risk was such that we felt it was impossible to take the normal level of risk we have done in the past with regards to Russian exposure.”
With more than 50 per cent of the portfolio exposed to the country, the combination of a falling Russian stockmarket and exposure to the “value end” of the market – which has struggled – have weighed on performance. “Russian mid caps have been bad performers this year,” he says. “The reason for that is predominantly liquidity. There have been some stocks in Russia where the earnings outlook has not changed significantly, but because there have been quite a lot of outflows from the Russian market, particularly from active fund managers, these stocks have been slightly caught by people taking money out.”
However, there has been some upside with some of the value plays in the materials sector, such as MMC Norilsk Nickel, the world’s largest nickel producer, and Rusal, the biggest aluminium producer. Other bright spots in the portfolio include strong performances from Turkish banks and other Turkish equities as the market has rallied.
Looking ahead, the two key factors affecting the outlook for Russia is the geopolitical situation and also the oil price, with both the Russian market and the currency tending to have a high correlation to the oil price, Mr Bain says. “Into 2015, the outlook for Russia is slightly positive,” he predicts. “If oil prices reach a level in 2014, then the rouble will have finished its depreciation and in 2015 you’ll have a different environment.”
On the geopolitical side, he points out the European sanctions will need to be re-ratified in July 2015, so if the situation does not get significantly worse, there is the possibility these could ease.
“If that is the case, then looking at valuations in Russia that are extraordinarily stressed you have an interesting combination of catalysts for Russian equities in 2015.”
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct:
Hugo Bain and Klaus Bockstaller took over this fund in 2009, since which time it has marginally underperformed its benchmark. Like many funds specialising in the region it has had a tough year to date, and much of the fund’s longer-term underperformance is derived from this period. A core fund for exposure to the region, though possibly there are cheaper alternatives, such as passives.
