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1 September 2011

Grin and Bear it


Business New Europe

Like bne's 2009 fund survey, the performance of funds investing in our region this past year was, to borrow footballing terminology, a game of two halves. The difference this time was that the second half of the year (which runs June 30, 2010 to June 30, 2011) was much worse, not better, than the first. As the debt crises in the US and Eurozone began to take their toll on economic growth and investor sentiment in the latter half of the period that this survey covers, the performance of the funds invested in Central and Eastern Europe and the Commonwealth of Independent States (CEE/CIS) consequently dropped off.

The rekindling of the crisis in the first half of this year forms the mirror image of the 2009 fund survey, when the financial meltdown in the autumn of 2008 caused markets to tank, before they began a comeback in the first half of 2009. "In the first half of this year, it's been all about the euro, the US debt and the global situation – it's much more focused on external factors," says Alexandre Dimitrov, who heads up Erste-Sparinvest's CEE equities team. "Last year in the second half, we were much more bullish, with financial results and earnings very good."

Looking at some of the reversals in fund performances, Troika Dialog's "Potential" equity fund grew 41.3% for the whole of the June 2010-June 2011 period, but actually fell 2.6% between January and June this year; Prosperity Capital's flagship "Quest" equity fund grew 43.9% for the year period, but only 7.7% between January and June this year; Erste-Sparinvest's Ringturm Osteuropa fund returned 22.8% over the year period, but just 2.2% between January and June this year; and Deutsche UFG's "OFG Invest – Balanced" fund rose 10.5% for the year period, but fell 2.0% between January and June this year.

These global fears have, needless to say, been reflected in the huge flows of money out of funds – a reversal of the huge inflows that were seen in 2010. For the year, investors have taken out about $14bn from emerging market stock funds (compared with the $45bn that left the EM stock fund world during the 2008 crisis). By the end of August, Emerging Europe equity funds had extended their current outflow streak to 15 straight weeks, with the week ended August 10 described by the fund tracker EPFR Global as a "brutal week" that "conjured up memories of 2008".

By contrast, emerging market bond funds were cementing their "safe haven" status in August. In the week ended August 2, when US equity and bond funds posted their biggest outflows since last year, emerging market bond funds took in over $1bn, with those focusing on local currency debt enjoying their best week in over a year. "The positioning of our [ESPA Bond Danubia] fund is for the moment cautious, especially in light of the risk of external factors, with a focus on countries with no major imbalances and good local demand, like Poland and Russia," says Christian Gaier, senior fund manager for Erste-Sparinvest.

The other major trend has been that Russia-focused funds have outshone other regional funds; all four winners in this year's survey are Russian fund management firms with local funds (see below). The reasons for this aren't hard to find: Russia's economy is still heavily influenced by the oil price rather than the exports to Germany that Central Europe relies on, and the oil price has been very much part of the commodity boom; its banks are not to the same extent owned by or exposed to the creaking western banks; its economic fundamentals are more robust. "The expected government debt/GDP ratio is 9% in 2011; the international reserves are above $530bn, which is more than 3x coverage of all government debt; the expected budget deficit for this year is 1.3% of GDP, far below the level of the US and many countries in Europe; growth of consumption is robust at 5.3% on year for the first half of 2011," lists Vladimir Tsuprov, chief investment officer at BNP Paribas Investment Partners in Moscow.

It was a tough year for real estate funds, though bright spots included Russia, which hosted the winning fund for this year's real estate category, and Hungary, whose office market is proving to be an attractive place to invest money for many funds. "The yield we see in the Hungarian office market is about 7.5-8%, depending on the length of lease and the tenant – it's quite a stable rate in Hungary right now, but still only few transactions on the market," says Balazs Pazmany, portfolio manager of the Erste Open-ended Real Estate Fund, which had a return of 6.5% for the period surveyed. 

And this year's winners are…

bne 2011 Best Equity Fund:
VTB Equity Fund with a 47.0% return

bne 2011 Best Fixed-Income Fund:
Troika Dialog - High-Yield bonds with a 26.3% return

bne 2011 Best Balanced Fund:
VTB Balanced Fund with a 37.3% return

bne 2011 Best Real Estate Fund:
Renaissance - Zemelny fund with a 28.3% return

bne 2011 Best Equity Fund

The winner of this year's best equity fund is VTB Capital Asset Management's VTB Equity Fund, which returned 47.02% over the year period. This open-ended investment fund is incorporated in Russia, and its aim is to seek long-term capital appreciation through investing in a diversified portfolio of Russian companies with high growth potential, according to Vladimir Potapov, head of Portfolio Management Business at VTB Capital Asset Management. "We are pleased that VTB Equity Fund and VTB Balanced Fund have been named '2011 Best Equity Fund' and '2011 Best Balanced Fund' respectively. We would like to thank Business New Europe for the high appraisal and recognition of VTB Capital's activities in asset management," says Potapov.

bne 2011 Best Real Estate Fund

The winner in the real estate category is Renaissance Group's Renaissance - Zemelny fund with a return over the period of 28.3%, quite exceptional given the difficult market conditions in this area. "We are very proud that, for the third time in a row, one of our real estate funds has been recognised as the '2011 Best Real Estate Fund'. This year, the recognition was received by Renaissance Land fund, which demonstrated a return of 28.3% for the evaluated period. Such an excellent result has been achieved through the superior efforts of dedicated professionals, careful selection of investment opportunities whose value appreciated significantly with the recovery of Russian real estate market, active management of the fund's assets, and absence of leverage. We are confident that the shift in investor focus to emerging markets represents a major opportunity in the Russian real estate sector, and the funds that perform will be enormously successful," says Ekaterina Konstantinova, CEO of Renaissance Real Estate.

bne 2011 Best Fixed-Income Fund

The winner of the fixed-income category is Troika Dialog AM's Troika Dialog - High-Yield bonds fund with a 26.32% return. "Despite the challenging market conditions presently facing investment managers, we are pleased that our funds continue to outperform the benchmarks and deliver exceptional returns for our investors. We continue to see solid fundamental value in the emerging markets and are absolutely convinced in the compelling investment case of our investment universe. As a leading local investment house, we will continue offering our best on-the-ground expertise and offer best and most up-to-date investment solutions in Russia and the CIS space," says Anton Rakhmanov, managing director at Troika Dialog AM.

bne 2011 Best Balanced Fund

VTB Capital Asset Management's VTB Balanced Fund is this year's winner in the balanced fund category with a 37.30% return for the year. According to VTB, the fund is an open-ended investment fund incorporated in Russia. The fund's investment objective is to achieve long-term capital growth and stable income stream from investing its assets in a balanced portfolio of highly liquid debt securities of Russian companies as well as equity securities to diversify the investment risk for investors.
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