Reflecting on a decade of investing in Eastern Europe and Russia
East Capital Eastern European Fund – Aivaras Abromavicius
Citywire Pan European Fund Selectors Forum Zurich, May 19-20, 2010
23 May 2010 2
Disclaimer
These notes should not be used as a basis for investment. Information and advice in this publication is based on sources that East
Capital deem reliable, but East Capital can under no circumstances be answerable for the totality or correctness of the information,
or for direct or indirect loss that can occur as a result of mistakes or discrepancies therein. Investment in funds is always associated
with risks. Historic yields are no guarantee of future yields. Fund units can go up or down in value, and there is no guarantee that
investors will get back all capital invested. As East Capital invests in foreign markets, currency fluctuations can affect the funds’
values. Fund information brochures can be obtained from East Capital.
Introduction
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23 May, 2010 44
East Capital
A leading independent asset manager specialising in
Eastern Europe and Russia, founded in 1997
5.7 billion USD in public and private equity
150 employees, out of which 37 investment professionals, 27 nationalities
Offices in Stockholm, Paris, Moscow,
Hong Kong, Tallinn, Oslo, Vienna and Kyiv
Diversified client base across segment and geography
with 450,000 investors from more than 60 countries
12 year track record, highly awarded funds
Independently owned and managed with founders and
main owners active at senior management level
23 May, 2010 55
East Capital investment vehicles
EAST CAPITAL
BALTIC PROPERTY FUND
EAST CAPITAL
FINANCIALS FUND
EAST CAPITAL BERING
RUSSIA FUND
EAST CAPITAL BERING
UKRAINE FUND
EAST CAPITAL BERING
BALKAN FUND
EAST CAPITAL
BALKAN FUND (SWE)
EAST CAPITAL
TURKISH FUND (SWE)
EAST CAPITAL
RUSSIAN FUND (SWE + LUX)
EAST CAPITAL
BALTIC FUND (SWE)
EAST CAPITAL EASTERN
EUROPEAN FUND (SWE + LUX)
EAST CAPITAL CONVERGENCE
EASTERN EUROPEAN FUND (LUX)
EAST CAPITAL BERING
CENTRAL ASIA FUND
EAST CAPITAL BERING
NEW EUROPE FUND
Private equity and real estateAlternative investmentsPublic equity funds (UCITS III)
EAST CAPITAL
POWER UTILITIES FUND
EAST CAPITAL
RUSSIAN PROPERTY FUND
EAST CAPITAL SPECIAL
OPPORTUNITIES FUND
0
10
20
30
40
50
60
2002 2003 2004 2005 2006 2007 2008 2009 2010
East Capital Eastern European Fund MSCI EM Europe Index
23 May, 2010 66
East Capital Eastern European Fund – Performance since inception
East Capital Eastern
European Fund
MSCI EM
Europe Index
Note: As of 31 March, 2010, in SEK
GOLDEN STAR 2004
DAGENS INDUSTRI AND
MORNINGSTAR SWEDEN
LIPPER FUND AWARDS 2006
LIPPER HOLLAND AND
LIPPER EUROPE
LIPPER FUND AWARDS 2007
LIPPER NORDICS, LIPPER FRANCE,
LIPPER AUSTRIA, LIPPER
NETHERLANDS AND LIPPER EUROPE
LIPPER FUND AWARDS 2008
LIPPER EUROPE, LIPPER AUSTRIA,
LIPPER NETHERLANDS,
LIPPER FRANCE
MORNINGSTAR AWARDS 2005
FD MORNINGSTAR
HOLLAND
LIPPER FUND AWARDS 2009
LIPPER FRANCE
23 May, 2010 77
East Capital
Russian Fund
RTS-Index
Note: As of 31 March, 2010, in SEK
East Capital Russian Fund – Performance since inception
0
500
1,000
1,500
2,000
1998 2000 2002 2004 2006 2008 2010
GOLDEN STAR 2001
DAGENS INDUSTRI AND
MORNINGSTAR SWEDEN
GOLDEN STAR 2003
DAGENS INDUSTRI AND
MORNINGSTAR SWEDEN
GOLDEN STAR 2005
DAGENS INDUSTRI AND
MORNINGSTAR SWEDEN
LIPPER FUND AWARDS 2008
LIPPER NORDIC
LIPPER FUND AWARDS 2010
LIPPER FRANCE
GOLDEN STAR 2006
DAGENS INDUSTRI AND
MORNINGSTAR SWEDEN
LA REMISE
DES PYRAMIDES
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East Capital Russian Fund
“The East Capital Russian Fund has returned 1,524% in USD
terms during the past decade (source Morningstar*), which is
561% better than the second best fund and 826% better than the
benchmark index RTS over the same period.”
Investment Team, Style and Process
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23 May, 2010 10
A dedication to research
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Traders (3)
Chief Economist (1) Quantitative Analysts (2)
Analysts (9)
Advisory Committee(7 internal, 3 external)
Portfolio Management Team (6)
One of the regions largest team dedicated to public equity – 24 investment professionals
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Long term approach with focus on convergence and domestic themes
Active stock-picking without index tracking
Strong local presence and in-house research based on frequent company visits
Broad portfolio diversification on all levels (country, sector, company)
Low valuations and high yield
Corporate governance
Core approach
Investment style
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Investment process
BOTTOM-UP Quantitative analysis
Qualitative analysis
Company visits
BOTTOM-UP Alternative ways to gain
exposure to a
development trend
Indirect exposure
Different type of shares
TOP DOWN Identifying right strategy
which are supported by
the long-term
development trends
TOP DOWN Macro-economic and
political analysis
Weighting
RIGHT COMPANY RIGHT INSTRUMENTRIGHT STRATEGYRIGHT REGION
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East Capital Eastern European fund vs. index– 7 of 8 years with outperformance (average 8.8% per year)
12,3%
68,8%
57,0% 56,1%
43,9%
31,9%
-69,9%
100,3%
-3,7%
65,4%
33,3%
47,8%
33,5%28,1%
-68,4%
77,5%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
2002 YTD 2003 YTD 2004 YTD 2005 YTD 2006 YTD 2007 YTD 2008 YTD 2009 YTD
East Capital Eastern European Fund MSCI EM Europe Index
Note: As of 30 December, 2009, USD
23.9% annualized performance since inception (USD)
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
120,00%
Jul-
06
Sep
-06
No
v-0
6
Jan
-07
Mar
-07
May
-07
Jul-
07
Sep
-07
No
v-0
7
Jan
-08
Mar
-08
May
-08
Jul-
08
Sep
-08
No
v-0
8
Jan
-09
Mar
-09
May
-09
Jul-
09
Sep
-09
No
v-0
9
Jan
-10
90-days rolling annualized volatility
GDUEEMEE Index MSCI EM E TR East Capital Eastern European fund
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Note: As of 21 January 2010, USD
East Capital Eastern European fund vs. index– Consistently lower risk
Reflecting on a decade of investing in Eastern Europe and Russia
23 May 2010 16
Observations after a decade of investments in Eastern Europe and Russia
Mainstream investment strategies still focused on blue-chips
– Research availability beyond large caps sparse
– Main growth sectors poorly represented in the index
Opportunities for active managers same as a decade ago
– Valuation discrepancies large between market cap segments
– Large discounts for selected names with double listings
– Preferred shares offer big discounts to ordinaries (and option for potential conversion)
Investors’ (and media’s) view on the region – mostly negative…
– Historically high discount on Eastern European equities compared to BRIC/GEM universe
– Significant upside potential of sentiment change
– A long term investment horizon pays off
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Source: Rosstat, VTB Capital
Sector breakdown of RTS index
Index still poorly captures main growth sectors
Sector breakdown of Russian GDP
O&G
Banks
M&M
Utilities
Retail
Consumer goods
Others
O&G
Financial intermediationM&M
Utilities
Wholesale, retail trade and pers servicesConsumer goods
Others
0%
10%
20%
30%
40%
50%
60%
2002 2003 2004 2005 2006 2007 2008 2009
MSCI Russia vs MSCI EM MSCI EM Europe vs MSCI EM
0%
10%
20%
30%
40%
50%
60%
70%
80%
2002 2003 2004 2005 2006 2007 2008 2009 2010e
MSCI Russia vs MSCI EM MSCI EM Europe vs MSCI EM
23 May 2010 19
Unjustified discount?
Source: Bloomberg
P/B discount P/E discount
The discount on “should“ be in the 10-20% range rather than 30-50%
Perspectives on the allocation to Emerging Markets
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0%10%20%30%40%50%60%70%80%90%
100%
MSCI AC World weight
Mcap share GDP share 2009
GDP share 2014
DM and EM in % of the world
TOTAL EM
TOTAL DM
Linear (TOTAL EM)
Linear (TOTAL DM)
Source: Bloomberg, IMF
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
MSCI AC World weight
Mcap share GDP share 2009
GDP share 2014
Russia and EE in % of the world
Russia
TOTAL EE
Allocating according to GDP, only investments to Russia
should increase 4-5 times in the coming 5 years
Russia and Eastern Europe
in % of the world
Developed Markets and Emerging
Markets in % of the world
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GDP per capita (USD)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Ta
jikis
tan
Kyrg
yz R
ep
.
Uzb
ekis
tan
Mo
ldo
va
Ukra
ine
Ge
org
ia
Arm
en
ia
Alb
an
ia
Tu
rkm
en
ista
n
B&
H
Ma
ce
do
nia
Aze
rba
ija
n
Be
laru
s
Se
rbia
Ka
za
kh
sta
n
Bu
lga
ria
Ro
ma
nia
Tu
rke
y
Ru
ssia
Po
lan
d
La
tvia
Lith
ua
nia
Hu
ng
ary
Cro
atia
Esto
nia
Slo
va
kia
Cze
ch
Re
p.
Slo
ve
nia
Ge
rma
ny
Sw
ed
en
US
2009F 2010F
23 May 2010 21
Despite strong regional development during past 15 yrs most catch up lies ahead in Eastern Europe
Source: IMF, World Economic Outlook, April 2009
Structural catch-up growth
Case study: What drove the Russian development?
Oil price
– Indirect effects are substantial
– Direct impact of oil exports is limited
Reforms
– Unlocking the potential in the private
sector
– Privatizations, corporate governance,
minority rights, bankruptcy procedures,
bank restructuring
Consumption
– Emergence of a new Russian
consumption class
– Most important component of Russian
GDP
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23 May, 2010 23
Magnit – a leading Russian regional retailer
Magnit Hypermarket, 11.000 kvm, Kamyshin, Volgograd
Leading discounter chain with a regional focus, established
in Krasnodar with first store opened in late 1998
Now 3318 stores in 1048 locations with 76.000 employees
Opened 636 new stores in 2009 alone and will add an
additional 500 in 2010
24 hypermarkets opened in 2007 – 09, will add an
additional 30 in 2010
Net debt / EBITDA 2010e: < 1.0
Market value of USD $ 7.8bn, share is up 70% from before
the crisis and 750% from the middle of the crisis (down
80% during the crisis)
29% YoY sales growth in 2009, 31% YoY growth expected
for 2010 (RUB)
Highest 9.5% EBITDA margin in retail sector
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Russian growth set to continue
Output
collapse
Average yearly
growth 7% from
low base
Assuming average
yearly growth 5%C
on
trac
tion
7.9
%
Source: Haver, East Capital
Russia in the next decade– Domestic demand likely to remain the key driver
Consumption still largest contributor
– Increased savings may curb consumption growth, but will
likely trigger higher investments
Investments likely to gain in importance
– Positive real interest rates may help the build-up of a
domestic funding base and local capital
– Availability of capital will increase investments in
modernization and much needed infrastructure
Net exports contributing less as imports are expected to
outpace exports
23 May 2010 25
Summary - key strengths & differentiating factors
A strong investment team with local language
skills and background
Local presence and sourcing information first
hand from companies
Combining proprietary fundamental research
with qualitative research
Company meetings to assess credibility of
management and identify risks
Strong network of senior advisors
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Enables an informational advantage and high conviction
Appendix
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23 May, 2010 28
Public Equity Team
PETER ELAM HÅKANSSON, Stockholm
• Chairman and one of the founders of East Capital. Head
of Public Equity Team.
• Previously held a series of senior positions at Enskilda
Securities in London, Paris and Stockholm. His last role
was as Head of Equities and Global Head of Research
• Fluent in Swedish, English and French
AIVARAS ABROMAVICIUS, Kiev
• Partner, Senior Advisor
• Formerly Head of Equities at Hansabank , the largest
Baltic Bank. Also worked three years as Head of Trading
at Brunswick Emerging Markets
• Fluent in Lithuanian, Russian, and English and
communicates well in Estonian.
JACOB GRAPENGIESSER, Moscow
• Partner, Senior Advisor
• Formerly analyst with Brunswick Emerging Markets and
also worked at Khanty Mansiysk Oil Corporation (KMOC)
in Moscow
• Fluent in Swedish, Russian and English
ANDRAS SZALKAI, Vienna
• Portfolio Advisor
• Covering Central Europe (CEE4)
• Formerly Head of Research at Erste bank in Hungary and
also worked as fund manager at Vontobel Bank in Austria
• Fluent in Hungarian, German and English and communicates
well in Swedish.
Adrian Pop, Stockholm
• Portfolio Manager
• Covering Balkans
• Worked for Accenture in Romania
• Fluent in Romanian, German, English and Swedish
Egle Fredriksson, Stockholm
• Portfolio Manager
• Covering the Baltic region and CIS
• Prior work experience from several Baltic companies,
including Philips Baltic and Phillip Morris Lietuva
• Fluent in Lithuanian, Russian, Swedish and English
23 May, 2010 2929
Fund information
Note: As of 30 April, 2010
USD EUR SEK USD EUR SEK
YTD Since Inception
East Capital Russian Fund 18.0% 26.7% 18.8% 1396.6% 1175.3% 1329.1%
RTS Index 10.2% 18.4% 11.0% 591.0% 488.9% 559.9%
East Capital Baltic Fund 23.9% 33.1% 24.8% 440.9% 362.0% 407.6%
Baltic30 Index 27.2% 36.6% 28.2% 186.5% 144.7% 168.9%
East Capital Eastern European Fund 15.7% 24.3% 16.6% 513.8% 304.6% 328.8%
MSCI Emerging Europe Index 7.6% 15.6% 8.4% 224.3% 113.7% 126.5%
East Capital Balkan Fund 9.5% 17.6% 10.3% 63.1% 52.0% 62.2%
MSCI Emerging Europe Index 7.6% 15.6% 8.4% 72.1% 60.4% 71.2%
East Capital Turkish Fund 15.2% 23.7% 16.0% 13.3% 2.1% 4.3%
ISE 100 National Index 16.2% 24.8% 17.0% 26.8% 14.3% 16.7%
East Capital (Lux) Eastern European Fund A 15.0% 23.5% -29.7% -23.3%
MSCI Emerging Europe Index 7.6% 15.6% -41.4% -35.4%
East Capital (Lux) Conv. Eastern European Fund A 10.9% 19.1% -32.6% -34.0%
MSCI Emerging Europe Index 7.6% 15.6% -20.3% -22.4%
East Capital (Lux) Russian Fund A 16.8% 26.4% -10.4% -11.4%
RTS Index 10.2% 18.4% -14.5% -16.8%
23 May 2010 30
Stockholm | Moscow | Paris | Oslo | Tallinn | Hong Kong | Vienna