Anton Lubenko, Portfolio Manager, Citadele Asset Management, "Citadele Russian Equity Fund" (15.02.2011): "Russian equities were range-bound throughout the first 11 months of 2010. After a strong start to the year, both MSCI Russia and the RTS Index fell behind the MSCI EM. They managed to squeeze back ahead of the EM benchmark only in the last four weeks of the year, having printed fresh post-2008 highs of 1,770 (+23% in 2010) and 931 (+17%) respectively. The year - end spurt was aided by the strength of commodity prices and the sentiment-enhancing events such as the reinvigorated WTO accession effort and the hosting of the 2018 World Cup. It promoted Russia marginally above the average for 2010 as whole."
Jacob Grapengiesser, Partner and Senior Advisor, East Capital, "East Capital Rysslandsfonden" (16.02.2011): "Low valuations (p/e around 7,4 for the Russian equity market as per 31/01/2011) in combination with re-emerging strong growth have increased the relative attractiveness for Russia among its emerging market peers. High commodity prices (brent oil price at around 100 USD/barrel) and good state of the financial system (write-backs of earlier provisioned loans to already well capitalized banks) have driven up expectations on earnings growth, further adding to Russia’s attraction. Increased activity from foreign direct investors (mainly Pepsi buying Will-Bill-Dann and the proposed Rosneft/BP equity swap) indicates that risk premium associated with the Russian market is exaggerated. Furthermore, positive spotlight has been put on Russia with the ousting of the Moscow mayor Luzhkov by president Medvedev, pointing towards an increased fight against corruption. Russia winning the right to host the 2018 FIFA World Cup has been an additional positive event."
Peter Bodis, Fondsmanager, Pioneer Investments, "Pioneer Funds Austria - Russia Stock T" (11.02.2011): "The most important was the re-acceleration of global growth, evidenced by a strong rebound in leading indicators world wide from September 2010. This lifted investors’ spirit for commodities, which performed well in Q4 and obviously benefitted Russian equities. Russian stocks are also cheap and underperformed in the first 3 quarters of 2010, which made them attractive as investors’ confidence returned. The ruble deserves special attention, because it was very weak in Q3 due to some capital flight out of Russia. The ruble underperformed other commodity currencies in this period. However in Q4 the ruble caught up with peers, and delivered strong performance contributing to the gains of Russian assets."
Matthias Siller, Fondsmanager, Barings, "Baring Russia C" (10.02.2011): "Haupteinflussfaktoren der letzten Monate:
a) Steuergesetzgebung im Bereich Erdoelfoerderung (Investionsanreize)
b) Globaler Anstieg von Rohstoffpreisen
c) Privatisierungsplaene der russischen Regierung."
Stefan Herz, Portfolioadvisor, Charlemagne Capital, "Magna Russia A EUR" (15.02.2011): "Over the last few months the Russian stockmarket has performed strongly on the back of rising commodity prices and in particular the strong oil price. This in itself is of course not surprising as Russia continues to be driven by commodities to a large extent and the composition of the main stock market indices remaisn very heavily skewed towards commodity (and in particular oil & gas) stocks. However, we do believe that Russia represents more than a pure commodity play and we find some interesting opportunities in the infrastructure and consumer sectors as well."
Zina Psiola, Fondsmanager, Clariden Leu, "Clariden Leu (Lux) Russia Equity Fund B" (16.02.2011): "Russia offers both value and growth today, which is rare in the global investment universe. The valuation of assets remains somewhat depressed in comparison to other parts of the world, and as the global business cycle gains momentum (China remains strong and now the US is picking up) Russia, as a supplier of basic resources to the world, will benefit naturally. Finally, we see increasing M&A activity with industrial buyers (rather than pure financial players) making bold acquisitions – like the USD 3 bn cash purchase of dairy products company Wimm-Bill-Dann by Pepsico and this signals to me that asset valuation has bottomed out."
e-fundresearch: "Which factors will be important in the next 12 months?"
Anton Lubenko, Portfolio Manager, Citadele Asset Management, "Citadele Russian Equity Fund" (15.02.2011):
"1. Abundant liquidity is expected to remain the key growth driver for the Russian market in 2011
2. Oil price – Russia is as dependent as ever on the price of oil. Though volatility increases uncertainty, Russia as a high beta play is well placed to benefit from a strong oil market in 2011.
3. US policy – US monetary policy looks likely to remain accommodative. Emerging Markets are the inevitable beneficiaries of capital flows looking for yield. Russia also benefits from Chinese import growth.
4. Infrastructure. Powerful growth drivers: APEC-2012 summit, The 2014 Olympics, World Cup 2018. Expenditures on preparation for the 2014 Olympics and development of Sochi infrastructure will come to RUR500 bn ($16 bn), APEC-2012 - nearly RUR270 bn ($9 bn). World Cup 2018 preliminary expenses are estimated in $50 bn. Russian government is going to establish the Federal Road Fund. The overall size of the Road Fund is estimated to reach RUB 378 bn, RUB 348 bn and RUB 408 bn in 2011, 2012 and 2013 respectively. Moscow City to receive $4.6 bn for transport infrastructure during the next 3 years."
Jacob Grapengiesser, Partner and Senior Advisor, East Capital, "East Capital Rysslandsfonden" (16.02.2011): "The privatization plan announced by the Russian government (50bn USD over the next 5 years and which started with the private placement of VTB shares and the proposed Rosneft/BP equity swap) signals a positive attitude towards foreign investors and a willingness to welcome foreign capital to Russia. Another important factor is the maintained positive growth outlook for Russian companies with an expected EPS growth at around 15% for 2011F at conservative expectations (mainly in terms of energy prices) and with clear upside risk 2011-2012F (most sectors excluding oil and gas are expected to grow at 15-50% CAGR 2011-2012F). The presidential elections in 2012 are likely to be a big event for investors but a possible WTO membership in 2011 is hardly priced into the market. Furthermore we will see infrastructure development boost the construction sector in the coming years due to a broad general investment need in the country. Only the upcoming 2012 APEC Summit in the Far East, the 2014 Winter Olympic games in Sochi and the FIFA World Cup in 2018 are estimated to need investments of around 30bn USD. Finally it should be mentioned that Russia’s current predicted economical growth of 4.1% for 2011 is based on an average oil price of 75 USD/barrel. Hence, if prices would remain at current levels, the market should see further upside. In addition there is also a possibility that we will see changes in oil taxation in order to spur oil production growth, which would be positive for the oil and gas sector which still dominates the market."
Peter Bodis, Fondsmanager, Pioneer Investments, "Pioneer Funds Austria - Russia Stock T" (11.02.2011): "Global growth, commodities, dollar, general appetite for risky assets."
Matthias Siller, Fondsmanager, Barings, "Baring Russia C" (10.02.2011):
"a) Wachstumsraten inlaendischer Konsum (Kreditwachstum)
b) Parlamentswahlen, Vorstellung der Kandidaten fuer die Praesidentschaftwahlen 2012
c) Erfolgreiche (?) Umsetzung der Privatisierungsplaene der russ. Regierung."
Stefan Herz, Portfolioadvisor, Charlemagne Capital, "Magna Russia A EUR" (15.02.2011): "Over the coming months commodities will remain probably the most important factor as far as sentiment towards Russia is concerned. However, we also believe that inflation remains an important issue in all emerging markets and in particular Central Bank willingness to control inflation via interest rates."
Zina Psiola, Fondsmanager, Clariden Leu, "Clariden Leu (Lux) Russia Equity Fund B" (16.02.2011): "We expect the positive sentiment for Russia to continue at least for the first 6-9 months of 2011. The global business cycle is still in a rather early expansion phase and with central banks determined to lubricate growth with cheap money it is unlikely that the recovery will be derailed. However, and this is hugely important for Russia, the economic cycle in China is peaking – it is not turning into a recession, but it started a new business cycle in 2009, earlier than everyone else and it could now also be the first to peak – at some point in 2011 we will probably see a rapidly falling rate of change for growth (i.e. second derivative of economic expansion). Today, China consumes one out of every two tons of all industrial metals and crude steel, so we believe that even a marginal reduction in demand or even growth in demand will have an immediate negative effect on the global supply-demand balance, and therefore Russia´s trade balance (as well as its currency). We do not know when this is going to happen, but investors should watch events in Asia closely by October or November 2011 at the latest. The Russian domestic situation is improving moderately, but if last year electricity demand grew by 4% y-o-y, this year it will only be close to 2%, according to the government´s forecast. This means that if the global economy starts to peak, the positive domestic situation will not last long."
Question 3:
e-fundresearch: "Which over- and underweights are currently held in the fund?"
Anton Lubenko, Portfolio Manager, Citadele Asset Management, "Citadele Russian Equity Fund" (15.02.2011): "As far as under-weights concerned, we structural and current major underweight in Energy sector. This is both due to Russia’s oil & gas sector historically lagging performance comparing to oil market juncture, as well as due to RTS index structure, which cannot be replicated in a UCITS-III compliant mutual fund. Nevertheless, with the oil prices strong and structural reforms planned (taxation) in Russia’s oil and gas sector, we started to increase share of Oil & Gas stocks in the Fund closer to the legally allowed limits. We also have an underweight in Financials and a slight underweight in Materials. Fund is overweight on Consumer Discretionary and Consumer Staples, because of the appeal of the strategic case for the Russian consumer market growth and development that we apply in the Fund. There is also an overweight in Industrials, Telecommunication Services and Utilities."
Jacob Grapengiesser, Partner and Senior Advisor, East Capital, "East Capital Rysslandsfonden" (16.02.2011): "Historically the East Capital Russian fund has been most focused on exposure to domestic consumption rather than commodity exporters. One of our preferred sectors has always been banks as we believe banks are the best proxy to capture the domestic growth. Currently we are overweight energy (relative to historical weights and peers) and we have been increasing our exposure over the past months. The main reasons for this increase are relative low valuations to the domestic sector and low valuations to global peers. Higher than expected oil prices are also likely to lead to upward revision of profits for the sector. As has been the case historically, we are overweight the financial sector as a play on the growing middle class and their demand for credits. Russia households are largely unleveraged and companies like Sberbank are likely to show very high EPS growth this year (Russian banks could show triple digit growth 2011). We have been decreasing our holdings in the consumer sector (retailers etc) after strong performance last year. Currently consumer stocks in Russia are trading at more than 5 times the p/e valuations of the oil and gas companies on average."
Peter Bodis, Fondsmanager, Pioneer Investments, "Pioneer Funds Austria - Russia Stock T" (11.02.2011): "We had a big underweight in energy in 2010 that we closed in Q4. The first half of 2011 will probably favour energy and materials, the second half of 2011 we will probably shift again to domestic sectors, like financials, consumers, and utilities."
Matthias Siller, Fondsmanager, Barings, "Baring Russia C" (10.02.2011): "Uebergewichtung: heimischer Konsum, Bankensektor, Infrastruktur (Transport-, Energieinfrastruktur), Telekomunikation, Gesundheitsvorsorge
Untergewichtung: Energie, Versorger."
Stefan Herz, Portfolioadvisor, Charlemagne Capital, "Magna Russia A EUR" (15.02.2011): "Within the fund some of our biggest overweights are in the consumer space where the fund owns positions in X5 and Okey, two retailers which will continue to benefit long-term from the structural change in the Russian retail sector - i.e. the move from non-organised to organised retail and as a result the continued strong store expansion programs. In addition the sector will benefit from continued growth in discretionary spending and income of the Russian middle class. Another overweight in the consumer space is Synergy, a vodka producer that will benefit from government attempts to reduce the size of the grey/black market via higher minimum prices for Vodka and increased taxation on the supply of pure alcohol in the manufacturing process.
One of the big underweights is the telecoms sector where we believe that valuations leave little upside. In particular the flagship telecoms company - MTS - is fully valued in our view despite being an extermeley well managed business. The stock suffers in line with the rest of the sector from declining growth rates and margin pressures."
Zina Psiola, Fondsmanager, Clariden Leu, "Clariden Leu (Lux) Russia Equity Fund B" (16.02.2011): "Our investment strategy is to search for companies that year after year exhibit profitable growth or, if they are mature enough, pay a substantial dividend. We prefer to invest in raw industrial commodity producers such as copper or silver, but we are very cautious in investing in those that are at an intermediate stage such as steel pipe producers. We believe earnings expectations are overstated for the latter group, but earnings might surprise to the upside in domestic retail and even telecoms. Ultimately, management needs to demonstrate its ability to successfully navigate through the full business cycle and keep company cash flow rich. There are many who will shine only for a short period of the business cycle and unless you are extremely good at market timing, it is, in our view, better to abstain from "two-week wonders"."
Question 4:
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the past year as well as over the past 3 and 4 years."
Anton Lubenko, Portfolio Manager, Citadele Asset Management, "Citadele Russian Equity Fund" (15.02.2011): "Our Fund has a very strong performance history relative to the RTS index, both in relative return and in risk-adjusted terms (measured by Sharpe ratio, please see the table below)."
Data is annualized
Risk-free rate for Sharpe calculation is 3m USD LIBOR
Source: Bloomberg
Jacob Grapengiesser, Partner and Senior Advisor, East Capital, "East Capital Rysslandsfonden" (16.02.2011):
"2007: The main reasons that the fund outperformed the index were good stock-picking and an over-weighting in domestic sectors such as banking, transportation and utilities, at the expense of oil and gas and other raw material companies.
2008: The fund marginally underperformed relative to its benchmark partly as a consequence of the financial crisis. Investors grew increasingly concerned with liquidity and thus sought to sell off smaller and less prominent companies; hurting the fund’s rather diversified portfolio with holdings also in small and mid-cap companies.
2009: As in 2007, the main reason for outperformance was the fund’s increased exposure to domestically-orientated sectors during the year like financials, retail, consumer goods and telecom, as it become clear that the Russian economy was in strong recovery.
2010: The fund continued its relatively large exposure towards the domestic sectors but as the valuation of certain consumer companies became stretched towards the end of the year, the exposure towards the oil and gas sector, which had heavily lagged in both performance and valuations, was rather heavily increased.
The fund’s volatility has been in line or lower than benchmark for the period (36% versus 37% for its benchmark in EUR for the period 2007-2010 based on monthly observations), despite strong outperformance."
Peter Bodis, Fondsmanager, Pioneer Investments, "Pioneer Funds Austria - Russia Stock T" (11.02.2011): "The fund generally had high rankings in the peer group in the last years. The second half of 2008 was difficult, because the liquidity crisis overwrote the traditional valuation metrics, and Russian equities fell to unprecedentedly cheap valuations. However, we managed to exploit these opportunities and delivered strong performance in the last two years."
Matthias Siller, Fondsmanager, Barings, "Baring Russia C" (10.02.2011): "Barings Russia scheidet bei aehnlichem Risikoprofil besser als der Durchschnitt der Konkurrenz ab."
Stefan Herz, Portfolioadvisor, Charlemagne Capital, "Magna Russia A EUR" (15.02.2011): "The Magna Russia fund operates with a tracking error range of 4 - 10% which is the only constraint to our bottom-up stock picking process. As such we do not make sector allocation calls but built our portfolios based purely on our stock picking and in-house research."
Zina Psiola, Fondsmanager, Clariden Leu, "Clariden Leu (Lux) Russia Equity Fund B" (16.02.2011): "1999-2008 was the first-ever period when modern Russia and its stock market went through the full business cycle and investors tested how well it can weather the recession. We know now that the answer is not satisfactory and worse than many expected. Tax collection from small and medium enterprises did not recover to pre-crisis levels and the stock market remains largely a place for the brave. The free float of Russia companies is USD 160 bn, but the amount of pension assets managed by non-government entities is only USD 4.5 bn. The funding gap is closed today by offshore investors and this causes substantial market volatility. Russian economy, its currency and capital markets are highly dependent on global commodity demand supply balance as well as global money flows (i.e. Investor preferences for certain asset classes and regions). This makes the fund a very high beta investment vehicle, which is not always such a bad thing. However, it is important that our risk management framework and portfolio construction process aims to achieve a lower volatility than the index and ensure daily liquidity."
Question 5:
e-fundresearch: "What are currently the most important opportunities and risks for investors in the Russian equity market?"
Anton Lubenko, Portfolio Manager, Citadele Asset Management, "Citadele Russian Equity Fund" (15.02.2011): "Russian equity market in 2011 can exhibit a combination of volatile and mixed global backdrop coupled with an overall supportive combination of domestic drivers. The global economy’s continued cyclical expansion combines brighter prospects for US growth with the strengthening headwinds from the monetary tightening in the EM world. The Euro zone’s fiscal crisis remains a source of ongoing noise and periodic bouts of risk aversion. In current global economic juncture Russian equity market still remains cheap valuation story, supported by strong macroeconomic fundamentals. These relatively low valuations compared to EM universe could imply additional positive momentum due to potential reallocation process of global EM funds.
Russia still is very dependent on hydrocarbons juncture. Thing worthy to think about is speculative nature of the oil price rise. But further on a rather deep correction might take place as speculators start to close their positions. From fundamental point of view, the market is not strong enough, the world crude oil consumption forecast, exceeding the pre-crisis level, looks little bit as exaggeration. Crude oil demand growth not only in Asia, but also in the US and EU is a necessary condition for this to happen. Even though the overhang of inventory, the excess capacity and the OPEC desire to prevent overshoot most probably will cap further upside to oil prices, the better demand backdrop will make the equity market more confident in the sustainability of the price range of US 80-90/bbl."
Jacob Grapengiesser, Partner and Senior Advisor, East Capital, "East Capital Rysslandsfonden" (16.02.2011): "Russia’s sensitivity to the oil price is both an opportunity and a risk since the Russian budget is still very dependent on oil revenues. Moreover, foreign investors are still important for the Russian equity market as the local investors base still is small. Despite the country’s strong macro fundamentals and improved relations with Europe and the US, widespread misconceptions still exist among these investors due to little evidence of broad fighting of corruption and the fact that corporate governance issues still are perceived to be larger than in other emerging markets. However, Russia today offers growth at a discount and looks very attractive with an valuation of p/e 7.4 for 2011e (around 40% discount to global emerging markets) and a broad economical recovery with GDP expected to grow above 4% and company earnings above 15% in 2011. Triggers such as WTO membership and potential changes in oil taxation as well as increased credit demand and investments on the back of single digit policy rates and state infrastructure spending are further adding to the picture and should ensure increased interest from the investor community going forward."
Peter Bodis, Fondsmanager, Pioneer Investments, "Pioneer Funds Austria - Russia Stock T" (11.02.2011): "Russia remains the cheapest market in GEM. Broadening global growth will support commodity markets, and that will improve the confidence in the Russian economy. We also expect, that the domestic economy led by consumption and renewed infrastructure investments will also deliver stronger growth in 2011. Political improvements both internationally (WTO entry, new nuclear treaty, better US-Russia ties), and domestically (reform agenda, resumption of privatization) may potentially reduce country risk. The biggest risks are related to the reversal of the above. Negative surprises of global growth, correction in commodity prices, renewed international and domestic political tensions can trigger a sharper correction."
Matthias Siller, Fondsmanager, Barings, "Baring Russia C" (10.02.2011): "Russland ist der billigste Aktienmarkt weltweit was mit sich fuehrt dass die Erwartungshaltung seitens Investoren in Bezug auf Wachstum und shareholder value creation extrem gering ist. Hier sehe ich großes Potential hinsichtlich positiver Ueberraschungen im Laufe der naechsten Jahre. Umso mehr als dass das sich Investoren und Regierung im „gleichen Boot“ befinden da ja die Privatisierungsplaene der russ. Regierung hauptsaechlich ueber den Aktienmarkt erfolgen werden, der russische Staat also ein unmittelbares Interesse an einer Verbesserung des Investionsklimas hat. Als Risiko ist sicherlich der hohe Anteil von Rohstoffaktien am russischen Aktienmarkt anzufuehren, bei Annahme langfristig fallender Rohstoffpreise ist daher nicht von einer outperformance des russischen Aktienmarkest auszugehen. Es muss jedoch angefuehrt werden, dass der „Investmentcase Russland“ NICHT von steigenden Rohstoffpreisen abhaengig ist sondern vielmehr vom strukturellen Wachstumspotential in fast allen Bereichen der Volkswirtschaft. Wir glauben dass diese Moeglichkeiten Kaptial anziehen werden und fuer Wachstum in der Volkswirtschaft und am Aktienmarkt sorgen werden."
Stefan Herz, Portfolioadvisor, Charlemagne Capital, "Magna Russia A EUR" (15.02.2011): "The long-term opportunities in Russia will come from the growth of the middle class and accompanying disposable incomes, significant need for infrastructure investment over the coming years and of course the countries position as one of the world´s leading commodity exporters. Although the government has stated that it wants to reduce the economy´s reliance on oil this is likely to take many years before it becomes meaningful. Further opportunities should arise through necessary reforms in areas such as the judiciary system, reduction in state spending, reducing barriers of entry to new market entrants.
A key risk remains corporate governance which remains weaker in Russia than in many other emerging markets and is too a large extent responsible for the continued discount at which Russia trades to other emerging markets. Indeed we already see that companies with higher levels of corporate governance tend to trade at premium valuations."
Zina Psiola, Fondsmanager, Clariden Leu, "Clariden Leu (Lux) Russia Equity Fund B" (16.02.2011): "Potentially, the privatization that was announced in 2010, but details remain scarce, unfortunately. The first wave of privatization in the early 1990s was like the first pancake, which as the Russian proverb goes, is always a failure. The new round of privatization that, according to announced plans, is to cover 900 companies and potentially generate EUR 60 bn in revenue is a historic opportunity for the government to restore a sense fairness to society and to bring in direct and portfolio investors who will be able to breathe new life into development and also lift asset values. In the meantime, we continue to invest in companies which we believe have the potential to grow the business profitably."
All date per 02.02.2011:
