With 450 million inhabitants in nearly 30 countries, the emerging European zone benefits from its strategic position at the intersection of Europe and Asia. It is a particularly dynamic region that is simultaneously one of the drivers and beneficiaries of world economic growth. The Natixis Emerging Europe Fund aims to capture this regional growth through a broadly diversified investment universe that extends to off-index European countries and stocks of Western European companies with relevant operations in emerging Europe. The Natixis Emerging Europe Fund seeks to achieve long-term growth of capital by investing in European emerging markets companies:
• Dual sources of alpha – The team’s investment approach seeks to add value from opportunistic country allocation and stock selection. Macroeconomic scenario analysis is at the heart of geographic allocation, and stock selection is driven by fundamental research and valuation analysis.
• Opportunistic investment process – The fund adopts a more diversified stance with the ability to invest outside of the reference index. The team also seeks early identification of compelling new markets and stocks, providing investors with attractive growth opportunities.
• Research-intensive approach – The process integrates experts at every level: the team relies
upon a broad range of internal resources (a dedicated team of regional economists, the
equity and credit research department, the research and strategy department) in addition
to accessing research through privileged connections across the region.
Natixis Asset Management believes that temporary market inefficiencies can be exploited through active management. These inefficiencies can be partly explained by the more recent development of the investment universe that has led to a broader universe, newly listed companies and low coverage by investment banks. The price of a share can therefore drift significantly from its fair value for varying lengths of time, and through intensive research our managers attempt to identify and exploit attractive investment opportunities.
• Invests primarily in European emerging market companies.
• Country allocation and security selection are the key drivers of return.
• Conviction drives portfolio construction with little regard for the reference index.
• The investment universe is broader than the countries and companies included in the reference
• index to offer a more diversified opportunity set.
• Asset class -Emerging Europe Equities
• Style -Active/Opportunistic
• Objective -Seeks to achieve long-term capital growth
• Index -MSCI Emerging Europe USD
• Inception -23 January 1998
• Reference currency –USD
• Other currencies available - GBP, EUR, EUR-hedged, SGD
The Investment Process
The approach the team adopts to construct the portfolio can be summarized in three steps:
Top-down approach: Macroeconomic considerations drive country allocation. Unlike continental Europe, domestic macroeconomic differentials between countries in the region such as growth, inflation, trade balance, monetary policy and exchange rates constitute the principal drivers of stock market returns and are more influential than sector allocation.
Bottom-up approach: Stock selection is based on fundamental company analysis like profitability, areas of risk and in-depth valuation analysis. Risk assessment is key and takes accounting risk and corporate governance into consideration.
Portfolio construction: Level of conviction guides stock weighting within established country/sector risk framework.
Performance Review 2010
Belondrade & Théret: "In spite of volatility levels that remain high, the share markets grew during the fourth quarter (8.55% for the MSCI World Index). This growth, which confirmed the recovery recorded during the third quarter, enabled the global share markets to end the year on a positive note, with a performance of almost 10% during 2010 (9.55% for the MSCI World Index).
The announcement by the Fed, at the beginning of November, of the conditions relating to the implementation of the second Quantitative Easing plan (QEII) was decisive in the good performance of the markets during the quarter. Indeed, the timing and extent of the measures proved to be in line with market forecasts (the purchase between now and June 2011 of $600 billion of Treasury bonds, to which $250-300 billion should be added due to the MBS repayments) and allowed for the resolution of certain concerns that may have affected the way in which the Fed
applied its monetary policy.
In Europe, persistent fears over the public debt of several eurozone countries continued to affect the development of the markets and constituted one of the main reasons behind volatility during the quarter. Thus Ireland, which had initially refused any intervention, finally had to resolve to seek joint aid from the EU and the IMF at the end of November. Spain, for its part, remains threatened by a downgrading of its rating if drastic budgetary measures are not implemented.
Finally, the share markets of the Emerging Europe area proved strong with 8.40% growth during the quarter, in comparison with 4.12% for the MSCI Europe Index. In contrast, on a global level, the performance of the emerging share markets fell behind in comparison with the developed markets: 7.05% for the MSCI Emerging Markets Index, in comparison with 8.55% for the MSCI World Index. In fact, with the exception of Russia (16.48% for the MSCI Russia Index during the fourth quarter), the other BRIC countries clearly underperformed during the last quarter: 2.62% for the MSCI Brazil, 1.99% for the MSCI India and 0.67% for the MSCI China.
Although, on the whole, the final quarter of the year was more volatile than the preceding one, the share markets continued to follow a very marked upward trend during the second part of 2010. The share markets for the Emerging Europe area grew by 8.50% during the fourth quarter, thereby outperforming the global emerging markets (7.05% for the MSCI Emerging Markets Index), but in line with the large developed markets (8.55% for the MSCI World Index).
During the fourth quarter of 2010, the Fund grew by 7.96%, in comparison with 8.40% for the index. Country allocation contributed negatively to performance during the quarter and explains the reason behind the underperformance of the Fund, in spite of the positive stock-picking contribution.
With regard to country allocation, the performance of the Fund suffered due to our underweighting on the Russian market, one of the best global emerging markets at the end of this year with growth of 16.62%, and our positions on off-index countries such as Romania and Slovenia. Although, on the whole, our stock-picking contributed positively to the performance of the Fund,
this contribution was not sufficient to compensate for our country allocation."
Performance Review 2011
Belondrade & Théret: "The debt crisis in Europe continued to be the focus of investors’ attention in the fourth quarter. However, in contrast to previous months, several elements tending towards a more global and lasting resolution of the crisis took shape during the quarter. The drop in the headline rates of the ECB to 1% in December, followed by the installation in mid-December of governments run by technocrats in Athens and Rome, the change in the parliamentary majority in Spain and finally the injection of almost 500 billion euros by the ECB at the end of December, enabled some of the immediate uncertainties to be alleviated (liquidity of the banking sector), indeed to create greater visibility in the medium term (sustainability of debt and the speed of the restructuring of public finances). Outside Europe, strong performance of macro-economic indicators in the United States, and the confirmation of a gradual easing of fiscal policy in the emerging economies allowed us to maintain a level of cautious optimism heading into 2012.
A move by the Central Bank of China at the end of November, to ease its restrictive monetary policy by lowering compulsory reserve levels, and the decision by the Fed to reduce the rate at which its European and Asian countries could borrow U.S. dollars to 0.6% also helped to support the markets at the end of the quarter. In this context, the fourth quarter ended with the U.S. markets (+11.5% for the MSCI USA) outperforming the European market (+5.4% for the MSCI Europe), and developed markets (+7.6% for the MSCI World) outperforming emerging markets (+4.4% for the MSCI Emerging Markets). Key to emerging markets, the European sovereign risk problem continued to weigh down performance in Emerging European countries.
During the fourth quarter, the Fund posted a drop of 4.47%, underperforming its index. The geographical allocation had a negative impact on performance. Relative performance suffered from our underweighting in Russia, the only market in the area which rose during the quarter (+6.2% for the MSCI Russia) on the back of petrol prices which remained high.
On the other hand, our overweighting on the Turkish market detracted from performance due to the return of anxiety about the Turkish currency and the sustainability of the current account deficit. Stock selection had a negative effect on relative performance of the portfolio over the quarter. A structural underweight to index-heavy stocks also detracted from performance, with Gazprom, which rose by 10.3% in the fourth quarter, accounting for almost 1% of the underperformance over the quarter. This outperformance of the large caps was to the detriment of the more defensive stocks in our selection such as M.Video (-8.0%), X5 Retail Group (-17.5%) and Pharmstandard (-36.8%).
Performance 2012 - Year-to-Date
Performance since 2007
Matthieu Belondrade, CFA, Portfolio Manager, Analyst
Matthieu began his career in 1999 as a sales manager with State Street Global Advisors in Paris. He joined Ixis Asset Management in 2001 as a product manager and in 2004 became an equity portfolio manager and product specialist in Natixis Asset Management’s European Equities and Emerging Markets team. Matthieu has a degree in Advanced Financial Studies from the University of Paris II–Panthéon-Assas, and he is a CFA charterholder.
François Théret, Portfolio Manager, Analyst
François started his career in 1997 as a sell-side analyst at Crédit Lyonnais in New York. A year later, he moved to Crédit Lyonnais Asset Management and covered the European banking and insurance sector. In 2001, he joined TAL, a subsidiary of Canadian Imperial Bank in Switzerland, and then moved to Axa Investment Managers in 2003 as a research analyst.
In March 2005, François joined Ixis AM as a senior bank & insurance analyst and was actively involved in building the research department and developing the research methodology for European stocks. He currently works as an emerging Europe portfolio manager and analyst with Natixis Asset Management. François is a graduate of the French business school Ecole Supérieure de Commerce de Paris.