As Eastern Europe equities continue to attract institutional money, the European Convergence Fund managed by WestLB Mellon Asset Management (WMAM), has managed to outperform its peers by its own using a custom–made index.
GRAPH: PERFORMANCE of the WestLB Mellon European Convergance Fund
While most of the funds investing in the region are benchmarked against industry-wide indices that overweight Russia and the energy sector, the European Convergence fund is following a different approach. “We wanted to do something a bit unique and at the end of 2000 we constructed our own index,” says Glen Prentice, the fund’s manager. “We weight all the countries that are in EU accession talks or attempting to join the EMU, based on the latest national GDP figures,” he explains.
Their custom index includes 13 different countries. “Russia is not part of our index. However, the fund can invest up to 10 per cent outside the custom index so typically we hold a small percentage of stocks in Russia when it looks attractive.”
According to data from Standard & Poor’s, the European Convergence fund was top performer in the European Equity Emerging Markets category over three years, with a cumulative return of 185.28 per cent over that period.
At the end of December last year, investments in Poland represented nearly 29 per cent of the fund’s total assets, followed by Turkey with just under 18 per cent, Czech Republic with 15 per cent and Hungary with over 10 per cent.
“The strong performance of the fund has a lot to do with the power of those larger Eastern European countries, but also those smaller ones that very few other funds offer investors access to,” Mr Prentice says.
In terms of industry sectors, the fund’s custom index overweights financial services that represent just over 40 per cent of the benchmark. This contrasts with the 13.7 per cent exposure to financials of the MSCI Eastern Europe index where the energy sector represents nearly 60 per cent of the benchmark.
“That of course comes from the large exposure to Russia [of the MSCI index],” he comments. “If you have a large weighting in oil and gas you are playing commodities, you are playing the global cycle. It is true that over the past three to four years oil prices have risen dramatically and that has helped some of the funds with high exposures to the sector. But I think the potential for Russia to produce double digit returns going forward is now lower.”
Instead, Mr Prentice believes that investments in the financial sector are “a very pure and clean way of playing European convergence”. He believes economies in the region are picking up thanks to improved macro management. “Investment from EU structural funds, decreasing unemployment levels and increasing levels of wealth and disposable income are boosting the demand for financial products in the form of credit cards, loans, mortgages and other related services,” he says. Precedents can be found in Portugal and Greece where financial services enjoyed a strong and sustained rally following EU membership.
Launched in 1998, the fund is domiciled in Luxembourg and at the end of December 2006 had €350m of assets under management.
TABLE: RATIOS (from inception to Dec 2006)
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