Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Contrarians should buy BlackRock Emerging Europe for portfolio diversification
Thursday 01 Jun 2017 Author: James Crux

With equity markets on both sides of the Atlantic testing new highs, investors worried the bubble could burst should diversify portfolios to guard against a potential correction.

One region with high long-term return potential largely forgotten by investors is Emerging Europe, which should excite contrarians
tolerant of political risk. One of the few regional specialist trusts is BlackRock Emerging Europe (BEEP), where a 7.67% discount to net asset value (NAV) looks interesting.

GI - BLACKROCK EMERGING EUROPE

BlackRock Emerging Europe has performed particularly strongly since the adoption of an unconstrained, concentrated investment approach in 2013. Its objective is to achieve long-term capital growth by investing in a concentrated portfolio of 20-30 companies doing business primarily in Eastern Europe, Russia, Central Asia and Turkey.

Ripe for a re-rating

‘We’ve had a lost decade in Emerging Europe,’ explain managers Sam Vecht and Christopher Colunga, addressing the de-rating of the region they view as a compelling deep value opportunity; Emerging European markets’ good returns over the last 12 months have been driven by fundamentals rather than re-ratings to a higher market valuation.

Assuming the oil price remains reasonably stable, Russian equities will see a meaningful re-rating over the next 18 months. Yields on Russian energy and financial companies remain very high, underpinned by positive earnings growth and reductions in capital expenditure.

The managers are also positive on prospects for Central Eastern European countries such as Poland, the Czech Republic, Romania, Hungary and even Greece.

BlackRock Emerging Europe performed strongly in 2016 in absolute terms, aided by a rally in Russian equities following a rise in the oil price and speculation President Trump’s election would lead to an easing of sanctions.

Hidden gems

‘We invest in companies where the direction of travel is improving,’ explains Vecht, who meets with management, customers, competitors and suppliers on the ground in order to unearth hidden gems and under-owned companies with improving returns.

As at 30 April, the fund’s fifteen largest investments ranged from Russia’s Sberbank and Gazprom to hypermarkets operator Lenta and social network-to-online games play Mail.Ru, not to mention Powszechny Zaklad Ubezpieczen (PZU), Poland’s largest insurance company.

Significantly, Winterflood Investment Trusts expect BlackRock Emerging Europe’s discount to ‘narrow materially’ in advance of June next year. The reason is that on or shortly before 21 June 2018, the fund will allow shareholders a full cash exit at NAV less costs, dependent on the anticipated level of uptake. The plan is to provide similar periodic returns of capital at five-year intervals thereafter.


BlackRock Emerging Europe (BEEP) 333.91p

Stop loss: 267.13p

Market value: £118.39m

‹ Previous2017-06-01Next ›