Baring Emerging Europe (BEE) aims to generate long-term total returns from a disciplined bottom-up approach, selecting the most attractive companies in the currently attractively valued emerging Europe region. The benchmark, the MSCI EM Europe 10/40 Index, is dominated by Russia (59%), and BEE has outperformed thanks to strong returns in that country as it recovers from the recession in 2014 and 2015 (discussed further in the Performance section). Returns have been strong on a risk adjusted basis too thanks to the skill of the manager, and BEE has added the most alpha of any emerging markets trust over five years.
Russia has been benefiting from a secular change in dividend culture in the region. As well as benefiting total returns, this has been particularly welcome for BEE given the shift of dividend policy in 2014 that led to greater emphasis on shareholder payouts and gave the board the ability to pay out capital. The yield is currently 4.1%.
BEE trades on a discount of 9%, below its 11% one-year average. The trust has a tender provision that is triggered if either of two conditions are not met as of the 30 September 2020 - if performance or discount don’t match up to certain targets. This should help to control the discount.
BEE is the only closed-ended fund focused on emerging Europe after the wind up of BlackRock Emerging Europe in 2018. It is typical of the ironies of investing that shortly after that trust wound up the market went on a tear and BEE profited handsomely – NAV total returns are 28% in 2019 to date, with shareholders up 34%. As well as strong returns on the market, the trust has been benefiting from a disciplined investment process that has generated impressive levels of alpha in a highly volatile collection of markets with often unpredictable political situations. The relative inefficiency of the emerging Europe region gives us confidence that this level of alpha is repeatable.
While returns have been strong in Russia over the past few years we think it an interesting place to be investing at the moment. The valuation on the market is extremely cheap (discussed further in the Discount section). With improving corporate governance and potential in the domestic economy after a period of healthy oil revenues, should the global economy continue to expand, Russia could outperform, in our view. Poland and Turkey, meanwhile, offer diversification benefits to the major market in the index. Additionally, some downside protection is afforded to BEE shareholders, provided by the yield, which at 4.1% is comparable to the 3.9% average of the AIC UK Equity Income sector. The discount also represents some recompense for the risk, with the 2020 tender offer likely, we believe, to act as a lower limit.
|An exceptional alpha-generation track record among emerging market trusts||A volatile region with the potential for political turmoil|
|An attractive yield with the ability to maintain income payments from capital||Exposure to the oil price, which can be unpredictable|
|An attractive discount with a tender offer offering downside protection|