Taking stock and risks in emerging europe

Elena Shaftan manages the Jupiter Emerging European Opportunities fund and the ADIG European Emerging Market Equity fund. Before joining Jupiter in 2000, Shaftan spent six years managing Eastern European equities at AIB Govett Asset Management. She has lived in Latvia and Russia, and studied radio electronic engineering at Riga Aviation University in Latvia.

Q: How would you describe your investment process?

A: Whilst I do take macro trends into account, the most important consideration is stock selection. I will never compromise on quality of companies just to meet a targeted exposure to a sector or country. For example, if I wanted to raise exposure to Poland because of a strong macro outlook but I could not find good-quality stocks with sufficient liquidity, I would rather invest elsewhere.

Q: What do you look for in stocks?

A: I try to find companies with highly visible trends of earnings, and stocks that can defend their margins from their competitors. Looking at the business itself, I want to see if it is viable and if it could survive increased competition. I also want to see if the management can deliver and, more importantly, whether or not it is in their interests to deliver.

A company’s accounts are also important. I do not like leveraged stocks; I want to see if a company can finance future growth and that its accounts are transparent. Finally, I examine valuations. I won’t ever chase expensive stocks.

Q: How concentrated is the portfolio?

A: Very. The fund is a best ideas portfolio of some 30 to 35 stocks and my top 10 holdings account for around 50% of the overall assets. Typically I hold around 70% of the portfolio in core holdings, which each represent 3.5% to 7.5% of the portfolio. I aim to hold these stocks for an average of 18 months, although some of the stocks in the fund right now I have owned from launch two years ago.

The rest of the fund is held in short-term trading positions and I also manage cash aggressively. With the permission of the trustees, I can go higher than 10% in cash and I have done so twice since the fund launched. This is because we took the view that the market was going to go lower. The trading positions are short-term investments and typically I will hold no more than 2% of the portfolio in these.

Q: What is your sell discipline?

A: This is a concentrated portfolio of best ideas, and I don’t like carrying dead weight. This means I examine all the holdings on regular basis, with a simple question – if I didn’t have it, would I buy it today? If the answer is no, for whatever reason – the management disappointed, or market environment changed, or it became too expensive – it goes.

Q: What are the risks of investing in emerging Europe?

A: Now that the Central European countries – Hungary, Czech Republic and Poland – have all signed up to the EU, the risks not dissimilar to developed Europe. Russia is the big risk. Politics are likely to continue to influence investor sentiment in Russia in the near term. However, this should not obscure the wider picture of strong economic growth, which is leading to upward revisions of earnings estimates.

Risks do exist but they are unlikely to undermine economic growth and stability significantly, and they are more than discounted by the current market valuation of around 7x price/earnings ratio or a 40% discount to other emerging markets. My attitude is to try to assess the impact of the risks on the economy and its impact on the portfolio; the rest is just noise.

Q: On the back of this view, how much do you have invested in Russia?

A: Historically my exposure to Russia has moved from around 35-50%. At present I have 45% of the portfolio invested in the country. Despite the volatility created by the shifts in the political background, the Russian economy has grown in excess of 7% so far this year. It is important to realise that this is not merely the consequence of a strong oil price. Rather, it’s a reflection of more sustainable, higher-quality growth driven by a trio of fixed investment, private consumption and improved domestic liquidity.

Q: What other countries do you hold in the portfolio?

A: The remainder of the fund is held in Poland, Hungary and the Czech Republic. It has been a good year for these regions. Economic growth in all three countries exceeded expectations as they all continued to benefit from the convergence process.

Q: What is your outlook going forward for these regions?

A: The prospects for Central Europe remain attractive. All the factors that drove performance to be good last year still remain. These include cheap labour, low taxes, good infrastructure, and stable and undervalued currencies. As a result, earnings growth should continue, while an increase in real wages and borrowing should also spur household consumption. I predict the countries in Eastern Europe will grow at double the pace of those in Western Europe over the next four years. Poland is currently growing at 6.5%, Hungary at 4% and the Czech Republic at 3.5%.

Q: How much of the portfolio do you have in these countries?

A: Driven by stock selection, I currently have 18.5% of the fund invested in Hungary. This is because I have found a number of well-managed companies with good growth outlooks. In particular, I am invested in a couple of retail banks. Retail lending in Eastern Europe is much lower than in Western Europe. Compared with 50% borrowing in Western Europe, it is in its low teens and growing fast. In Hungary borrowing has jumped from 6% to 16% and there is still a long way to go. The beneficiaries of this are the retail banks.

Q: Do you look at benchmarks?

A: The fund is run on active basis so I don’t pay much attention to benchmarks. Most of them are too heavily skewed towards Russia or adjust on a pretty arbitrary basis. What I am trying to do is find good companies in sound economies, and whether they are in the index or not is irrelevant.

Q: Do you invest on a multi-cap basis?

A: The fund does invest across all market caps but the liquidity of a company is very important to me. I do not like being invested in illiquid stocks when they go wrong. As a result, for me, free flows and daily turnover are more important considerations than multi-cap. At present around 13% of the fund is invested in small-caps.

Q: The fund currently has £125m of assets under management. At what size would liquidity become an issue?

A: At present, it is not an issue. As it grows bigger, I won’t change my management style. However, if liquidity does become a problem, I may cut back my exposure to small-caps.

Q: Do you invest in the fund yourself?

A: My only investements are in the funds I manage.