Reflecting on a decade of investing
              in Eastern Europe and Russia
East Capital Eastern European Fund – Aivara...
Disclaimer

 These notes should not be used as a basis for investment. Information and advice in this publication is based...
Introduction




23 May 2010                  3
East Capital
 A leading independent asset manager specialising in
  Eastern Europe and Russia, founded in 1997
 5.7 bill...
East Capital investment vehicles
                Public equity funds (UCITS III)   Alternative investments   Private equit...
East Capital Eastern European Fund
– Performance since inception
                             LIPPER FUND AWARDS 2008     ...
East Capital Russian Fund
– Performance since inception                                                                   ...
East Capital Russian Fund
“The East Capital Russian Fund has returned 1,524% in USD
terms during the past decade (source M...
Investment Team, Style and Process




23 May 2010                                        9
A dedication to research




23 May, 2010               10
One of the regions largest team dedicated to
public equity – 24 investment professionals

                           Advis...
Investment style
 Long term approach with focus on
  convergence and domestic themes
 Active stock-picking without index...
Investment process


        RIGHT REGION        RIGHT STRATEGY                 RIGHT COMPANY           RIGHT INSTRUMENT

...
East Capital Eastern European fund vs. index
 – 7 of 8 years with outperformance (average 8.8% per year)
        120%
    ...
East Capital Eastern European fund vs. index
 – Consistently lower risk
                                                  ...
Reflecting on a decade of investing in
                   Eastern Europe and Russia




23 May 2010                       ...
Observations after a decade of investments in
Eastern Europe and Russia
 Mainstream investment strategies still focused o...
Index still poorly captures main growth sectors
   Sector breakdown of RTS index                Sector breakdown of Russia...
Unjustified discount?
80%                                                                                 60%
            ...
Perspectives on the allocation to Emerging Markets
                 Russia and Eastern Europe                             ...
Despite strong regional development during past 15 yrs
    most catch up lies ahead in Eastern Europe
                    ...
Case study: What drove the Russian development?
  Oil price
        – Indirect effects are substantial
        – Direct i...
Magnit – a leading Russian regional retailer
   Leading discounter chain with a regional focus, established
    in Krasno...
Russian growth set to continue




                                               Contraction 7.9%
                       ...
Russia in the next decade
– Domestic demand likely to remain the key driver

  Consumption still largest contributor
    ...
Summary - key strengths & differentiating factors
   A strong investment team with local language
    skills and backgrou...
Appendix




23 May 2010              27
Public Equity Team
               PETER ELAM HÅKANSSON, Stockholm                              ANDRAS SZALKAI, Vienna
    ...
Fund information
                                                           YTD                Since Inception
           ...
Stockholm | Moscow | Paris | Oslo | Tallinn | Hong Kong | Vienna
23 May 2010                                              ...
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Citywire zurich presentation east capital

  1. 1. Reflecting on a decade of investing in Eastern Europe and Russia East Capital Eastern European Fund – Aivaras Abromavicius Citywire Pan European Fund Selectors Forum Zurich, May 19-20, 2010
  2. 2. Disclaimer These notes should not be used as a basis for investment. Information and advice in this publication is based on sources that East Capital deem reliable, but East Capital can under no circumstances be answerable for the totality or correctness of the information, or for direct or indirect loss that can occur as a result of mistakes or discrepancies therein. Investment in funds is always associated with risks. Historic yields are no guarantee of future yields. Fund units can go up or down in value, and there is no guarantee that investors will get back all capital invested. As East Capital invests in foreign markets, currency fluctuations can affect the funds’ values. Fund information brochures can be obtained from East Capital. 23 May 2010 2
  3. 3. Introduction 23 May 2010 3
  4. 4. East Capital  A leading independent asset manager specialising in Eastern Europe and Russia, founded in 1997  5.7 billion USD in public and private equity  150 employees, out of which 37 investment professionals, 27 nationalities  Offices in Stockholm, Paris, Moscow, Hong Kong, Tallinn, Oslo, Vienna and Kyiv  Diversified client base across segment and geography with 450,000 investors from more than 60 countries  12 year track record, highly awarded funds  Independently owned and managed with founders and main owners active at senior management level 23 May, 2010 4
  5. 5. East Capital investment vehicles Public equity funds (UCITS III) Alternative investments Private equity and real estate EAST CAPITAL EAST CAPITAL BERING EAST CAPITAL RUSSIAN FUND (SWE + LUX) RUSSIA FUND BALTIC PROPERTY FUND EAST CAPITAL EAST CAPITAL BERING EAST CAPITAL BALTIC FUND (SWE) UKRAINE FUND FINANCIALS FUND EAST CAPITAL EASTERN EAST CAPITAL BERING EAST CAPITAL EUROPEAN FUND (SWE + LUX) BALKAN FUND RUSSIAN PROPERTY FUND EAST CAPITAL EAST CAPITAL BERING BALKAN FUND (SWE) CENTRAL ASIA FUND EAST CAPITAL EAST CAPITAL BERING TURKISH FUND (SWE) NEW EUROPE FUND EAST CAPITAL CONVERGENCE EAST CAPITAL EASTERN EUROPEAN FUND (LUX) POWER UTILITIES FUND EAST CAPITAL SPECIAL OPPORTUNITIES FUND 23 May, 2010 5
  6. 6. East Capital Eastern European Fund – Performance since inception LIPPER FUND AWARDS 2008 LIPPER FUND AWARDS 2007 LIPPER FUND AWARDS 2006 MORNINGSTAR AWARDS 2005 LIPPER FUND AWARDS 2009 GOLDEN STAR 2004 LIPPER EUROPE, LIPPER AUSTRIA, LIPPER NORDICS, LIPPER FRANCE, LIPPER HOLLAND AND FD MORNINGSTAR LIPPER FRANCE DAGENS INDUSTRI AND LIPPER NETHERLANDS, LIPPER AUSTRIA, LIPPER LIPPER EUROPE HOLLAND MORNINGSTAR SWEDEN LIPPER FRANCE NETHERLANDS AND LIPPER EUROPE 60 50 East Capital Eastern 40 European Fund 30 MSCI EM 20 Europe Index 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Note: As of 31 March, 2010, in SEK East Capital Eastern European Fund MSCI EM Europe Index 23 May, 2010 6
  7. 7. East Capital Russian Fund – Performance since inception LA REMISE DES PYRAMIDES GOLDEN STAR 2003 GOLDEN STAR 2001 GOLDEN STAR 2006 GOLDEN STAR 2005 DAGENS INDUSTRI AND LIPPER FUND AWARDS 2010 LIPPER FUND AWARDS 2008 DAGENS INDUSTRI AND DAGENS INDUSTRI AND DAGENS INDUSTRI AND MORNINGSTAR SWEDEN LIPPER FRANCE LIPPER NORDIC MORNINGSTAR SWEDEN MORNINGSTAR SWEDEN MORNINGSTAR SWEDEN 2,000 1,500 East Capital Russian Fund 1,000 RTS-Index 500 0 1998 2000 2002 2004 2006 2008 2010 Note: As of 31 March, 2010, in SEK 23 May, 2010 7
  8. 8. East Capital Russian Fund “The East Capital Russian Fund has returned 1,524% in USD terms during the past decade (source Morningstar*), which is 561% better than the second best fund and 826% better than the benchmark index RTS over the same period.” 23 May 2010 8
  9. 9. Investment Team, Style and Process 23 May 2010 9
  10. 10. A dedication to research 23 May, 2010 10
  11. 11. One of the regions largest team dedicated to public equity – 24 investment professionals Advisory Committee Portfolio Management Team (6) (7 internal, 3 external) Chief Economist (1) Quantitative Analysts (2) Traders (3) Analysts (9) 23 May 2010 11
  12. 12. Investment style  Long term approach with focus on convergence and domestic themes  Active stock-picking without index tracking  Strong local presence and in-house research based on frequent company visits  Broad portfolio diversification on all levels (country, sector, company)  Low valuations and high yield  Corporate governance  Core approach 23 May 2010 12
  13. 13. Investment process RIGHT REGION RIGHT STRATEGY RIGHT COMPANY RIGHT INSTRUMENT TOP DOWN TOP DOWN BOTTOM-UP BOTTOM-UP  Macro-economic and  Identifying right strategy  Quantitative analysis  Alternative ways to gain political analysis which are supported by  Qualitative analysis exposure to a  Weighting the long-term  Company visits development trend development trends  Indirect exposure  Different type of shares 23 May 2010 13
  14. 14. East Capital Eastern European fund vs. index – 7 of 8 years with outperformance (average 8.8% per year) 120% 100,3% 100% 68,8% 77,5% 80% 65,4% 57,0% 56,1% 60% 47,8% 43,9% 40% 33,3% 33,5% 31,9% 28,1% 20% 12,3% 0% -3,7% -20% -40% -60% -80% -69,9% -68,4% 2002 YTD 2003 YTD 2004 YTD 2005 YTD 2006 YTD 2007 YTD 2008 YTD 2009 YTD East Capital Eastern European Fund MSCI EM Europe Index 23.9% annualized performance since inception (USD) Note: As of 30 December, 2009, USD 23 May 2010 14
  15. 15. East Capital Eastern European fund vs. index – Consistently lower risk 90-days rolling annualized volatility 120,00% 100,00% 80,00% 60,00% 40,00% 20,00% 0,00% May-07 May-08 May-09 Mar-07 Mar-08 Mar-09 Sep-06 Sep-07 Sep-08 Sep-09 Jul-06 Jul-07 Jul-08 Jul-09 Nov-06 Nov-07 Nov-08 Nov-09 Jan-07 Jan-08 Jan-09 Jan-10 GDUEEMEE Index MSCI EM E TR East Capital Eastern European fund Note: As of 21 January 2010, USD 23 May 2010 15
  16. 16. Reflecting on a decade of investing in Eastern Europe and Russia 23 May 2010 16
  17. 17. Observations after a decade of investments in Eastern Europe and Russia  Mainstream investment strategies still focused on blue-chips – Research availability beyond large caps sparse – Main growth sectors poorly represented in the index  Opportunities for active managers same as a decade ago – Valuation discrepancies large between market cap segments – Large discounts for selected names with double listings – Preferred shares offer big discounts to ordinaries (and option for potential conversion)  Investors’ (and media’s) view on the region – mostly negative… – Historically high discount on Eastern European equities compared to BRIC/GEM universe – Significant upside potential of sentiment change – A long term investment horizon pays off
  18. 18. Index still poorly captures main growth sectors Sector breakdown of RTS index Sector breakdown of Russian GDP O&G O&G Banks Financial intermediation M&M M&M Utilities Utilities Wholesale, retail trade Retail and pers services Consumer goods Consumer goods Others Others Source: Rosstat, VTB Capital 23 May 2010 18
  19. 19. Unjustified discount? 80% 60% P/E discount P/B discount 70% 50% 60% 40% 50% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2002 2003 2004 2005 2006 2007 2008 2009 MSCI Russia vs MSCI EM MSCI EM Europe vs MSCI EM MSCI Russia vs MSCI EM MSCI EM Europe vs MSCI EM The discount on “should“ be in the 10-20% range rather than 30-50% Source: Bloomberg 23 May 2010 19
  20. 20. Perspectives on the allocation to Emerging Markets Russia and Eastern Europe Developed Markets and Emerging in % of the world Markets in % of the world Russia and EE in % of the world DM and EM in % of the world 6,0% 100% 5,0% 90% 80% 4,0% 70% 60% 3,0% TOTAL EM Russia 50% 2,0% 40% TOTAL DM TOTAL EE 30% 1,0% 20% Linear (TOTAL EM) 10% Linear (TOTAL DM) 0,0% 0% MSCI AC World Mcap share GDP share GDP share MSCI AC Mcap share GDP share GDP share weight 2009 2014 World 2009 2014 weight Allocating according to GDP, only investments to Russia should increase 4-5 times in the coming 5 years Source: Bloomberg, IMF 23 May 2010 20
  21. 21. Despite strong regional development during past 15 yrs most catch up lies ahead in Eastern Europe GDP per capita (USD) 50,000 45,000 Structural catch-up growth 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Kyrgyz Rep. Turkmenistan Hungary Czech Rep. Tajikistan Uzbekistan Turkey Slovenia Azerbaijan Kazakhstan Lithuania Moldova Ukraine Albania Belarus Germany Russia Poland Slovakia Sweden Bulgaria Romania Armenia Latvia Estonia US Macedonia B&H Georgia Serbia Croatia 2009F 2010F Source: IMF, World Economic Outlook, April 2009 23 May 2010 21
  22. 22. Case study: What drove the Russian development?  Oil price – Indirect effects are substantial – Direct impact of oil exports is limited  Reforms – Unlocking the potential in the private sector – Privatizations, corporate governance, minority rights, bankruptcy procedures, bank restructuring  Consumption – Emergence of a new Russian consumption class – Most important component of Russian GDP 23 May 2010 22
  23. 23. Magnit – a leading Russian regional retailer  Leading discounter chain with a regional focus, established in Krasnodar with first store opened in late 1998  Now 3318 stores in 1048 locations with 76.000 employees  Opened 636 new stores in 2009 alone and will add an additional 500 in 2010  24 hypermarkets opened in 2007 – 09, will add an additional 30 in 2010  Net debt / EBITDA 2010e: < 1.0  Market value of USD $ 7.8bn, share is up 70% from before the crisis and 750% from the middle of the crisis (down 80% during the crisis)  29% YoY sales growth in 2009, 31% YoY growth expected for 2010 (RUB)  Highest 9.5% EBITDA margin in retail sector Magnit Hypermarket, 11.000 kvm, Kamyshin, Volgograd 23 May, 2010 23
  24. 24. Russian growth set to continue Contraction 7.9% Average yearly Assuming average Output growth 7% from yearly growth 5% collapse low base Source: Haver, East Capital 23 May 2010 24
  25. 25. Russia in the next decade – Domestic demand likely to remain the key driver  Consumption still largest contributor – Increased savings may curb consumption growth, but will likely trigger higher investments  Investments likely to gain in importance – Positive real interest rates may help the build-up of a domestic funding base and local capital – Availability of capital will increase investments in modernization and much needed infrastructure  Net exports contributing less as imports are expected to outpace exports 23 May 2010 25
  26. 26. Summary - key strengths & differentiating factors  A strong investment team with local language skills and background  Local presence and sourcing information first hand from companies  Combining proprietary fundamental research with qualitative research  Company meetings to assess credibility of management and identify risks  Strong network of senior advisors Enables an informational advantage and high conviction 23 May 2010 26
  27. 27. Appendix 23 May 2010 27
  28. 28. Public Equity Team PETER ELAM HÅKANSSON, Stockholm ANDRAS SZALKAI, Vienna • Chairman and one of the founders of East Capital. Head • Portfolio Advisor of Public Equity Team. • Covering Central Europe (CEE4) • Previously held a series of senior positions at Enskilda • Formerly Head of Research at Erste bank in Hungary and Securities in London, Paris and Stockholm. His last role also worked as fund manager at Vontobel Bank in Austria was as Head of Equities and Global Head of Research • Fluent in Hungarian, German and English and communicates • Fluent in Swedish, English and French well in Swedish. AIVARAS ABROMAVICIUS, Kiev Adrian Pop, Stockholm • Partner, Senior Advisor • Portfolio Manager • Formerly Head of Equities at Hansabank , the largest • Covering Balkans Baltic Bank. Also worked three years as Head of Trading • Worked for Accenture in Romania at Brunswick Emerging Markets • Fluent in Romanian, German, English and Swedish • Fluent in Lithuanian, Russian, and English and communicates well in Estonian. JACOB GRAPENGIESSER, Moscow Egle Fredriksson, Stockholm • Partner, Senior Advisor • Portfolio Manager • Formerly analyst with Brunswick Emerging Markets and • Covering the Baltic region and CIS also worked at Khanty Mansiysk Oil Corporation (KMOC) • Prior work experience from several Baltic companies, in Moscow including Philips Baltic and Phillip Morris Lietuva • Fluent in Swedish, Russian and English • Fluent in Lithuanian, Russian, Swedish and English 23 May, 2010 28
  29. 29. Fund information YTD Since Inception USD EUR SEK USD EUR SEK East Capital Russian Fund 18.0% 26.7% 18.8% 1396.6% 1175.3% 1329.1% RTS Index 10.2% 18.4% 11.0% 591.0% 488.9% 559.9% East Capital Baltic Fund 23.9% 33.1% 24.8% 440.9% 362.0% 407.6% Baltic30 Index 27.2% 36.6% 28.2% 186.5% 144.7% 168.9% East Capital Eastern European Fund 15.7% 24.3% 16.6% 513.8% 304.6% 328.8% MSCI Emerging Europe Index 7.6% 15.6% 8.4% 224.3% 113.7% 126.5% East Capital Balkan Fund 9.5% 17.6% 10.3% 63.1% 52.0% 62.2% MSCI Emerging Europe Index 7.6% 15.6% 8.4% 72.1% 60.4% 71.2% East Capital Turkish Fund 15.2% 23.7% 16.0% 13.3% 2.1% 4.3% ISE 100 National Index 16.2% 24.8% 17.0% 26.8% 14.3% 16.7% East Capital (Lux) Eastern European Fund A 15.0% 23.5% -29.7% -23.3% MSCI Emerging Europe Index 7.6% 15.6% -41.4% -35.4% East Capital (Lux) Conv. Eastern European Fund A 10.9% 19.1% -32.6% -34.0% MSCI Emerging Europe Index 7.6% 15.6% -20.3% -22.4% East Capital (Lux) Russian Fund A 16.8% 26.4% -10.4% -11.4% RTS Index 10.2% 18.4% -14.5% -16.8% Note: As of 30 April, 2010 23 May, 2010 29
  30. 30. Stockholm | Moscow | Paris | Oslo | Tallinn | Hong Kong | Vienna 23 May 2010 30
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