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Limestone Sustainability Yearbook 2011

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Limestone in collaboration with Northern Star have published the third annual Sustainability Yearbook 2011. The Yearbook presents a comprehensive overview of key issues and implementation of …

Limestone in collaboration with Northern Star have published the third annual Sustainability Yearbook 2011. The Yearbook presents a comprehensive overview of key issues and implementation of integrated ESG research in Eastern Europe, Russia and emerging frontier markets.

The Sustainability Yearbook 2011 includes insight into the following topics:
• Northern Star - roadmap to building an emerging markets multi-boutique platform with a dedicated focus on sustainability and responsible investing
• Limestone New Europe fund - three years of sustainable investing in Eastern Europe
• Fully integrated ESG research - Best Risk Management Tool for Emerging Markets
• Country focus – Serbia, the last European frontier
• Company specific summaries of sustainability opportunties and risks in the region

Published in: Economy & Finance, Business

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  • 1. SustainabilityYearbook 2011 1
  • 2. Printed on CyclusPrint Recycled2
  • 3. Interaction Transparency Knowledge ValueNorthern StarNorthern Star is a global multi-boutique asset manager specializing in active investment management and strategicpartnerships with clients. Established in Helsinki by a senior team of financial industry professionals, NorthernStar is striving to become a leading international investment management business with scale and institutionalcredibility. Leveraging its partnership with Limestone, Northern Star is pioneering in introducing responsibleinvesting in worldwide emerging and frontier markets.Limestone Investment ManagementLimestone is a specialist Emerging European equity fund manager based in Tallinn. The company was founded in2007 and is managed by its owners. We focus exclusively on delivering outstanding investment performance toour clients. Our home region and investment universe, Central and Eastern Europe, is one of the most dynamicinvestment markets in the world. Limestone is one of the very first New Europe based investment managers thatintegrates the concepts of socially responsible investment and sustainable development into fundamental researchprocess as essential factors for long term performance and risk management. Limestone is a signatory to the United Nations Principles for Responsible Investment (UN PRI) and European SRI Transparency CodeThe European SRI Transparency logo signifies that the Limestone commits to provide accurate, adequate and timely information to enable stakeholders, inparticular consumers, to understand the Sustainable Responsible Investment (SRI) policies and practices relating to the fund. Detailed information about theEuropean SRI Transparency Code can be found on www.eurosif.org, and information of the SRI policies and practices of the Limestone SRI Fund can be foundat Limestone website. The Transparency Code are managed by Eurosif, an independent organisation. The European SRI Transparency Logo reflects the fundmanager’s commitment as detailed above and should not be taken as an endorsement of any particular company, organisation or individual 3
  • 4. Dear Reader If there is one clear message to learn from the financial crisis that has rocked the world for the better part of last four years, it is that change is needed. From the sudden understanding that borrowed welfare is not an asset but liability, to the realisation that the sacred ratings that the entire financial system relies upon are nothing more than more or less educated guesses, there are signs everywhere that the current Western financial model is not entirely sustainable. Find-the-greater-fool in highest possible frequency has become an ever more popular game in stock markets, places that were created to mediate capital between investors and entrepreneurs, diversifying the risks and distributing the gains. We believe it is time to return to the very basics of investing, to do it in a way it was meant to be. Limestone took up the task of introducing sustainable investing practices in Eastern Europe four years ago. Meanwhile, we found a like-minded partner in Northern Star and decided to create together something truly unique: a global multi boutique investment house with common sustainable investment framework. Northern Star Group brings together Limestone’s team with experience from emerging Europe and ambitious international investment professionals with their own experiences from all over the world. This creates synergy that will lead to a all new type of investment culture with sight and focus on long term gains arising from sustainable growth, something that will always outperform eventually. Limestone New Europe Fund has reached three year milestone, often considered by institutional investors the minimum proof of meaningful performance history. Meanwhile, Northern Star Group has launched two new funds, dedicated to deliver the best there is from other emerging regions of the world. A concept, contrarian to the mainstream world-view, of looking at the emerging world as a collection of investment themes driven by long term demographic and social shifts, as opposed to a political map of separate countries, is the underlying idea of Globetrotter Fund. Northern Star Russia was created to answer to the demand for a more sophisticated view on Russia than presented by the usual index driven mega funds playing the ever more virtual commodities-game. While GDP in most rich economies is still below its level at the end of 2007, emerging economies’ output has jumped by almost one fifth over the same period. The rich world’s woes have clearly hastened the shift in global economic power towards the emerging markets. The long-term outlook for emerging economies remains bright, with less debt, more growth and huge potential to lift productivity. Investment flows will follow. Northern Star was created to accommodate that shift in a pioneering way. Building on long experience from global capital markets and grass root level ground work practice, Northern Star and Limestone team has something novel to offer. We sincerely hope that this book will achieve its primary goal and convince you that it is not only possible to do things differently but it is also necessary in order to survive and prosper in these turbulent times. The world is full of opportunities. Tomi Långström Alvar Roosimaa CEO, Northern Star CIO, Limestone4
  • 5. ContentsNorthern Star Group: Nourishing the Best of Boutique Culture 6Responsible Investing Makes Sense From Day One 8 Nothing Sacrificed and Whole Lot Gained 8 Leveraging Limestone’s Three Year Success Track 8 Best Risk Management Tool for Emerging Markets 8 Integrated Research as Yin and Yang of Successful Investing 9Limestone New Europe Fund 10 Update And Outlook 11Globetrotter – Unlocking the Undiscovered World 14 What Are Frontier Markets? 14 Clear Investing Principles: Key to Success 16 Investment Themes in Focus 17In Russia, Governance Is Everything 19Integrated Research the Only Way Forward 21Country Focus: Serbia, the Last European Frontier 25 Development and Challenges 27 Capital Markets and Corporate Governance 28 Companies in Focus 29Why Governance Matters: From Investing To Litigation in A&D Pharma 32Northern Star Group Responsible Investment Principles 34 Framework for ESG Evaluation 34 Evaluating Corporate Governance 36 5
  • 6. Northern Star Group: Nourishing the Best of Boutique Culture The post crisis investment community is looking for new and were embedded with poor internal governance to solutions with better alignment of motivation between enter into anything complex or risky. investors and managers and more straightforward value and risk proposition. In the boom days when funds The recognition is universal that even when it is obvious could pick and choose investors and assets piled up that small management controlled investment teams without too much effort, these were easily overlooked have higher motivation and potential to outperform, – unless things went horribly wrong. business risks often outweigh that prospect. People who are good at trading or investing are not necessarily Recent investment innovation has focused on themes good at running businesses. Growth is hard to achieve like new asset classes and allocation techniques, new now without building a robust infrastructure with high risk and return enhancing tools, theme investing, and quality internal controls. new business models. Institutions that have gained the most from that innovation had strong investment beliefs Northern Star has been created to tap this opportunity which they were able to implement in a disciplined way, by creating a multi-boutique asset management house: often benefiting from early mover advantage. a base where talented fund managers could operate and share resources. A flight to quality and size often means Institutions that lost the most were victims of their a flight to “boring”, or benchmark-hugging strategies – herd instinct combined with low engagement with their entrepreneurs supported by institutional infrastructure asset managers. Usually these were lacking also skills are the solution. By partnering up with Limestone,6
  • 7. Northern Star got to an instant start with licensed that are an opportunity for investment managers withLuxembourg based infrastructure, and a talented team analytical resources and investment infrastructurethat had been building institutional quality service for capable to collect and process non-standardized data,the last three years. including non-financial information.Creating something new is an opportunity to combine Asset managers with success have often had strongall the newest and best innovations into one. In addition overlay of human judgement in risk models andto modern business concept, Northern Star is focusing investment processes. The example of Limestoneon the integration of two other areas of investing that investment team being a pioneer in East Europe ispromise to be market share winners in the coming broadened up to be the core element of the wholeyears: responsible investing and emerging markets. Northern Star group and its products and services. Our multi-boutique business model is determined toNon-financial risks demand strong human judgement, be decisively outward looking and more ideas seeking.disciplined processes and high engagement with Special insights and foresight will be driven frominvestment targets. Mere lip service, such as having learning-by-doing, learning by experimentation andsigned a global principle, can be a good start, but learning from others.unfortunately too often leaves everything elseunchanged within the investment process. Responsibleinvesting is not so recent innovation, but is undergoing a Creating something new is antransformation to adapt to real needs by real investors. opportunity to combine all theThere is still a rather small group of asset managers andinstitutional investors who take it seriously. Ahead of newest and best innovationsthe crowd, Northern Star is being ESG implementation into one.pioneer in new geographical areas and in new ways tointegrate ESG into traditional valuation methodology. We may not be able to change the world, but we will seek to be better by putting into action such investmentOver the coming years, massive debt burdens will be beliefs which we believe to create an alignment ofa drag on rich countries’ growth. At the other end, the interest with our long term clients and ourselves. Onelong-term outlook for emerging economies remains such belief is having integrated ESG as unique valuebright, with less debt, more favourable demography driver. Northern Star products are often classified asand huge potential to lift productivity. Investing in high alpha seeking against indices. We believe that bydeveloping markets is traditionally considered to carry being benchmark agnostic against traditional indicesa higher degree of risk, and the main reason is the can actually lead into less risky portfolios when ESG isinformation problem: company specific data is not fully integrated into investment process.readily available. The pricing inefficiencies created by 7
  • 8. Responsible Investing Makes Sense From Day One Northern Star has taken on a unique challenge to build that goal and, as with every new thing in an established up an emerging markets multi-boutique platform with environment with sticky traditions, more threats and a dedicated focus on sustainability and responsible immediate problems are on the visible surface than investing. There are no readymade solutions towards quick wins. Nothing Sacrificed and social and governance analysis before. The first three Whole Lot Gained years have proven highly successful: fund’s long term Mainstream investment community still views anything returns are at the top of CEE ex-Russia peer group that has to do with social responsibility or sustainability without having to compromise on our standards. The with a fair share of suspicion. Being pioneers in the area, track record has also been characterized by a constant we have had to spend considerable amount of effort search for more effective ways of assessing the extra- to demystify the concept of ESG research and social financial side of companies. The approach has earned responsibility in investing. It is the one of the basic praise from several investors, encouraging Northern traits of human nature, the present-bias, that needs to Star to strive for a group wide sustainable investment be taken good care of in order for SRI to break out into policy development. mainstream. Prevailing view of SRI investing is that it requires for immediate sacrifices in the performance Best Risk Management Tool and selection of opportunities, for the sake of doubtful for Emerging Markets benefits in the unclear future. This should not be the All investment portfolios would benefit from managing case. Our minimum exclusion and integrated research ESG risks, but it is in emerging markets where the approach adds value from day one without any degree is most acute. Gathering and assessing sacrifices. We hope that by increasing the size of our environmental, social and governance information, business we reach more investors and help turn socially and limiting exposure to risks associated with extra responsible investing concept from „frown upon“ into financial factors significantly reduces „tail risk“ – the „smiled upon“. risk of unlikely events causing catastrophic damage. The real challenge hereby is the significant information Leveraging Limestone’s Three Year problem. This can only be tackled by building up an Success Track inhouse research process that is capable of gathering Limestone New Europe Socially Responsible Fund has the necessary information from outside the public data since 2008 served as a real life experiment. Nobody had vendors’ services, and to integrate it into company tried to do fundamentals driven all-cap active investing valuation methodology. in Emerging Europe with integrated environmental,8
  • 9. The Yin and Yang of Investment Analysis A dynamic, unified relationship exists between financial and extra financial information. Omitting either part leads to insufficient knowledge about the company and creates exposure to unforeseen risks. Rational Visible Hard Facts Weak financials diminish Financial strength opportunities for innovation and sustainable development YANG Balanced analysis can be Financial results achieved by evaluating both parts. Tensions in both parts can be creative and YIN constrainingCorporate governance Environmental and Poor corporate governance social sustainability and management of environmental and social Managerial strength risks leads to fines, bad press, loss of customers, and valuable employees – reflected in financials. Intuitive Invisible Soft Facts 9
  • 10. Limestone New Europe Fund Limestone New Europe SRI Fund celebrated its third New Europe, and invest investors’ funds in their publicly anniversary in August 2010. Launched in the wake of the traded stock at the best possible terms. The ultimate worst financial crisis in modern history – a few weeks goal is to outperform any competitive peer and before Lehman Brothers’ bankruptcy filing – the fund investable market proxy in any three year time period. was the first equity fund managed from New Europe To achieve that goal the management team employs to incorporate sustainability factors in its investment rigorous bottom up investment process, which is based process. The fund has been equally successful in on an in-house developed research framework and pioneering in corporate social responsibility in tools, including unique ESG factor integration serving New Europe and producing strongly outperforming primarily as a risk management tool. investment returns. The fund has a simple and straightforward purpose: to find the best companies with the highest upside in Limestone New Europe Fund STOXX EU Enlarged Total Return 140 120 100 80 60 40 20 July 08 Oct 08 Jan 09 April 09 July 09 Oct 09 Jan 10 April 10 July 10 Oct 10 jan 11 April 11 Source: Bloomberg10
  • 11. Update And OutlookLooking back to last year, and reviewing year-old from Baa3 to Baa2 with a stable outlook. The increaseforecasts, it feels like deja vu. The final run-up to is a consequence of the continuing fiscal discipline, theLimestone New Europe Fund’s three year milestone improved institutional stability as well as the relativewas again characterized by uncertainty about the flexibility of the financial system, the report reads.sustainability of global recovery. Plenty of one off Bulgaria is effectively running a balanced budget andthreats and hurdles kept popping up, like US debt ceiling has very low levels of the public debt, something thatdebate, earthquake in Japan and of course the Greeks is quite rare these days. In addition, Moody’s assessedkeeping the financial markets all over the world theirhostage, threatening to blow up Eurozone. No wonderthen that external factors were heavily prevailing over While the world was holding itslocal progress reports in setting the sentiment for breath during most of the springCentral and Eastern European markets. and summer over Eurozone andLooking beyond the generic risk-on and risk-off market US debt, news from New Europeview that dominated investment flows, New Europe has grew constantly more positive.shown surprisingly strong recovery from the crisis. Fromeconomic to political spectrum, all signs show healthy the public finance and the Bulgarian banking systemrestructuring and quick return to convergence path with to remain out of the influence of the Greek debtgrowth returning to long term double-the-EU-average crisis owing to the considerable liquidity and capitalalready in 2011. While the world was holding its breath buffers. EBRD revised upward its forecast for Romanianduring most of the spring and summer over Eurozone economic growth, saying it expects harsh austerityand US debt, news from New Europe grew constantly measures implemented under a multilateral financialmore positive. program will pay off. And again, EBRD also assessed Greek influence and concluded that Greece’s seeminglyThe European Council concluded that Croatia is ready to turn for the worse is unlikely to push Romanian economybecome the 28th member of the European Union and into recession. And Serbia, the last European “outcast”accession treaty should be signed during 2011, which with size, made a giant leap towards EU accession whenwill enable the country to become a full member state it caught the last missing war criminals and handedin 2013. Moody’s raised the credit rating of Bulgaria them over to Hague court. 11
  • 12. COUNTRY, 2011E POPULATION GDP (PPP) NOMINAL GDP PER 2011F WAGE/MONTHS PUBLIC DEBT BUDGET DEFICIT MARKET CAP STOCKS MAIN INDEX FREEFLOAT RETURN FROM MN PER CAPITA CAPITA 2012F %YOY € %GDP 2012F €MN ‘07 HIGH Poland 38.2 70% 11.5 3.6% 904 54 -3.2% 418 118 WIG20 45% -39% Czech Rep 10.5 91% 15.9 2.9% 1069 40 -3.8% 27 32.7 PX 40% -48% Romania 21.5 44% 6.8 3.5% 472 35 -4.0% 82 13.4 BET 20% -55% Bulgaria 7.4 47% 5.6 3.5% 353 16 -2.1% 98 5.0 SOFIX 25% -81% Hungary 10.0 69% 11.5 2.8% 880 80 -3.6% 55 17.7 BUX 53% -38% Croatia 4.3 65% 11.6 1.8% 1043 55 -4.8% 256 19.2 CROBEX 30% -63% Serbia 7.3 40% 5.0 4.0% 493 42 -3.0% 90 8.7 BELEX15 20% -81% Estonia 1.3 68% 12.3 3.7% 792 8 -1.8% 15 1.3 OMXT 30% -44% Slovenia 2.0 103% 20.0 2.4% 1405 36 -5.0% 34 3.2 SBITOP 25% -38% Lithuania 3.1 63% 9.7 3.8% 614 37 -4.5% 38 5.5 OMXV 30% -75% New europe (10) 106 66% 11.0 3.2% 803 40 -3.6% 1113 207 DJ STOXX 42% -49% Euro area (17) 332 100% 38.6 1.8% 2450 81 -4.0% 6 700 STOXX 600 79% -42% share of... 32% 66% 28% 178% 33% 50% 3.1% Source: GDP: World Bank , GDP Forecast: IMF World Economic Recent financial crisis and subsequent reforms have turned New Europe into a Outlook April 2011, Budget Deficit: Eurostat financially sound and very competitive region within the borderless European Union. The above selection of news delibaretly focuses to room for future growth definitely is. the Southern part of New Europe, the least liked by The importance of Eurozone stability for New Europe is investors in the crisis aftermath and therefore the hard to overestimate. At the same time it is important most neglected. Most markets in that region trade to understand the difference between the direct not much higher than at the bottom of the crisis in impact on domestic economy of CEE countries and Spring 2009. We see it as an extraordinary investment the potential damage that would come from another opportunity, something alike the second half of 2009 wave of risk aversion and renewed general perception downgrade, would Greek crisis escalate further. The In the „periphery“ of Eastern former is relatively moderate and the effects have already run their course. The latter, however, is what Europe we find the cheapest moves financial markets and short term asset prices; companies with the most to the “risk off ” trade that pushed prices lower in CEE is the direct consequence of that. benefit from both the short term recovery and the longer Naturally, all depends on the scale of crisis escalation. term convergence. A real renewed economic slowdown in the Eurozone would cause stronger decline in CEE exports and growth when the fund nearly doubled its unit price. Our strictly in whatever other areas of the local economies will not fundamentals-driven portfolio has throughout 2011 be able to make up for that. In addition, investments shifted more weight to the newest members of EU and into the CEE region largely come from the Eurozone, and the next two hopefuls, together often characterized as would therefore be negatively affected in such a case, the „periphery“ of Eastern Europe. This is where we too. Even though there are indications of a recovery find the cheapest companies with the most to benefit that should shift in the coming months and years from from both the short term recovery and the longer term export-driven growth to more balanced growth, the convergence. With careful liquidity management and economic recovery will continue to rely on external rigorous bottom up research we are certain that for our factors from the Eurozone. While CEE countries with a portfolio the fundamental risk is not significantly higher larger domestic demand base may be able to counter in the Balkans than it is in Warsaw or Prague. But the some negative external effects more efficiently than12
  • 13. smaller and less diversified economies in the future, not only mirror the chances stemming from continuedthe overall region will continue to depend on economic convergence but also the risks of a slowdown in growth.trends in the Eurozone, and especially Germany. CEE will Itraxx CEEMEA Itraxx Western Europe 350 300 250 200 150 100 50 Jan 10 Feb 10 March 10 April 10 May 10 June 10 July 10 Aug 10 Sept 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 March 11 Apirl 11 May 11 June 11 July 11Source: Bloomberg For the first time ever, risk of CEEMEA, as measured by CDS spreads, has dropped below Western European level. This would suggest that convergence of asset valuation levels should converge, too.Considering that New Europe is a relatively small and near-emerging market growth rates. Limestoneinvestment region with open economies and strong New Europe Fund management team will continueties to Western Europe, it is unlikely to decouple from to do what we know best: finding the most attractivegeneral trends in global markets. What it offers, is a companies in the region and constructing a uniquelarge long term outperformance if and when European portfolio to deliver the outperformance.economy recovers, with near-developed market risk Working in equity markets from 1996 as equities trader and portfolio manager, Alvar joined Suprema Fund Head of Eastern European Equities Management in 2000 as a fund manager. In 2003 Alvar started in Hansa Investment Funds where he initiated the set up of CEE investment management team and a portfolio of funds including the Morningstar 5* rated Hansa Eastern Europe Equity Fund. In 2007, Alvar co-initiated the setup of Limestone Investment Alvar Roosimaa Management, an independent specialist Eastern Europe equity funds investment manager, where most of the team from previous employer eventually followed. He was nominated the Fund Manager of The Year in Estonia in 2005 and 2006. Alvar has a MSc in Finance degree from London Business School. 13
  • 14. Globetrotter – Unlocking the Undiscovered World For those with the skill and patience to choose carefully as well as assessing the soft values and company’s and a strong view on how the world will look like in the interaction with the environment around it. coming years, global frontier markets provide excellent opportunities. There are many unexplored markets with There are many, both objective and subjective, reasons exceptional value and growth opportunities that the big for the inefficiencies to pop in these markets. There are money has not found yet. Accessing these markets in some markets that have not been found yet because earnest requires experience and takes a lot of ground they are very new or very small and investors just work, research, and network building. That is what the haven’t noticed them yet. Some markets are restricted Globetrotter fund was created to do. from foreign investors, which provide opportunities for What Are Frontier Markets? The lack of investor base Northern Star defines frontier markets as the most inefficient emerging markets with historically low overlap with global markets correlation with major global markets. Mainstream systematically creates asset research coverage from investment banks and brokers mispricing in frontier markets. does not reach these markets and that, along with other reasons, keeps the mass of foreign investors away. those who have the capability to dodge the restrictions. This lack of investor base overlap with global markets Good examples of these are Chinese and Saudi Arabian systematically creates asset mispricing and that gives local markets that Globetrotter has access to, thanks to remarkable opportunities for investors who are capable the local network created over many years of activity of conducting a deeper research on the grass-root level in the region. Then there are markets like Russia, and14
  • 15. Central Asian and Eastern European smaller countries these high-potential markets are in the beginning of orthat suffer from reputational downgrades that have already going through their fast growth phases wherelittle to do with real developments, thus offering the highest returns come from. Indexes considerextraordinary opportunities for investors with deeperlocal knowledge. Companies operating in the high-potential markets areSelected countries in Globetrotterfrontier market universe in the beginning of their fastQuite often, frontier markets funds base their portfolio growth phases where theconstruction on indexes and geographical borders. This highest returns come from.usually means that large countries and regions havelarge weights and small ones have small weights, no adding the companies remarkably later, long after suchmatter what the outlook. Stock-wise, biggest companies prosperous gains.in the market that are added to indexes usually getmore attention. In the end of the day, everybody is Racing the index does not necessarily make anybodydoing pretty much the same thing and earning the same rich either. A fund can outperform a benchmark indexmoney because they let someone else decide where but still give a negative return. Who would win inand how much to invest. this case? Working on one’s own speed, having only the target performance in sight will create value forThat approach will not capture the true potential in investors and increase their wealth.frontier markets. Some large countries are way tooexpensive during some periods while small markets Parts of the world considered frontier are going throughcould have tremendous potential. But higher risk the fast-growth-phase and large structural changes, butprofile that comes with big potential makes it seem to not equally in all sectors and all markets. That is wherebe safer to keep away while it really only requires more the theme-investing comes in.homework. Moreover, the companies operating in Balance on Time required Ease of doing Current to start a business Urban Mortality rate Population, GDP growth, GDP growth, Account, % of business, days, (1=best, Railways, km, population, % under-5, of Area km² mln, 2010 2011 est 2012 est GDP, 2011 est 2010 183=worst) 2010 of total, 2010 1000 Cambodia 181,035 14.3 6.5 6.5 -11.4 8 147 690 22.8 88 China 9,596,961 1,341.0 9.6 9.5 5.7 38 79 86,000 45.2 19 Congo, Dem Rep 2,344,858 62.6 6.5 6.0 -2.8 84 175 4,007 35.2 128 Egypt, Arab Rep 1,001,450 75.5 1.0 4.0 -2.7 7 94 5,083 42.8 21 Ghana 238,533 23.5 13.7 7.3 -6.8 12 67 947 51.5 69 India 3,287,263 1,182.1 8.2 7.8 -3.7 29 134 63,974 30.1 66 Indonesia 1,904,569 234.0 6.2 6.5 0.9 47 121 5,042 53.7 39 Iran, Islamic Rep 1,648,195 76.9 0.0 3.0 11.7 8 129 8,442 69.5 31 Iraq 438,317 30,399.6 9.6 12.6 -3.2 77 166 2,272 66.4 44 Kazakhstan 2,724,900 16.1 5.9 5.6 5.8 19 59 15,079 58.5 29 Kenya 580,367 37.5 5.7 6.5 -9.3 33 98 2,066 22.2 84 Kuwait 17,818 3.5 5.3 5.1 39.4 35 74 98.4 10 Liberia 111,369 3.8 5.9 9.8 -37.6 20 155 429 61.5 112 Malaysia 329,847 27.6 5.5 5.2 11.4 17 21 1,849 72.2 6 Mongolia 1,564,116 2.8 9.8 7.1 -13.3 13 73 1,908 57.5 29 Mozambique 799,380 21.4 7.5 7.8 -12.0 13 126 4,787 38.4 142 Nigeria 923,768 148.1 6.9 6.6 14.6 31 137 3,505 49.8 138 Qatar 11,586 1.5 20.0 7.1 36.1 12 50 95.8 11 Saudi Arabia 2,149,690 27.7 7.5 3.0 19.8 5 11 1,378 82.1 21 United Arab Emirates 83,600 8.9 3.3 3.8 10.4 15 40 78.1 7 Vietnam 331,210 86.9 6.3 6.8 -4.0 44 78 2,347 28.8 24Source: IMF, World Bank, CIA, FAO 15
  • 16. Clear Investing Principles: Investing thematically captures Key to Success the maximum growth in the Falling in love with companies is quite easy when doing selected areas of economy as much work with them as frontier markets require. Knowing them so well and seeing the opportunities while not dragging the lagging they offer could lead to buying assets that are relatively parts of it along. fairly priced. To prevent that, quite straightforward investing principles have to be set in place. The idea of investing thematically is to capture the maximum growth in the selected areas of economy while The whole investment process of Globetrotter is based not dragging the lagging parts of it along. The strategy is on fundamental and geopolitical analysis as well as to identify those themes that benefit first and pick up the grass root level research while also adding soft values future winning companies in each theme, wherever they like environmental, social and governance factors. All operate in our universe or where they are listed. That the markets in frontiers’ universe are very different, helps achieve real diversification benefits in the fund. there are no homogenous areas. All markets have different political regimes and cultural characteristics. While different parts of the frontier markets are in a They all have different risks involved. Before investing, different phase of development, the themes to benefit all these aspects must be considered and measured are also different. As changes take place, the winning accordingly. This is the one place where geographical themes change, so modifications should also be done in borders actually do matter and are reckoned with. the portfolio in order to stay ahead of the market. In Globetrotter, the most important principle while The benefitting themes are usually quite well protected building the portfolio is having at least 50 percent during the times of market turbulence, because the upside for each theme and each company over the big money has not reached them yet or does not care next 6 to 18 months. That is clear enough to prevent about them. Only smaller number of focused investors making hasty investment decisions and together with is involved in the beginning. inefficient market approach, will give enough downside CASH LOCAL CHINA MARKET CHINA LUXURY GOODS FSU BANKING EE LAGGARDS FOOD ASIAN NEW TIGERS CENTRAL ASIAN COMMODITY RESERVES CEMENT OIL SERVICES AND EXPLORATION AFRICAN CONSUMER MIDDLE EAST RECOVERY SAUDI ARABIA OPENING GATES16
  • 17. protection during difficult times while providing an intention to punish companies that do not disclose theirexcellent upside. ESG practices but rather engage with them, explain the mutual benefits, and encourage them to open up. In The most important principle frontier markets, the challenge is big – most companies do not have a habit of disclosing their ESG information, is to have at least 50 percent the reasons can be anything from cultural to the fear upside for each theme and of competition or clients’ reaction. Among many good causes the ESG integration serves, it is also a vital risk company over the next 6 to 18 management tool against damaging event risks in an months. environment where public information availability is underdeveloped.Clearly, nobody has a crystal ball in the office. Even ifall the fundamentals support the upside principle andinefficient markets approach, the performance can turn According to Risklab research,out to be less than expected. But it can also turn out “tail risk”, the risk of unlikelyto be much better. There are themes that will probably events causing catastrophicbring some disappointment but there are some thatwill go through the roof. Following the principles makes damage, can be reduced nearlyit less probable to get stuck in themes and companies 40 percent in an emergingthat could probably end up being on the losers’ side. markets portfolio that hasIn accordance with the Northern Star group wide limited its exposure to ESGprinciples, no investment is done without thorough ESG risks.considerations. Discussions of sustainability issues forman integral part of management and analyst meetingsand play important role in assessing the long term Investment Themes in Focusbusiness prospects of most companies. In choosing its To give example of some out of more than teninvestment themes, Globetrotter prefers developments investment themes in the portfolio, food and cement, asthat support local societies and improve people’s living basic crucial necessities in frontier markets, make goodconditions. ESG factors are integrated to financial cases. Food, one of the latest additions to Globetrotter,models in the calculation of the target price. There is no is a crucial issue everywhere, but especially so in the 17
  • 18. developing world, where population growth is strong Cement theme has its main focus on emerging Asia and and urbanization pace rapid. Africa. These regions are stepping in the era of big social and structural changes in the coming years. In China, There are 925 million undernourished people in the social housing construction plan foresees building 36 world, according to Food and Agriculture Organization million housing units in the next five years, and local of the United Nations (FAO) estimate for this year, cement producers are due a prosperous period. with most of them, 62 percent, living Asia and Pacific, followed by Sub-Saharan Africa with 26 percent of Even bigger changes are expected in Africa where world’s hungry people. Along with the very poor, very infrastructure development is picking rapidly. Nigeria hungry people, come the “newly rich people” or those has a housing deficit of 17 million homes and poor state who have the benefit of increasing personal income of infrastructure, both which the country’s Vision 2020 together with the development of the broad economy. plan intends to relief. Currently, Nigeria has one of the Higher disposable income reflects on the kitchen-table lowest annual cement consumptions per capita in Africa quite fast – products with higher quality or even more of 57 kg. That compares to South-Africa’s 210 kg and shiny labels have high attraction factor. These people Gabon’s 330 kg consumption per capita. The country is live, additionally to the regions mentioned above, also currently in cement deficit that is expected to end by in Middle East and Eastern Europe with the last one 2013 when only local production will be sold. That also having recorded the most rapid growth in per capita means better returns for the producers. consumption of basic foods in recent years. All of the companies we have chosen to our Cement Approaching the companies through the eyes of theme have very modern technologies and waste responsible investing, we look for evidence that the management to reduce environmental effects. They production is clean, traceable and sustainable, that are big employers and take initiative in the local social the companies create new jobs and give their share in projects. improving living conditions of local people or customers. They also have to preserve local environment and take steps to reduce their negative influence. Ari-Pekka is one of the most experienced frontier market investors in the Nordic investment industry. With over 23 years of total experience in equity markets Head of Frontier Market Equities and portfolio management, he first started investing in emerging markets in early 1990’s. A-P has managed funds of various size and style, including 1.5 billion euro emerging/frontier market equity portfolio in Finnish Varma. Prior to Varma, from where he left to co-found Ari-Pekka Hilden Northern Star, A-P worked as the Head of Equities for institutions like LGPI and SEB Private Bank Luxembourg. AP has acted as a seed and anchor investor for numerous emerging market funds, including the first China A share Fund, and funds in Iraq, Iran, Vietnam and Cambodia.18
  • 19. In Russia, Governance Is EverythingRussia, always the land of plenty and full of promise, the bottom ten companies increased shareholder valuehas yet never really fully delivered. Blame it on difficult by mere 583 percent and 145 percent, respectively.history or bad luck, the Russian market has retained The RTS index rose 613 and 190 percent duringits reputation of being risky and opaque. And yet, for these periods. Statistics prove clearly that selectionskilful investors, there have been periods over the last from corporate governance viewpoint makes a largedecade when substantial outperformance could have difference in performance.been extracted. Northern Star, in the search for theright model in Russia, has turned its main attentionto corporate governance of Russian companies, as a A straightforward strategynatural source of much needed portfolio risk reduction. for investors with a long term investment horizon in Russia:It is generally accepted that governance issues areone of the most important factors differentiating great concentrate on firms with solidcompanies from poor ones but also one of the biggest corporate governancehurdles that investors must overcome in Russia. Arecent study by Aton, a Russian investment bank, shows Unfortunately, there are a number of companies instrong relationship between the quality of corporate Russia that have no understanding of trust betweengovernance and company market performance. When shareholders and companies. They are having hard100 leading companies were ranked according to their times to comply even with the very minimum legalcorporate governance scores weighted by market requirements enforced by the exchange. Good thing iscapitalization, the top ten companies delivered a that the regulations are improving, slowly but surely.growth of over 2,700 percent starting from 2002 up to For example, insider trading became criminal offence in2Q 2011, and over 400 percent since 2009. Conversely, January 2011 and according to new reform, dividends 19
  • 20. must be paid in 60 days instead of 6 months allowed and what is prohibited: anything can potentially used earlier. It is unfortunate that often companies that against you. And what is most important, the general underperform in terms of governance make public understanding of the potential benefits of improving spotlights, and that creates a biased image of the whole the image of the company is just not yet entrenched market. the business-community. Old habits die hard, especially when the top down environment in the form of rule of When investing in Russia, it is vital to know the controlling law is hardly supportive. shareholders’ background and their ambition with regard to the company. Cases of speculators who wrap up poor businesses in attractive packages in order to A closer look reveals, however, that there are amazingly make a quick sale are not uncommon. At the same time, many Russian companies that aspire to become a there are plenty of new generation entrepreneurs truly modern company by means of governance and investor interested in long-term value creation. Making a clear relations. They have moved out of the “comfort” zone distinction is crucial but definitely not an easy task. and working in the name of gaining foreign interest and The main obstacle to make things easier is the still poor having an international investor base. In many cases, information disclosure habit in Russia. Among the main they just do not know how to communicate their efforts reasons behind that is the Russian legal and financial to the public. This is where dedicated research and infrastructure that is still underdeveloped. Also, tax engagement based analysis can make a big difference. legislation is deficient, which makes companies afraid of Management meetings and thorough homework will disclosing information as it is not clear what is allowed help to find the true gems in the market. A veteran of the Russian financial markets, Maxim was advising Pohjola Asset Management’s OP 650m EUR OP Russia Fund prior to joining Northern Star in 2011. During his tenure with Pohjola from 2008, OP Fund was firmly at the top of peer group rankings. Head of Russian Equities Previously, Maxim was Director of International Equity Sales at Deutsche Bank, Moscow. Having more than 20 years of experience in Russian and emerging market Maxim Achkasov equities from New York, London, Moscow and Helsinki, Maxim deep knowledge of the Russian equity markets and boasts a unique network of connections in local business community.20
  • 21. Integrated Research the Only Way ForwardResearch is the cornerstone of Limestone, and thewhole Northern Star Group’s, investment process. Development opportunitiesWhile necessarily effective in its traditional fundamental in this field are endless,focus, the true uniqueness in the approach lies inthe continuing development of the integration of providing further prospectsenvironmental, social and governance (ESG) research to for streamlining of thefundamental valuation. methods and practices we useSince the last Yearbook, we have developed further in investment decisions thatthe concept of including ESG assessment to company take into consideration ESGvaluations and have been able to reach remarkable aspects.results. Our approach to responsible investing isobviously integration, defined as an inclusion of In previous Yearbooks we have described the gradingESG considerations to traditional financial analysis. mechanism that is implemented in calculation of cost ofTheoretically, integration should belong under the broad capital, which has been developed in order to provideSRI umbrella that is regarded to lead to mainstreaming distinct tools for our research analysts for uniformof the process. Emerging markets are not broad based assessment of ESG factors. In addition to in-houseenough to enable thematic approach that is regarded work, we have been communicating our message andmore fashionable in the developed world. Therefore, have become even more visible in the SRI community.already before the launch of Limestone New Europe Our presentations in several high profile responsibleFund, it was obvious to us that while traditional approach investment conferences and investor events haveprovides a starting point for ESG implementation to received a lot of positive feedback. It is understandablefundamental analysis, it did not offer any readymade that our structured and scalable solution to integrationsolutions. raises widespread interest among industry professionals 21
  • 22. who have mostly seen and been sold traditional ratings- universe was graded slightly below average, and the based qualitative assessment methodology that has fund portfolio constituents were doing significantly little to do with investment analysis. better. Altogether, the grades give a snapshot of the management quality and awareness of environmental Our methodology in the nutshell is the following: an and social issues, as there can’t be perfect environmental ESG matrix is developed, where the analyst can rate management and a total disregard of social issues each company by these three factors that combined within one company. There are better and worse Having built that assessment mechanism, without additional tools, every individual result would depend companies in the investment only on single analyst’s subjective view, which would universe and their respective not ensure the comparability of results that is needed risk levels are taken into for portfolio construction purposes. Thus, although the analyst responsible for assessing companies knows account in assignment of more than anybody else on the subject and is most target price through cost of qualified for granting the grades, supporting tools for equity calculation. reaching a certain degree of uniformity in final grades are required. will create an overall ESG score of the company. To make the building blocks simple, a rating score from For building the tools, the starting point would be the 1-5 is applied, where the score of 3 will not ignite any assessment of information, analytical equipment and changes to the cost of equity and each notch below or concepts that we had at hand. One of the key building above respectively adds or subtracts basis points from blocks we derive from screening of the investment cost of equity. In the selected scale of adjustment, the universe is sector based risk level assessment. Obviously, cost of equity can vary by 240 bps on scores from one oil companies have higher environmental risk than to five. Screening of the investment universe and fund banks, whereas social risk is higher in construction portfolio at one point indicated that the average score in and retail than in technology, for example. Therefore, the universe was 2.85 and that of the portfolio was 3.9. mapping of risk on Environmental and Social scale Therefore, although 3 different analysts were granting for each company in the universe serves as the core the grades independently, the average company in the concept in construction of risk assessment tools. LOW Media IT Services Telco Finance Real Estate Tourism & Leisure Social Risk Automotive Pharma Utilities Food Construction Retail Oil & Gas Metals & Mining HIGH Environmental Risk LOW Source: Limestone22
  • 23. The risk profile of different sectors information available and are therefore most qualifiedPosition of sectors in Environmental and Social scale for such task. Quality of governance and approach ofis arbitrary and in real life the differences between executive management towards ESG issues are therisk levels are narrower than can be deducted from prevailing criteria affecting all relevant metrics. Inthe graph above. Inherent company risk level provides addition to implementation of relevant policies andonly the first step for assigning ESG grades and availability of documentation on governance, socialadjustment to cost of equity. When the starting point, and environmental aspects are analysed. In addition,or base risk as we call it, is set, the risk evaluation will community support, stakeholder relations and charitybe adjusted. Information required for evaluation is work are also taken into consideration. Description ofgathered by sector analysts that have the widest set of the methodology is depicted on the following graph: Factors In-House Research Environmental Risk Risk Based Grade Modified Grade Cost of Equity Social Risk Risk Based GradeIn New Europe and emerging markets in general the key can also be downgraded, i.e. the risk level can also berisk factor is management quality or governance in more increased from the base level when our analyst has proofbroad terms. Therefore, assessment of management that e.g. social aspects of the business are disregardedquality is the decisive factor behind ESG risk assessment or there is evidence of inferior management quality.in every step and analysts will pay significant attention Also here governance is decisive. For adjustment ofto it throughout the process. It is the dominant factor risk level, based on additional information gatheredand in every step of evaluation governance is the silver and processed by analysts, we introduced a descriptivelining that at the end will be decisive. The base risk tool Risk Adjustment Levers or RAL, as illustrated on thecan move to both positive and negative side, meaning picture below.that e.g. initially low risk profile of financial companies HIGH LOW Environmental Risk Social Risk HIGH LOW GOVERNANCE HIGH LOW Management Quality 23
  • 24. Risk Adjustment Levers This happens when we have proof of irresponsible The underlying principle in RAL is that every company development, e.g. there might be labour relations’ is put on respective scale from environmental and issues in certain telecom companies that usually should social perspective, based on a pre-assessed sector risk. be of low risk, or predatory lending practices in banks Separate issue is managment quality that is given its that by default have low sector ESG risk. That will lead respective position on the weak-versus-strong scale. to increase in cost of capital and lower fair value target. Unlike environmental and social evaluation, there is no pre-set base, and evaluation is already based on available There is no doubt in our minds detailed information, not just sector risk. So, the levers are moved towards positive or negative side of the axes that ESG integration is really according of the results of research. Final position of the only way forward. the company on these three measures will serve as the foundation in assigning of grades and adjustment to Through adaptation of risk adjustment levers we have cost of equity. Accordingly, position at the high risk area provided our investment team an additional tool to by environmental and social risk indicates grades 1-2 on better grasp risk profiles of the companies and to our ESG matrics for these items, 3 is average and 4 and further enhance the integration of ESG principles into 5 indicate already superior performance and lowering financial modelling and investment decisionmaking. risk position. Practical application has proven that However, the road does not stop here and we expect we have very few companies with grades in extreme the work on research process to continue. The goal positions like 1 or 5. is to get the environmental, social and governance research completely out from the „soft values“ closet In essence, each company’s starting position is and make them a natural and fully accepted part of determined by the industry risk profile, and then the everyday decisionmaking. Now, with the Limestone analyst starts to look for justifications for moving the New Europe SRI Fund having 3 years of excellent track levers in either way, preferrably towards lower risk. record to present, we have even more confidence in the It is not uncommon that companies will be given the righteousness of our path. final grade that is less than their starting position. Rein is heading the research process at Limestone and Northern Star Group. Before co-founding Limestone in 2007, Rein run the research team in Hansa Investment Management, the largest investment manager in the Baltic region, and managed Hansa Central Asia Equity Fund, the first dedicated UCITS fund investing in the region. Started as an equity analyst at Suprema Securities in 1997, Rein later held the positions of Senior Rein Ojavere, CFA Head of Research Analyst, Associate Director and Director until 2006. He participated in a number of landmark M&A deals and IPO’s in the Baltic region with main responsibility areas of valuation and structuring. Rein is a CFA Charterholder and holds MSc in Economics and Business Administration degree from University of Tartu.24
  • 25. Serbia 25
  • 26. Country Focus: Serbia, the Last European Frontier Republic of Serbia is a landlocked country in the few. Agricultural products such as wheat, maize, sugar south-eastern Europe, covering the southern part beets, sunflower, raspberries, beef, pork and milk are of the Carpathian basin. Serbia has borders with produced. seven countries: Bosnia & Herzegovina, Croatia and Montenegro to the west, Kosovo and Macedonia to the The capital of Serbia, Belgrade, has a population of south, Bulgaria and Romania to the east and Hungary to close to 1.5 million out of 7.3 million in the country. the north. Covered with rich fertile plains in the north, Serbian national identity began emerging in the 8th limestone ranges and basins in the east, and ancient century, with the ruling of prince Višeslav. The country’s mountains and hills in the south-east, the total territory territories expanded until being defeated by the Turks of 77,474 square kilometres ranks Serbia the 117th in in 1389. In the next century, Ottoman Empire exerted the world. complete control over all Serb lands for nearly 4 centuries. Serbia formally gained independence in Serbia offers a range of natural minerals. As of 1878 at the Congress of Berlin which was regained in January 2010, it has proved reserves of oil and gas 2006 after a number of political and military struggles. of 78 million barrels and 50 billion cubic meters, In 2009, Serbia submitted its application for European respectively. Additionally, the surface holds coal, iron Union membership. ore, copper, zinc, gold and silver reservoirs, to name a26
  • 27. 2005 2006 2007 2008 2009 2010 2011F 2012F Nominal GDP (EUR bn) 20.4 23.6 29.1 33.4 30.0 29.5 34.3 36.4 Real GDP (% YoY) 5.6 5.2 6.9 5.5 -3.1 1.8 3.0 3.8 Industrial production (% YoY) 0.7 4.7 3.7 4.5 -12.1 2.9 4.8 6.0 Unemployment rate 20.8 20.9 9.7 13.7 16.1 19.2 19.0 18.5 CPI, year end (%) 171.0 6.0 11.0 8.6 6.6 10.3 8.5 5.7 Monthly average gross wages (EUR) 307.7 377.2 484.4 561.1 470.3 460.5 502.4 532.0 Gross nominal wages (% YoY) 24.1 24.4 22.0 17.9 8.8 7.5 8.0 9.0 Foreign direct investment (% of GDP) 5.9 14.4 8.6 6.0 4.7 3.4 4.0 7.0 Budget balance (% of GDP) 0.7 -1.5 -1.9 -2.6 -4.3 -4.5 -4.1 -3.5 Public debt (% of GDP) 31.0 27.0 34.0 43.0 42.0 43.0 Trade balance (% of GDP) -20.3 -20.5 -22.8 -22.6 -17.0 -16.2 -15.6 -15.4 10-year interest rate (avg) 5.6 5.5 5.6 6.4 5.7 3.9 5.5 5.5Source: Erste, Raiffeisen, IMFDevelopment and Challenges of sustainable future growth. World Bank in its reportFollowing the democratic changes in 2000, Serbian has praised Serbia for some reform achievementseconomy witnessed relatively high annual economic as already having very positive effect on the privategrowth rates of 5.7 percent on average from 2000 to businesses operating environment. Last building blocks2008. The average growth in Western Balkan region was soon to be put in place, not least because the promise5 percent. That supported one of the highest levels of of eventual EU membership, we share the opinion thatforeign direct investment inflows in Serbia during that Serbia will be one of the greatest European successperiod. Due to severe impact of the financial crisis, stories in the coming years.the Serbian market has been largely abandoned byinternational investors in the past three years. Together In the “Ease of doing business” business climatewith the positive signs of recovery, interest is, though, rankings from IMF, Serbia still ranked just 89th of 183returning. in the world (Poland at 70, Croatia at 84, Greece at 109, and Russia at 123) in 2010. Companies operating in theThe biggest challenges for the Serbian transition country have brought up issues of political instability,process for becoming an open-market economy and practices of informal sector and limited access toa modern European state seem to be behind by now. finance. Dedicated efforts to tackle the issues hinderingThe painful and violent break up process of Yugoslavia a better ranking were started in 2009 and are at theirin 90’s, climaxed by extensive NATO bombing of Serbia final stages of implementation.in 1999, set the country lagging its regional peers. Overthe last few years Serbia has made great efforts to shrug Another tool to strengthen and accelerate theoff the legacy of that unfortunate period, including the transition is the EU integration process. It provides amuch publicized catching and extraditing alleged war unique incentive for political and economic reform andcriminals. aims to bring the country up to European standards in all areas covered by EU treaties. Following free travelThe business infrastructure modernization is still in arrangements from 2010, accession talks have begunearly stages. Governance regulations and enterprise in 2011 and an official opinion regarding Serbia’srestructuring laws, and competition policies are already membership is expected by 2012. Based on our handsrecognized at the highest levels as the important pillars on experience from the region, this kind of run up 27
  • 28. period to EU membership could be very rewarding for Corporate social responsibility (CSR) approach is investors willing to take on some liquidity risk. relatively new to Serbia. Although awareness of this exists, it is mostly on the level of concept-formation rather than on the level of locally realized practice. Yet Serbia is the last country it does not encompass all of the companies. in Europe with critical scale for financial investors to go In order to promote the emerging interest in CSR in Serbia, many projects have been put together. In 2004, through the accession process. Responsible Business Initiative was introduced and in 2008, Business Leaders Forum was established. While Capital Markets and the first one was founded to inspire, institutionalize Corporate Governance and put into practice the concept of corporate social Belgrade stock exchange is considered one of the oldest responsibility, the forum actually gathers Serbia’s exchanges in Europe, having been founded in 1894 socially responsible companies to one network. These to promote, facilitate and regulate trading in various companies have a shared goal of promoting CSR and commodities. In the beginning of 20th century, the most operating in a sustainable way to benefit the interests wanted and stable securities listed on the exchange of the whole community. On one hand, the forum is were government securities. The rule to observe was “if designed to encourage Serbian companies and their you want to eat well, invest in shares. But if you want to employees to contribute to social and environmental sleep well, invest in government bonds”, according to causes as part of their everyday operations. On the the exchange’s homepage. In 1953 the stock exchange other side, it also has a task of connecting business was closed to be reborn again in 1989 as Yugoslav leaders to government representatives to identify social Capital Market that changed its name to Belgrade Stock and economic problems and find appropriate solutions. Exchange three years later. The BELEX trading system It’s a start. was launched in 2001. We have met many managers There is a corporate governance code in place for listed companies or others who wish to get acquainted with during our company meetings and implement corporate governance principles. It in Serbia who are very well depicts a set of rules and principles expressed through aware of the values of CSR recommendations which should be implemented. The code was adopted in 2008. On stock market’s and are pursuing the practices home page, there is Corporate Governance Scorecard in their companies for all the introduced for companies to fill and evaluate their right reasons. corporate governance practices on different aspects of the issue. That helps them improve their knowledge about corporate governance factors and also see where their efforts are still lacking.28
  • 29. Companies in FocusTigar compact and well-equipped industrial complex, Tigar 3,A company established in 1935 in the southern Serbian which enjoys a surface area of some 22 hectares, andtown of Pirot, has transformed itself from the simple encompasses cutting-edge industrial capacities in onecar tire manufacturer for the entire Yugoslavia into of the region’s largest industrial zones. Tigar operatesworld class rubber footwear and technical rubber now in attractive sector, as market share of rubberspecialist. Being historically the largest producer of car boots on global scale is increasing, as leather boots aretires, the management realised in the early stage that significantly more expensive. Also competitive situationin highly competitive international environment with is favourable, as there is only one competitor left inever expanding R&D budgets of major competitors, Europe and there is some competition from China.there is no place for a small independent tire producer. During the years Tigar has acquired several brandsTherefore, more than 10 years ago the Company started and has developed its own brands and introducedto look for strategic partner and in 2001 Tigar formed specialised footwear retail chain in Serbia. Overall, thea joint-venture with Michelin that was financially revenues from rubber footwear sales are expected tosupported by EBRD and IFC. By 2009 the Company more than double in 2011.exited the tire business and focused on production ofrubber footwear and technical rubber products. Tigar also owns and operates the only national chain of car service stations and distributes tires, batteriesWith an investment of over 23 million Euros in and motor oils in Serbia. This forms a unique asset withdevelopment, reengineering and upgrading of high potential for disposal to strategic investors that aremanufacturing facilities, the company has created a expanding their operations in the CEE region, where 29
  • 30. Serbia is the natural next market to enter. In addition to enables AIK Banka to be present in all important regions excellent competitive position, the Serbian market will of the country. As a typical wholesale bank, AIK provides also witness high growth, as only from 2011 all cars are various banking services across all main business obliged to use winter tires. segments. Its retail banking services include various accounts, credits, and deposits while corporate banking Tigar has made good progress in the field of CSR. It offers short term credit, credits for both export financing has implemented ISO and OHSAS certificates, as well and development financing, as well as corporate as established modern, highly efficient production depositing products. Great variety of payment cards, facilities with low level of energy use and minimum safe-depositing, money transfer, and electronic banking waste. In 2010 the Company commissioned the plant services are also on the offer. The bank has also built a for production of recycled-rubber products. Corporate reputation of a strong dealer-broker company on local Governance practices are of high standard, developed capital markets. Among other Serbian banks, AIK Banka in cooperation with IFC, and they are exceeding the especially differentiates from the rest of the group by requirements of local stock exchange. Tigar is also its exceptional capitalization level with CAR above 30%, considered to have one of the most professional investor together with excellent operational efficiency: cost to relation services in Serbia, which Limestone team has income ratio is well below 30%. experienced several times in company meetings during our trips to Serbia. Such a strong market position combined with remarkable development potential of the country itself, adds further responsibilty for AIK Banka in order to step up as a pioneer in shaping sustainable values in local society. Although there is a long way to go, the awareness is there, as Limestone team concluded after meeting the newly appointed Chairman in Belgrade in spring 2011. Strength of the capital base, massive earnings potential and extremely low valuation make AIK an exellent case for any investor who is looking to get exposure to Serbian development. Energoprojekt Energoprojekt is the largest engineering and construction group in Serbia. Through its network of regional branches, subsidiaries, joint ventures and other corporate entities, Energoprojekt controls projects in 24 countries across four continents. From AIK Banka the Yugoslav days, Energoprojekt has retained its Founded in 1976 as the internal bank for the Agro- position as one of the major design, engineering and industrial Combine of Nis, AiK Banka has emerged construction companies in the South-eastern Europe. into one of the leading wholesale banks in Serbia. AIK With a solid reputation, and revenues of approximately Banka obtained the license from the National Bank of €200 million per annum and annual contracts in excess Yugoslavia in August 1993 and was restructured as a of €400 million, Energoprojekt presents a very good joint-stock company in June 1995. From October 2005 platform for regional expansion. The investments in company`s shares are listed on the Belgrade Stock infrastructure and energy projects in Serbia and South- Exchange and in September 2006, Greece’s ATE Bank Eastern Europe are expected to exceed €3bn over the became the major shareholder in the Bank by acquiring next several years, from which the company will get its 20 percent stake. Current network of 66 branches fair share. From July, 2007, Energoprojekt is listed on30
  • 31. the A List of Belgrade Stock Exchange, which contains Energoprojekt decisive competitive edge. Operationsonly three other companies. in a number of countries on several continents require top scale quality control and adherence of strictThe vision of Energoprojekt, as stated by the company, environmental regulations. Therefore, the Companyis to be one of the international leaders in the fields of has adopted the ISO quality management system.engineering, construction, and project management,so that the investors, partners and clients will perceive Energoprojekt supports the objectives and the tenthem as an integral part of their own success, satisfied principles of the Global Compact and has formallyemployees, shareholders, and sharing the responsibility joined The UN Global Compact Initiative. The Powertowards the society as a whole. The Company is Engineering magazine, in December 2010, declared theregarded as one of the best employers in Serbia and project HPP Tekeze in Ethiopia, depicted on the abovehas outstanding reputation in this field, as knowledge picture, as the project of the year in the category ofand experience of employees are the factors that give sustainable projects. 31
  • 32. Why Governance Matters: From Investing To Litigation in A&D Pharma A&D Pharma (ADPH) is the leading pharmaceuticals Minority Squeeze distribution and retail company in Romania, listed on ADPH was always considered as an obvious takeover London AIM in Global Depositary Receipt format from target, and with financial success the potential to attract 2006, when sole owner raised more than 100 million strategic interest obviously increased. The majority EUR through secondary public offering, which brought owners, allegedly approached by interested parties, in no new capital for ADPH. One GDR was priced and become too greedy to share the success with public sold for 12 EUR. shareholders and designed a scheme towards the end of 2010 how to squeeze out GDR holders and take over The company, initially struggling with operational the company. The plan was revealed at Christmas time and management issues, went through a complete 2010, and was carried through by February 2011. turnaround in 2007—2009 when new management was installed, costs structure and operations restructured, Limestone was one of the initiators of minority and strategy renewed. Results were becoming evident shareholder revolt against the buyback and was among by mid 2009 and success of the restructuring clear in the applicants in legal proceedings against the majority 2010. shareholder in Dutch court. Limestone team had been following the company There were two main shortcomings from the investors’ since the listing and conducted several meetings with side in this case, which made it easy for the management the management over the years. We always believed and majority holder to take control. First, the lax legal that the company should be able to capitalise on their environment of London AIM market, which gives unique market position, but were not convinced until the Depositary Receipt holders no protection usually managerial capacity was boosted. In 1H10 report, sales enjoyed by the stockholders. Second, company’s were up 30% over last year, and net profit was 17.5m board members, except for one, turned out to be not EUR for the period, representing 80% of consensus full independent and in fact quite directly tied to majority year 2010 estimates. shareholder.32
  • 33. Public announcement: December 17 2010 A&D Pharma Holdings N.V Proposed Delisting of GDRs and Termination of Depositary Agreements Proposed Purchase of GDRs and Reduction of Share Capital Announcemen of Board ChangesDear fellow investors, Email: December 21 2010 Final Applicants: • LimestoneLimestone is 100% commited to fight the delisting, even if for the • Kairosprinciple; their actions is cynical, ugly and a grand violation of all • BankInvestthe ethical standards we stand for. • Henderson • T.Rowe PriceAs it is clear from ING’s preliminary study, straight forward legal • East Capitalmeans are scarce. We lack previous experience in such cases but • SEBthe first option coming to mind is approaching the banks that, • Lupusaccording to the announcement, have veto power. Could any of • et alyou who has better access to experienced legal counseling, comeup with additional ideas? Legal Councel: • Baker & McKenzieLooking forward to fruitful discussion and productive action.Kind regardsAlvar RoosimaaFund ManagerLimestone Investment ManagementFrom owners of 65% of GDR’s / 24% of the Company:1. Letter to the Board of Directors of A&D Pharma Holdings N.V.2. Letter to the Citibank (holder and issuer of the GDR’s)3. Enquiries with Banks financing A&D Pharma, indirectly also the buyback4. Enquiries with global industry peers to search for alternative offer5. Enquiries with London stock Exchange6. Application to Dutch Court’s Commerce ChamberResponses:1. Company claimed that liquidity on AIM is low, listing is costly and it is time consuming tomarket the company for public investors2. Citi referred to prospectus’ small print3. Banks were unwilling to take any stance without court decision4. Stock exchange: formal rules are not violated5. Court referred to prospectus’ small print where risk of delisting is always mentioned, andthat no existing law is brokenShareholder’s meeting on January 31, 2011 decided to delist the company, end the GDRagreement with Citi , and provide liquidity facility for the investors @4.50 EUR/GDR.Thus, the majority shareholder used 45m € company money to buy back shares it sold 5 yearsearlier for 120m € for its own benefit. The company, valued @150m € at the buyout is worthsignificantly more when sold to strategic investor. 33
  • 34. Northern Star Group Responsible Investment Principles As an integral part of its fiduciary duty towards its for ensuring that the management of a company either clients, Northern Star (NS) integrates environmental, has the understanding of material ESG challenges or social and governance (ESG) issues into research, possesses the willingness to explore and manage the ownership and engagement policies and procedures. risks the organization faces from environmental and NS engages with companies or funds in which it invests, social factors. or is considering for investment, with regard to their ESG risk management policies, strategies, performance, In order to examine ESG performance of companies, disclosure and management capabilities. our analysts are evaluating all three factors separately using their professional skills and tools provided by Proxy voting is an important engagement tool through the company, supported by internally created „cheat which we not only seek to protect our investment value sheets“ for sectors and regions. The latter should ensure when it may be at risk, but also acknowledge good that the evaluation process is standardized enough to corporate governance of the companies where we are make the results comparable across companies, sectors shareholders. Consequently, NS employs proxy voting and markets. Initial information gathering for analysis primarily together with engagement to support and is conducted using public sources, such as company sustain engagement results. websites, reports, media and info vendors. If public sources provide inadequate amount of information, Framework for ESG Evaluation the analysts are expected to engage the company Evaluation of the ESG factors at NS starts with assessing directly for more information and address unanswered the quality of corporate governance. We believe that questions during company meetings. good corporate governance is a fundamental element34
  • 35. Responsible Investment Methodology Integral Elements of Responsible Investment at NS Group: Investment Potential and Good Governance Investment Idea selection based on investment potential and good governance Evaluation of Environmental and Social Factors using publik sources Using internial “cheat sheets” for sector and region specific ESG issuesLack of public information/need for clarification All info publicly availableCompany meeting/correspondence Information analysisto address: Integration of ESG factors to financial models- ESG issues Target price assignment- Management quality- Profitability- Strategic development etc. Investment Desicion Discussion at investment Committe No investment/ Inclusion into Engagement and Proxy Voting Further analysis portfolio 35
  • 36. Evaluating Corporate Governance Good corporate governance is an integral element based on investment potential and good corporate guaranteeing that companies are well managed, governance and engages on environmental and social deliver long-term returns to their shareholders and issues with those companies that need guidance with take account of their responsibilities to society and material ESG factors. the environment. Therefore, NS selects investments Corporate Governance Principles the exercise of voting rights. Boards should treat all The Global Principles of Accountable Corporate corporations’ shareowners equitably and should ensure Governance create a framework by which Northern Star that the rights of all investors, including minority and (NS) executes its proxy voting. In addition, the Principles foreign shareowners, are protected. Corporations’ provide a foundation for supporting our corporate ordinary shares should feature one vote for each engagement and governance initiatives to achieve long- share. Corporations should act to ensure the owners’ term sustainable risk adjusted returns. rights to vote. Divergence from a ‘one-share, one- vote’ standard which gives certain shareowners power Corporate objective disproportionate to their equity ownership should be The overriding objective of the corporation should be both disclosed and justified. to optimize the returns to its shareholders over time. Where other considerations affect this objective, they Audit should be clearly stated and disclosed. To achieve this Annual audits of the financial statements carried objective, the corporation should endeavour to ensure out on behalf of shareowners should be required for the long-term viability of its business, and to manage its all corporations. The audit should be carried out by relationships with stakeholders effectively. independent, external auditors who should be proposed by or with the assistance of, the audit committee of the Disclosure and transparency board (or its equivalent where applicable) for approval Corporation should disclose accurate, adequate and by shareowners. The corporation’s interaction with timely information, in particular meeting market the external auditor should be overseen by the audit guidelines where they exist, so as to allow investors committee on behalf of the shareowners. To limit the to make informed decisions about the acquisition, risk of possible conflicts of interest, non-audit services ownership obligations and rights, and sale of shares. and fees paid to auditors for non-audit services should be both approved in advance by the audit committee Voting rights and disclosed in the annual report. The exercise of ownership rights by all shareowners should be facilitated, including giving shareowners Corporate Boards reasonable notice of all matters in respect of which The board of directors, or supervisory board, as an entity, shareowners are required to or may take action in and each of its members, as an individual, is a fiduciary36
  • 37. for all shareholders, and should be accountable to the economic interests or share ownership rights ofshareholder body as a whole. Each member should existing shareholders should not be made withoutstand for elections on a regular basis. prior shareholder approval of the proposed change. Shareholders should be given sufficient informationCorporation should disclose upon appointment to about any such proposal early enough, to allow them tothe board and thereafter in each annual report or make an informed judgement and exercise their votingproxy statement information on the identities, core rights.competencies, professional or other backgrounds,factors affecting independence, and overall Operating Performancequalifications of board members and nominees so as Corporate governance practices should focus boardto enable investors to weigh the value they add to the attention on optimizing over time the company’scompany. Information on the appointment procedure operating performance. In particular, the companyshould also be disclosed annually. should strive to excel in specific sector peer group comparisons.Boards should include a sufficient number ofindependent non-executive members with appropriate Shareholder Returnscompetencies. Responsibilities should include Corporate governance practices should also focus boardmonitoring and contributing effectively to the strategy attention on optimizing the returns to shareholdersand performance of management, staff key committees over time. In particular, the company should strive toor the boards, and influence the conduct of the board excel in comparison with the specific equity sector peeras a whole. Accordingly, independent non-executives group benchmark.should comprise no fewer than three members and asmuch as substantial majority. Audit, remuneration and Corporate Citizenship, Stakeholdernomination board committees should be composed Relations, and the Ethical Conduct ofwholly or predominantly of independent non- Businessexecutives. The board is accountable to shareowners and responsible for managing successful and productiveCorporate Remuneration Policies relationships with the corporation’s stakeholders.Remuneration of corporate directors or supervisory Corporations should adhere to all applicable laws of theboard members and key executives should be aligned jurisdictions in which they operate, and disclose theirwith the interests of shareholders. Corporations should policies on issues involving stakeholders.disclose in each annual report or proxy statement theboard’s policies on remuneration — and, preferably, the Corporations are encouraged to develop performance-remuneration break up of individual board members enhancing mechanisms, which align employee interestsand top executives — so that investors can judge with shareowner and other stakeholder interests. Thesewhether corporate pay policies and practices meet that include broad-based employee share ownership plansstandard. Broad-based employee share ownership plans or other profit-sharing programs that are designedor other profit-sharing programs are effective market to enable employees to share in improved returns tomechanisms that promote employee participation. shareowners.Strategic Focus Corporations should adopt and effectively implement aMajor strategic modifications to the core business(es) code of ethics and should conduct their activities in anof a corporation should not be made without prior economically, socially and environmentally responsibleshareholder approval of the proposed modification. manner. The board is responsible for determining,Equally, major corporate changes that in substance implementing and maintaining a culture of integrity.or effect materially dilute the equity or erode the 37
  • 38. Corporate Governance bodies, so as to resolve disputes, if possible, through Implementation negotiation, mediation or arbitration. Where those Corporations should comply with a widely recognized means fail, more forceful actions should be possible. national corporate governance code. Where such For instance, investors should have the right to sponsor a code does not exist, investors and others should resolutions or convene extraordinary meetings. endeavour to develop a code. Each corporation should disclose the code that is applicable to it, whether it is Evaluating Environmental and complied with and, where not, the reasons for non- Social Factors compliance. Institutional investors should give due and NS has developed internal evaluation system based informed consideration given by corporation for such on sector and region specific material social and non-compliance. environmental factors. Our analysts use sector specific „cheat sheets“ to test whether the company has the Corporate governance issues between shareholders, understanding of the risks and challenges that it creates the board and management should be pursued by with its operations and how the company manages dialogue and, where appropriate, with government and those risks. regulatory representatives as well as other concerned38
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