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Asset Management in CEE

Karoll Financial Group offers investment opportunities in Emerging Europe through various funds and strategies. Their Emerging Europe Opportunities strategy invests across stock markets in Central and Eastern Europe, the Baltics, and Balkans with the goal of outperforming benchmarks. The strategy is managed by an experienced team based in Sofia with in-depth knowledge of local markets. Karoll Capital also offers a high-growth exporters strategy focused on small and mid-cap industrial, outsourcing, and ICT companies in Emerging Europe benefiting from low costs and skilled labor. They aim to overcome barriers global investors face in the region through analytical tools and on-the-ground research.

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Emerging Europe Investment Opportunities 2017
Karoll Financial Group Mission “Our goal is to create accessible vehicles, tools and processes in helping global investors harness the exciting potential of Emerging Europe.” Stanimir Karolev Founder and Chairman, Karoll Financial Group
Karoll Financial Group Karoll Brokerage Karoll Capital Management Advance Terrafund Advance Equity Karoll Investment Leader by number of transactions on BSE for 15 years in a row 30% market share of of all transactions Pioneered the first mutual fund in the country (2004) Strategic partner of Schroders for the local markets Largest farm land REIT in the country IFC (World Bank) - key stakeholder First Private Equity fund in Bulgaria Executed the first IPO in Bulgaria (2004) 25 EXCITING YEARS OF SUCCESS | TEAM OF 200 EXPERTS
Karoll Financial Group Product Offering Bulgarian Capital Market International Capital Markets Brokerage Wealth Management • Advance Invest • Advance Eastern Europe • Advance Emerging Europe Opportunities • Advance Global Trends • Advance Conservative Fund • Separately Managed Accounts Institutional Mandates • Emerging Europe Opportunities (Eastern Europe) • Central Europe • Balkan • Thematic equity • Mixed Asset Management IPO & SPO Activities M&A Restructuring Investment Banking Real Estate ADVANCE TerraFund REIT Private Equity ADVANCE Equity Holding
Karoll Capital Management Overview Unique heritage in Emerging Europe Founded in Sofia in 2003, our roots are truly in Emerging Europe Independent and skilled Eastern Europe-based team with long tenure Part of Karoll Financial Group with support of 200 professionals + 70 local offices Steady business growth on solid reputation AUM ~ USD 250 mln. Assets split in various mutual funds, real estate investment trusts, wealth mgt & mandates Manages 5 UCITS funds and multiple private accounts Crisp focus on Emerging Europe Helping clients harness the potential of Emerging Europe Deep understanding of the cultures and dynamics of our markets On-the-ground research coverage of strategically important holdings Partnership with top international names Local representative of Schroder Investment Management, UK Partners with IFC (World Bank), European institutions and global players Cheverny Capital – our Canadian representative
Our Unique Value Proposition “Emerging Europe is a unique investment theme with strong upside potential and low correlation to the developed world. It is a truly overlooked opportunity! We pick out high-growth sectors in a high-growth region. We generate alpha in the region while helping global investors overcome local barriers.” Daniel Ganev Managing Director, Karoll Capital Management Independent Flexible Entrepreneurial Deep understanding of local markets
Karoll Capital’s Investment Committee Seasoned investment team with long tenure and unique combination of skills: Daniel Ganev, MBA, Managing Director  15+ yrs of experience in in fund management, financial products development and marketing, business development in emerging markets Nadia Nedelcheva, CFA, Head of Portfolio Management  15+ yrs of experience in portfolio management, research, valuations and modeling in Central & Eastern Europe (CEE) Alexander Nikolov, Portfolio Manager  18+ yrs of experience in portfolio management, financial analysis, technical analysis on the US, European and CEE market Katerina Atanassova, Portfolio Manager  15+ yrs of experience in portfolio management, technical analysis and trading on the global developed and emerging markets Georgi Georgiev, Portfolio Manager  13+ yrs of experience in research, fundamental analysis, valuations, portfolio management and trading in the global emerging markets and USA
Karoll Capital’s Analytical Support Our Sofia-based analysts have easy access to regional companies in search of investment opportunities: Dimitrios Latitaris, Investment Analyst  4+ yrs of experience in research, investment banking, fundamental analysis, valuations in Central & Eastern Europe Georgi Raykov, Investment Analyst  3+ yrs of experience in research, fundamental analysis, valuations in Central & Eastern Europe
International Partners and Clients
Karoll Capital’s Investment Process – the 4 S’s Screen The process starts with our on-the-ground analyst team screening the landscape in search of investment opportunities in Emerging Europe. We apply filters in terms of liquidity (time needed to enter/exit investment), market cap, transparency, corporate governance, etc. As a result, our investment universe comprises around 500 stocks out of some 3 000 listed companies in Central and Eastern Europe. Our major advantage is the freedom to deviate from local indices based on our views. This gives us flexibility in our investment choice, regularly leading to superior results and outperformance of benchmarks and peers. Using proprietary analytical tools and exchange with local contacts, we seek to pinpoint stocks that are trading at a discount or that are in a position to undergo some fundamental change. Examples of such events are turnaround situations, management changes, financial results surprises, etc. Study The generation of investment ideas leads to the next step -- a thorough in-depth analysis conducted in house. Because of market inefficiencies we believe Emerging Europe is abundant with mispriced assets. In estimating the true value of a stock we study the firm’s business model and its ability to realize returns greater than the cost of capital, the shareholder structure and management capabilities, sector dynamics and overall market position. We strive to find companies with improving profitability margins and low debt levels that are traded at a discount to peers. On-site visits and regular contact with company representatives are a key part of research as well. In addition to employing valuation methods, we also consider investor psychology, liquidity and order flows. The outcome of the investment assessment is the analyst proposal to the investment committee, which summarizes the case, the rationale behind it, potential upside and associated triggers, as well as the risks involved. Shape Karoll Capital’s 4-member investment committee, supported by our analyst team, examines the selected investment proposals in view of portfolio construction. In the case of managed accounts / mandates the decision is collective. Convening each month, the committee decides on position weight changes and/or liquidations. At each stage, compliance with regulatory guidelines and client-tailored requirements are factored in. Scrutinize Finally, the investment portfolio is monitored with all different positions being systematically scrutinized. The investment team applies in-house processes and practices enabling it to adequately react to the different triggers causing distortions to the investment case. As part of the process our analysts and portfolio managers follow up with the companies’ management, screen the sector competitors and general business/political environment. Conducting attribution and risk management analysis on the portfolio holdings is essential. Any resulting concerns related to the investment case prompt reviews of the rationale behind the decision to add / hold/ reduce the stock as a portfolio component.
Our Investment Universe 3,000+ listed companies in CEE Investment Universe – 1,500 750 500 250 Survivors 150 Selection Filters: Sector Outlook & Company Competitiveness Mkt cap & Liquidity Corp Governance & Transparency Financial Strength In-house Valuation
Karoll Capital’s Investment Process In-house valuation Our PMs and analysts use the following valuation methods: - Peers comparison - Discounted cash flows model Financial strength - Earnings: earnings cyclicality, recurring earnings, forecast sales and - Analyze profitability, Leverage and funding, Debt service, Liquidity, Asset Sector outlook and competitiveness - Identify key growth drivers and themes, assess sustainable Corporate governance and transparency - Study and evaluate board composition, executive remuneration, shareholders, provided access to documents Market cap and liquidity filter - For more liquid markets: up to 3 days for entry/exit - For less liquid markets: up to 7 days for entry/exit - Free-float > 25%
We aim to achieve sound risk- adjusted performance We define risk indicators/limits regarding market risk, liquidity risk, exposure to a single issuer, to less liquid stocks/markets, etc. Risk management is executed on a day-to-day basis by portfolio managers who assess risk at each level of the investment life- cycle  investment selection, portfolio construction and portfolio monitoring The risk management department supports the investment process by implementing and monitoring the policy and procedures for risk identification  constantly monitors risk factors/indicators, performs contribution analysis and risk assessment The risk management department prepares a monthly report for the Board, as well as notifies portfolio managers immediately upon approaching of critical levels of key risk indicators Risk Management
Investment team meetings Weekly meetings - PMs and analysts interact and exchange ideas Monthly meetings - Portfolio reviews of mutual funds / managed accounts, contribution analysis - Overview of market development -> modify portfolios if necessary Quarterly meetings - In-depth analysis of investment portfolios - Strategic asset allocation decisions Ad-hoc meetings - In the event of a trigger from the in-house surveillance system
Karoll Capital Management Investment Capabilities & Results Main strategies offered to institutional investors: Emerging Europe Opportunities (Eastern Europe), Central Europe, Balkan, Thematic, as well as mixed strategies based on specific mandate Karoll Capital’s Investment Committee aims to construct for our institutional clients Individually Managed Accounts / Mandates portfolios designed to take advantage of the L.T. trends as well as hot opportunities in the market Strategies results vs. benchmarks, as of 31.01.2017 YTD 1 year 3 years, annualized 5 years, annualized Volatility Beta Alpha MSCI EFM Europe +CIS -0.48% 27.26% -1.72% -4.13% 23.04% MSCI EFM Europe +CIS ex RU 2.54% 6.13% -5.22% -4.61% 19.21% Emerging Europe Opportunities (Eastern Europe) 2.16% 20.53% 1.30% 2.63% 12.89% 0.70 2.08% Central Europe strategy 5.33% 20.77% -0.63% 0.73% 11.10% 0.70 2.60% Balkan strategy 7.44% 25.95% 3.10% 4.75% 10.83% 0.58 5.54% Emerging Europe High-growth Exporters strategy 6.22% 32.69% 25.12% n.a 12.14% 0.26 18.61%
Emerging Europe Opportunities Strategy at a Glance Invests in the stock markets of Emerging Europe Europe, the Baltics, Balkans) Provides access to a robustly growing region, achieves better vs. benchmarks Invests in regional large-cap, but also small & mid-cap fast benchmark agnostic Managed by a seasoned team with long tenure, based on the profound understanding of local markets 10+ years track record of strategy
Karoll Capital’s Emerging Europe Opportunities Strategy Investment theme: invests across the stock markets of Emerging Europe (Central & Eastern Europe, the Baltics, Balkans) Investment style: blended (value and growth), stock-picking, bottom up combined with top down and sector views Target: to achieve higher return than the market at lower risk Market cap: regional large cap, but also small & mid cap Portfolio components: 70-100 positions Low portfolio turnover and limited volatility Offering format: Separately Managed Account Minimum size of investment: €0.250 mln. Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark Highly-experienced team with long tenure & excellent understanding of local markets Launch: October, 2006
Outperformance of Strategy vs. benchmark Strategy vs. Benchmark, performance, as of 31.01.2017 1 month YTD 1 year 3 years annualized 5 years, annualized Annualized (since inception) Volatility Beta Alpha MSCI EFM Europe +CIS -0.48% -0.48% 27.26% -1.72% -4.13% -4.12% 23.04% Emerging Europe Opportunities Strategy 2.16% 2.16% 20.53% 1.30% 2.63% -2.19% 12.89% 0.7 2.08% 30 50 70 90 110 130 150 04.10.2006 04.10.2008 04.10.2010 04.10.2012 04.10.2014 04.10.2016 Strategy Benchmark
Emerging Europe Opportunities Strategy Geographic breakdown (31.01.2017) Sector breakdown Top 5 positions % of portfolio Country Sector GMK Norliski Nikel 3% Russia Metals X5 Retail Group 2.4% Russia Retail RICHTER GEDEON 2.2% Hungary Healthcare KRUK S.A. 2.1% Poland Financial OTP BANK 2.1% Hungary Banks 24.0% 18.2% 10.0% 9.1% 7.0% 6.6% 4.0% 3.6% 3.2% 3.0% 2.9% 2.5% 5.8% Russia Poland Hungary Czech Republic Turkey Romania Bulgaria Croatia Serbia Baltics Ukraine Austria Cash 12.4% 10.9% 6.4% 6.2% 5.4% 4.6%4.7% 4.2% 4.6% 3.8% 3.2% 2.7% 25.0% Oil and gas Banks Metals Retail IT Conglomerates Healthcare Agriculture Industrial Transportation Utilities Precious metals Other
Emerging Europe High-Growth Exporters Karoll Capital’s highest alpha generating strategy Investment theme: to invest in high-growth industrial, outsourcing and ICT companies benefiting from low labor costs, highly skilled workforce and lowest taxes in a fast-growing region with strategic location Investment style: growth, benchmark agnostic, bottom-up Market cap: small and mid cap. Concentrated portfolio: 20-30 positions Low portfolio turnover (<20%) and limited volatility Offering format: Managed Account Minimum size of investment: EUR 0.25 mln. Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark Highly-experienced team with long tenure and excellent understanding of local markets Launch: April, 2013
Solid outperformance of Thematic Strategy vs. benchmark Strategy vs. Benchmark, performance, as of 31.12.2016 1 month YTD 1 year Since inception Annualized (since inception) Volatility Beta Alpha MSCI EFM Europe +CIS 9.33% 24.58% 24.58% -17.90% -5.15% 23.04% Thematic strategy (Emerging Europe High-Growth Exporters) 4.61% 22.06% 22.06% 100.35% 20.01% 12.21% 0.26 17.31% 0 50 100 150 200 250 4/5/2013 4/5/2014 4/5/2015 4/5/2016 MSCI EFM Europe +CIS Strategy
Emerging Europe High-Growth Exporters Geographic breakdown (31.12.2016) Sector breakdown Top 5 positions % of portfolio Country Sector CD Projekt 8.26% Poland IT Services & Consulting Uniwheels AG 6.75% Poland Automotive supplies GMK Noril'skiy nikel' PAO 6.19% Russia Metals and mining Novolipetsk Steel PAO 5.73% Russia Metals and mining Fabryki Mebli Forte SA 5.01% Poland Furniture Poland 43.12% Russia 23.03% Turkey 14.61% Romania 7.37% Hungary 4.15% Bulgaria 3.41% Czech 2.40% Ukraine 1.91% IT services and consulting 24.41% Basic materials 19.83% Chemical 9.24% Household appliances 8.90% Machinery 8.66% Wood products Furniture 8.63% Pharmaceutical 6.95% Automotive supplies 6.75% Auto&Multi Utility Vehicles 4.72% Agriculture 1.91%
Accessing investment opportunities in Emerging Europe is often obstructed by various challenges related to language barriers, cultural differences and transparency issues. To help our institutional clients make the most of what the region has to offer we provide a number of analytical tools: quarterly strategy report & flash reports individual sector and stock reports upon request monthly performance statements, attribution analyses conference calls and discussions with investment committee members on-site client visits upon request Analytical Support for Institutional Clients
Karoll Capital’s UCITS Funds Advance Mutual Funds Family  Stock selection in Bulgaria & Romania  Stock selection in Eastern Europe  Stock selection in Central Europe  Local deposits, fixed income, repo-agreements  Flexible global multi-asset fund
Emerging Europe – the Overlooked Opportunity
While Central & Eastern Europe is a diverse region, it offers appreciable scale: 350+ mln combined population USD 4+ trln GDP (1/3 of euro-zone total) 3,000+ listed companies USD 1+ trln total market cap Emerging Europe buoyant region converging with the rest of Europe incubator for thriving companies increasingly participating in European & global supply chains  vast number of companies shifting production here
Emerging Europe among the fastest growing regions Source: IMF October 2016 outlook 2014 20152016e 2017f 2018f 2019f 2020f 2021f World 3.4% 3.2% 3.1% 3.4% 3.6% 3.7% 3.7% 3.8% Advanced economies 1.9% 2.1% 1.6% 1.8% 1.8% 1.8% 1.7% 1.7% Euro area 1.1% 2.0% 1.7% 1.5% 1.6% 1.5% 1.5% 1.5% European Union 1.6% 2.3% 1.9% 1.7% 1.8% 1.8% 1.8% 1.7% Emerging market and developing economies 4.6% 4.0% 4.2% 4.6% 4.8% 5.0% 5.1% 5.1% Commonwealth of Independent States 1.1% -2.8% -0.3% 1.4% 1.7% 2.1% 2.2% 2.4% Emerging and developing Asia 6.8% 6.6% 6.5% 6.3% 6.3% 6.4% 6.4% 6.4% Emerging and developing Europe 2.8% 3.6% 3.3% 3.1% 3.2% 3.1% 3.2% 3.2% Latin America and the Caribbean 1.0% 0.0% -0.6% 1.6% 2.1% 2.6% 2.7% 2.7% Middle East and North Africa 2.6% 2.1% 3.2% 3.2% 3.4% 3.6% 3.7% 3.6% Sub-Saharan Africa 5.1% 3.4% 1.4% 2.9% 3.6% 4.2% 4.3% 4.2%
Emerging Europe now a major production & services hub CEE countries have become major automotive producers  26% of motor vehicles in Europe are produced here Local suppliers steadily moving up the value chain CEE is Europe’s Silicon Valley  IT sector rapidly increasing its share of GDP with fast growing number of employees Booming outsourcing sector  CEE countries in top 20 ranking for Business Process Outsourcing
Emerging Europe growing much faster than developed Europe GDP growth (%) -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Euro area Emerging and developing Europe Source: IMF April 2016 outlook Emerging Europe growing at a much faster pace vs. developed Europe: +3.5% on avg b/n 2005 and 2015 vs. +0.8% for euro-area Trend expected to persist in the following years GDP growth (%)
Solid performance of regional economies continued in 2016 -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% -0.6% 0.5% 0.8% 1.3% 1.6% 1.8% 2.0% 2.0% 2.1% 2.6% 3.0% 3.1% 3.1% 5.9% GDP growth Q2'16 y-o-y Most regional economies are growing at a faster pace compared to the euro-zone average thanks to robust domestic consumption growth Romania posted the highest GDP growth rate in the EU in Q2 2016 Recession in Russia is easing as it experienced the slowest contraction in Q2 2016 since it started to contract at the beginning of 2015 Ukraine bottomed out and returned to modest positive growth in Q1 with GDP figures accelerating in Q2 Source: Eurostat, National statistics institutes
Low levels of GDP p.c. = solid catch-up potential GDP per capita (EUR), 2015 Source: Eurostat, IMF Rising but still very low levels of GDP per capita: b/n 6 - 51% of euro-zone average 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Euro area Czech Republic Estonia Lithuania Latvia Hungary Poland Croatia Turkey Russia Romania Bulgaria Serbia Ukraine
Compelling opportunities in Emerging Europe Strategic location of the region  ideally situated for building trade links between Western Europe, Middle East and Asia. Infrastructure has significantly improved in the past years with major investments planned in the mid term  region now deeply integrated with pan-European transport corridors Most countries are current or future members of EU, OECD and NATO  major changes in their economies and business environment. Some have already adopted the Euro. Legal, regulatory and business conditions have marked solid improvement; regulatory framework synchronized following EU accession. CEE boasts well-educated and relatively inexpensive workforce  labor force with tertiary education steadily increasing. Wages on the rise, but still far below EU average. Favorable tax regimes  significantly lower tax rates (e.g. 10% corporate income tax in Bulgaria)
Stable economies with low level of government debt Government debt/GDP, 2015 Source: Eurostat, IMF Government debt in CEE at low levels: below 50% of GDP on average for the region vs. 91% for euro-zone 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Euro area Croatia Ukraine Serbia Hungary Poland Lithuania Czech Republic Romania Latvia Turkey Bulgaria Russia Estonia 91% 87% 80% 77% 75% 51% 43% 41% 38% 36% 33% 27% 18% 10%
Emerging Europe boasts favorable tax regimes Corporate tax rates 55% 35% 34% 30% 30% 30% 25% 25% 22% 20% 20% 20% 20% 19% 19% 19% 18% 16% 15% 15% 15% 10% 0% 10% 20% 30% 40% 50% 60% France USA Brazil Mexico India Germany China Indonesia Slovak Republic Croatia Russia Turkey Estonia Hungary Poland Czech Republic Ukraine Romania Serbia Latvia Lithuania Bulgaria Corporate and other taxes much lower in Central & Eastern Europe vs. developed world and major manufacturing hubs Most regional states provide tax incentives and additional stimulus to attract foreign investors
Emerging Europe boasts highly educated & qualified workforce 17.1 24.1 35.3 15.1 9.2 15.1 11.7 9.5 7.5 26.5 33.1 32.7 27.8 24.3 23.9 20.9 19.7 18.6 14.7 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 European Union Estonia Lithuania Latvia Poland Bulgaria Hungary Czech Republic Slovakia Romania 2000 2015 People with tertiary education (% of population) Share of people with tertiary education in CEE steadily on the rise Source: Eurostat
Labor costs significantly below those in the developed world Labor costs per hour (EUR), 2015 While convergence has been driving wages in CEE higher, they are still far below European averages Min wages range b/n €194 in Bulgaria and €425 in Turkey, compared to €1,473 in Germany and €1,500 in UK Source: Eurostat 51.2 41.3 39.1 37.4 36.2 35.1 34.1 33.0 32.4 32.2 30.0 29.7 28.1 25.7 21.2 15.8 15.6 13.2 13.0 10.3 10.0 9.9 9.6 8.6 7.5 7.1 6.8 5.0 4.1 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Norway Denmark Belgium Sweden Luxembourg France Netherlands Finland Austria Germany Ireland Euro zone average Italy United Kingdom Spain Slovenia Cyprus Portugal Malta Estonia Slovakia Czech Republic Croatia Poland Hungary Latvia Lithuania Romania Bulgaria
High growth of employment in science & tech Human resources in science and technology (% of active population) Science & tech play an increasing role with R&D expenditures rising fast The Czech Republic, Estonia, Hungary, Lithuania now spending over 1% of GDP on R&D While this figure is still low compared to EU average of 2%, it is rapidly rising Source: Eurostat 0% 5% 10% 15% 20% 25% 30% 35% 27% 25% 24% 22% 21% 30% 24% 21% 21% 25% 17% 32% 30% 30% 28% 29% 31% 28% 24% 26% 24% 19% 2005 2015
Emerging Europe enjoys solid FDI flows Services were the main recipient of FDI flows in the transition period driven by extensive privatization processes + market seeking and supply cost optimization Banking systems and telecom operators now mostly in the hands of foreign investors, primarily from EU FDI in manufacturing have been concentrated in: automotive sector, transport equipment, electrical equipment, food, chemicals & metals Source: UNCTAD
Emerging Europe abundant resources provided by EU Since these countries became EU members, EU co-financing has become an essential factor for their development  EU Structural and Cohesion Funds accounted for 11.3 - 25% of annual GDP in 2007-2013, fostering regional cohesion Large part of EU SCF financed major infrastructure projects, but also environment projects, renewable energy, SMEs, education & health, information society, increasing the adaptability of workers and enterprises, strengthening of institutional capacity Poland Czech Republic Hungary Romania Slovakia Lithuania Bulgaria Latvia Slovenia Estonia Croatia EU funds, 2007-2013 (EUR, bln.) 67.19 26.3 24.92 19.18 11.65 6.77 6.67 4.54 4.1 3.4 1 EU funds/GDP (%) 17.2% 17.6% 25.4% 13.4% 16.2% 19.6% 16.7% 19.4% 11.6% 18.5% 2.3% Total: €175.7 bln = 16.2% of GDP on average
EU cohesion policy 2014-2020 to provide further boost to regional competitiveness 0 10 20 30 40 50 60 70 80 77.6 32.8 28.6 23 22 21.9 21.5 19.2 15.9 15.5 14 11.8 8.6 7.6 6.8 4.5 3.6 3.1 2.3 2.1 1.5 1.4 1.2 1.2 0.7 0.7 0.6 0.1 EU cohesion policy 2014-2020, allocation by country (EUR bln) CEE to receive over 50% of EU 2014-2020 Cohesion Policy = more than €190 bln EU 2014-2020 Cohesion Policy targets: R&D, ICT sector, sustainable transport, SMEs, renewable energy & energy efficiency, environment, employment and education
Competitiveness of local economies steadily on the rise Country Rank, 2006 Rank, 2016 Change of position Estonia 18 16 2 Lithuania 22 20 2 Poland 56 25 31 Slovenia 42 29 13 Slovakia 32 29 3 Czech Republic 59 36 23 Romania 62 37 25 Mexico 58 38 20 Bulgaria 48 38 10 Hungary 46 42 4 Thailand 23 49 -26 Russia 95 51 44 Turkey 60 55 5 Croatia 115 65 50 Vietnam 75 78 -3 China 89 90 -1 Serbia 78 91 -13 Indonesia 114 114 0 India 116 130 -14 Competitiveness of local economies has registered rapid advance as measured by the Ease of Doing Business Ranking by the World Bank Most CEE countries are in top 50 5 countries hold a position in top 30
Rising role in European value chains 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 56.7 114.0 54.0 41.6 36.2 15.8 5.7 6.2 8.7 4.8 1.2 4.5 3.2 141.6 135.7 119.1 72.4 61.6 40.2 14.9 14.1 12.8 8.7 7.9 7.7 7.5 2005 2015 Export of Emerging Europe countries to EU (EUR bln) Export of CEE countries to EU have jumped by more than 80% b/n 2005 - 2015 Share in total EU imports now above 37% (2005: 29.8%) and significantly lower before that Most countries export over 50% of production to EU 2015 Czech Republic 83.4% Hungary 81.4% Poland 79.2% Estonia 75.2% Romania 73.7% Latvia 69.5% Croatia 65.9% Bulgaria 64.2% Serbia 63.7% Lithuania 61.3% Turkey 44.5% Russia 44.4% Ukraine 24.2% Share of export to the EU in total export (2015) Source: Eurostat, KCM calculations
Eastern Europe becoming a major manufacturing hub for multinationals For 15 years the regions has seen massive inflows of foreign investors Following the GFC there is a clear trend of Emerging Europe establishing itself as a major manufacturing hub Much lower production costs – labor, office rentals, electricity, taxes and other incentives many multinationals shifting production to Eastern Europe Location becoming more important – proximity, both in geographical and cultural terms, favors Eastern Europe over Asia and Latin America EU membership and accession make trading much easier NEARSHORING gaining popularity
Emerging Europe vs. Asia Eastern Europe increasingly recognizing the importance of quality as a differentiator to low-cost Asian producers Wages have been growing robustly in Asia in the past years with wage gap b/n Eastern Europe and Asia narrowing; wages in China have more than tripled in the past decade Realizing the trend of nearshoring, even Asian companies are investing in the region Emerging Europe now moving up the value chain  from low-cost manufacturing centers, regional economies now facing the challenge to become innovative knowledge-based economies Rather than viewing the CEE region as a cheap production base, multinationals increasingly consider it to be a source of expertise. The trend will continue and a deep supplier base will emerge here as local companies become integrated into global supply chains. Production gains in CEE have come from better management rather than from growing population and capital investment (the Asian case).
Automotive sector in CEE Assessing the potential of the region, Western European and Asian companies invested in local automakers and established new companies. Fiat acquired Poland’s FSM in 1992; Volkswagen took over Škoda in the Czech Republic in 1991; and Renault bought Dacia in Romania in 1998. Audi, Opel, and Suzuki all opened plants in Hungary; Peugeot, Toyota, and Hyundai established operations in the Czech Republic; and Peugeot Citroën invested in Slovakia. Renault, Toyota, Hyundai, Honda, Ford and Fiat all have production facilities in Turkey. Russia is the top producer in the whole CEE region with sizable production by Hyundai, Renault, Volkswagen, Nissan, General Motors and others. Along with the automakers came automotive parts suppliers, creating automotive clusters across the region. The factory of Audi in Hungary is now the biggest car engines producer in the world. Nearly 2/3 of automotive exports go to EU-15 markets, and 60% of sales are concentrated in Germany, the UK, and France
Booming car production in CEE 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 Russia Turkey Czech Republic Slovak Republic Poland Hungary Romania Serbia 1,354,504 879,452 602,237 218,349 613,200 152,015 194,802 14,179 1,384,399 1,358,796 1,303,603 1,000,001 660,603 495,370 387,177 83,630 2005 2015 Motor vehicles production in CEE (units) Car production rose nearly 70% from 2005 to 2015, with Slovakia, Czech Republic and Hungary more than doubling production Renault now with over 35% of total production in CEE Source: International Organization of Motor Vehicle Manufacturers
Eastern Europe – the new Silicon Valley The human assets of the region make it a major player in technological innovation  Forbes consistently ranks CEE at the top of the world in educational achievement in math, science & technology. In 2013, 16 out of the 24 finalists of Google's annual Code Jam programming competition were from Central and Eastern Europe Solid growth of number of employees in ICT sector (Estonia: +128% in the past 10 years, Romania: +120%, Bulgaria: +84%). Many significant tech businesses have started in CEE: - Skype founded by Estonians, acquired by Microsoft for $8.5 bln - Whatsapp founded by Ukrainian, acquired by Facebook for $19 bln - Prezi launched in Hungary as online tool for creating presentations - Major cyber security companies - AVG Technologies, Avast and ESET, in the Czech Republic and Slovakia Abundant EU funding supports start-ups from the tech sector
48 Emerging Europe stock markets lagging behind 0.000 50.000 100.000 150.000 200.000 250.000 300.000 ACWI EFM EUROPE + CIS EM ASIA EM LATIN AMERICA EUROPE NORTH AMERICA Performance of MSCI EFM Europe+CIS, EUR as of 31.12.2016 3M 15.46% YTD 24.4% 1Y 24.40% 3Y, annualized -3.91% 5Y, annualized -1.52% 10Y, annualized -5.43% since 2007 peak -49.7%
Emerging Europe attractive valuation ratios across the region Source: Reuters P/E ratios, ttm
Emerging Europe P/E ratios by country (ttm) 50 Source: Thompson Reuters, KCM calculations
Compelling reasons to invest in CEE -CEE turning into major manufacturing hub -> rising role in global value chains (over 50% of exports to EU) -Major global companies shift production here -> solid FDIs in automotive sector, transport equipment, electrical equipment, food, chemicals & metals -CEE turning into the new Silicon Valley due to highly qualified IT specialists -Booming outsourcing sector -> CEE countries in top 20 for Business Process Outsourcing. -Buoyant region with appreciable scale converging with the West -Growing much faster than developed Europe -Among lowest taxes in the world -Low labor costs –> 27% of euro-zone average -Well-educated & highly qualified workforce -Abundant EU funding boosts competitiveness -Geographic & cultural proximity to the West -Greater focus on quality vs. low cost Asian producers
Why invest in Emerging Europe now Solid catch-up potential based on lagging performance in recent years Improving sentiment towards emerging markets as a whole has sparked uptrend Attractive valuation ratios with multiples lower than peers and historic averages Low market penetration = solid catch-up potential Improving liquidity Take advantage of the Emerging Europe opportunities with Karoll Capital’s flagship strategies: >>> Emerging Europe Opportunities >>> Emerging Europe High-Growth Exporters
Contact us at: Daniel Ganev, MBA Managing Director, Karoll Capital Management E-mail: ganevd@karoll.bg Tel: +359 2 400 8 382 Nadia Nedelcheva, CFA Head of Portfolio Management, Karoll Capital Management E-mail: nnedelcheva@karoll.bg Tel: +359 2 400 8 386 Headquarters Sofia 1 Zlatovrah Str., Sofia 1164, Bulgaria | (+359 2) / 4008 382 | kcm@karoll.bg www.karollcapital.bg
Disclaimer This presentation is for information purposes only and does not represent a proposal for buying of selling securities. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Karoll Capital Management makes no representation that it is accurate or complete. The information contained herein is subject to change without notice. Karoll makes no representations or warranties whatsoever as to the data and information provided in any third party referenced website and shall have no liability or responsibility arising out of or in connection with any such referenced website. Karoll does not maintain a predetermined schedule for publication of research and will not necessarily update this presentation. Karoll Capital Management and any of its officers, employees, related and discretionary accounts may, to the extent not disclosed above and to the extent permitted by law, have long or short positions or may be otherwise interested in the investments or securities referred to in this document, or in options on such investments or securities, or in related investments (including other securities of the same issuer). Karoll, or its clients or customers, may trade as market maker in the investments or securities that are the subject of this document, or in related investments, and may have acted upon, bought for their own account or used the information contained in this document, before its publication. In addition, Karoll Financial Group may provide banking, insurance or asset management services for, or solicit such business from, any company referred to in this presentation. Any investments referred to herein may involve significant risk, may be illiquid and may not be suitable for all investors. Investors should note that income from such investments or other securities, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this presentation. This presentation should not be regarded by recipients as a substitute for the exercise of their own judgment. Investors should make their own investigations and investment decisions without relying on this presentation. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this presentation. Before entering into any transaction, investors should consult their advisors and understand the risks involved in these transactions. Investors should make themselves aware of any local laws governing such securities or investments.

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Asset Management in CEE

  • 1.
  • 2.
    Karoll Financial Group Mission “Ourgoal is to create accessible vehicles, tools and processes in helping global investors harness the exciting potential of Emerging Europe.” Stanimir Karolev Founder and Chairman, Karoll Financial Group
  • 3.
    Karoll Financial Group KarollBrokerage Karoll Capital Management Advance Terrafund Advance Equity Karoll Investment Leader by number of transactions on BSE for 15 years in a row 30% market share of of all transactions Pioneered the first mutual fund in the country (2004) Strategic partner of Schroders for the local markets Largest farm land REIT in the country IFC (World Bank) - key stakeholder First Private Equity fund in Bulgaria Executed the first IPO in Bulgaria (2004) 25 EXCITING YEARS OF SUCCESS | TEAM OF 200 EXPERTS
  • 4.
    Karoll Financial Group ProductOffering Bulgarian Capital Market International Capital Markets Brokerage Wealth Management • Advance Invest • Advance Eastern Europe • Advance Emerging Europe Opportunities • Advance Global Trends • Advance Conservative Fund • Separately Managed Accounts Institutional Mandates • Emerging Europe Opportunities (Eastern Europe) • Central Europe • Balkan • Thematic equity • Mixed Asset Management IPO & SPO Activities M&A Restructuring Investment Banking Real Estate ADVANCE TerraFund REIT Private Equity ADVANCE Equity Holding
  • 5.
    Karoll Capital ManagementOverview Unique heritage in Emerging Europe Founded in Sofia in 2003, our roots are truly in Emerging Europe Independent and skilled Eastern Europe-based team with long tenure Part of Karoll Financial Group with support of 200 professionals + 70 local offices Steady business growth on solid reputation AUM ~ USD 250 mln. Assets split in various mutual funds, real estate investment trusts, wealth mgt & mandates Manages 5 UCITS funds and multiple private accounts Crisp focus on Emerging Europe Helping clients harness the potential of Emerging Europe Deep understanding of the cultures and dynamics of our markets On-the-ground research coverage of strategically important holdings Partnership with top international names Local representative of Schroder Investment Management, UK Partners with IFC (World Bank), European institutions and global players Cheverny Capital – our Canadian representative
  • 6.
    Our Unique ValueProposition “Emerging Europe is a unique investment theme with strong upside potential and low correlation to the developed world. It is a truly overlooked opportunity! We pick out high-growth sectors in a high-growth region. We generate alpha in the region while helping global investors overcome local barriers.” Daniel Ganev Managing Director, Karoll Capital Management Independent Flexible Entrepreneurial Deep understanding of local markets
  • 7.
    Karoll Capital’s InvestmentCommittee Seasoned investment team with long tenure and unique combination of skills: Daniel Ganev, MBA, Managing Director  15+ yrs of experience in in fund management, financial products development and marketing, business development in emerging markets Nadia Nedelcheva, CFA, Head of Portfolio Management  15+ yrs of experience in portfolio management, research, valuations and modeling in Central & Eastern Europe (CEE) Alexander Nikolov, Portfolio Manager  18+ yrs of experience in portfolio management, financial analysis, technical analysis on the US, European and CEE market Katerina Atanassova, Portfolio Manager  15+ yrs of experience in portfolio management, technical analysis and trading on the global developed and emerging markets Georgi Georgiev, Portfolio Manager  13+ yrs of experience in research, fundamental analysis, valuations, portfolio management and trading in the global emerging markets and USA
  • 8.
    Karoll Capital’s AnalyticalSupport Our Sofia-based analysts have easy access to regional companies in search of investment opportunities: Dimitrios Latitaris, Investment Analyst  4+ yrs of experience in research, investment banking, fundamental analysis, valuations in Central & Eastern Europe Georgi Raykov, Investment Analyst  3+ yrs of experience in research, fundamental analysis, valuations in Central & Eastern Europe
  • 9.
  • 10.
    Karoll Capital’s InvestmentProcess – the 4 S’s Screen The process starts with our on-the-ground analyst team screening the landscape in search of investment opportunities in Emerging Europe. We apply filters in terms of liquidity (time needed to enter/exit investment), market cap, transparency, corporate governance, etc. As a result, our investment universe comprises around 500 stocks out of some 3 000 listed companies in Central and Eastern Europe. Our major advantage is the freedom to deviate from local indices based on our views. This gives us flexibility in our investment choice, regularly leading to superior results and outperformance of benchmarks and peers. Using proprietary analytical tools and exchange with local contacts, we seek to pinpoint stocks that are trading at a discount or that are in a position to undergo some fundamental change. Examples of such events are turnaround situations, management changes, financial results surprises, etc. Study The generation of investment ideas leads to the next step -- a thorough in-depth analysis conducted in house. Because of market inefficiencies we believe Emerging Europe is abundant with mispriced assets. In estimating the true value of a stock we study the firm’s business model and its ability to realize returns greater than the cost of capital, the shareholder structure and management capabilities, sector dynamics and overall market position. We strive to find companies with improving profitability margins and low debt levels that are traded at a discount to peers. On-site visits and regular contact with company representatives are a key part of research as well. In addition to employing valuation methods, we also consider investor psychology, liquidity and order flows. The outcome of the investment assessment is the analyst proposal to the investment committee, which summarizes the case, the rationale behind it, potential upside and associated triggers, as well as the risks involved. Shape Karoll Capital’s 4-member investment committee, supported by our analyst team, examines the selected investment proposals in view of portfolio construction. In the case of managed accounts / mandates the decision is collective. Convening each month, the committee decides on position weight changes and/or liquidations. At each stage, compliance with regulatory guidelines and client-tailored requirements are factored in. Scrutinize Finally, the investment portfolio is monitored with all different positions being systematically scrutinized. The investment team applies in-house processes and practices enabling it to adequately react to the different triggers causing distortions to the investment case. As part of the process our analysts and portfolio managers follow up with the companies’ management, screen the sector competitors and general business/political environment. Conducting attribution and risk management analysis on the portfolio holdings is essential. Any resulting concerns related to the investment case prompt reviews of the rationale behind the decision to add / hold/ reduce the stock as a portfolio component.
  • 11.
    Our Investment Universe 3,000+listed companies in CEE Investment Universe – 1,500 750 500 250 Survivors 150 Selection Filters: Sector Outlook & Company Competitiveness Mkt cap & Liquidity Corp Governance & Transparency Financial Strength In-house Valuation
  • 12.
    Karoll Capital’s InvestmentProcess In-house valuation Our PMs and analysts use the following valuation methods: - Peers comparison - Discounted cash flows model Financial strength - Earnings: earnings cyclicality, recurring earnings, forecast sales and - Analyze profitability, Leverage and funding, Debt service, Liquidity, Asset Sector outlook and competitiveness - Identify key growth drivers and themes, assess sustainable Corporate governance and transparency - Study and evaluate board composition, executive remuneration, shareholders, provided access to documents Market cap and liquidity filter - For more liquid markets: up to 3 days for entry/exit - For less liquid markets: up to 7 days for entry/exit - Free-float > 25%
  • 13.
    We aim toachieve sound risk- adjusted performance We define risk indicators/limits regarding market risk, liquidity risk, exposure to a single issuer, to less liquid stocks/markets, etc. Risk management is executed on a day-to-day basis by portfolio managers who assess risk at each level of the investment life- cycle  investment selection, portfolio construction and portfolio monitoring The risk management department supports the investment process by implementing and monitoring the policy and procedures for risk identification  constantly monitors risk factors/indicators, performs contribution analysis and risk assessment The risk management department prepares a monthly report for the Board, as well as notifies portfolio managers immediately upon approaching of critical levels of key risk indicators Risk Management
  • 14.
    Investment team meetings Weeklymeetings - PMs and analysts interact and exchange ideas Monthly meetings - Portfolio reviews of mutual funds / managed accounts, contribution analysis - Overview of market development -> modify portfolios if necessary Quarterly meetings - In-depth analysis of investment portfolios - Strategic asset allocation decisions Ad-hoc meetings - In the event of a trigger from the in-house surveillance system
  • 15.
    Karoll Capital Management InvestmentCapabilities & Results Main strategies offered to institutional investors: Emerging Europe Opportunities (Eastern Europe), Central Europe, Balkan, Thematic, as well as mixed strategies based on specific mandate Karoll Capital’s Investment Committee aims to construct for our institutional clients Individually Managed Accounts / Mandates portfolios designed to take advantage of the L.T. trends as well as hot opportunities in the market Strategies results vs. benchmarks, as of 31.01.2017 YTD 1 year 3 years, annualized 5 years, annualized Volatility Beta Alpha MSCI EFM Europe +CIS -0.48% 27.26% -1.72% -4.13% 23.04% MSCI EFM Europe +CIS ex RU 2.54% 6.13% -5.22% -4.61% 19.21% Emerging Europe Opportunities (Eastern Europe) 2.16% 20.53% 1.30% 2.63% 12.89% 0.70 2.08% Central Europe strategy 5.33% 20.77% -0.63% 0.73% 11.10% 0.70 2.60% Balkan strategy 7.44% 25.95% 3.10% 4.75% 10.83% 0.58 5.54% Emerging Europe High-growth Exporters strategy 6.22% 32.69% 25.12% n.a 12.14% 0.26 18.61%
  • 16.
    Emerging Europe Opportunities Strategyat a Glance Invests in the stock markets of Emerging Europe Europe, the Baltics, Balkans) Provides access to a robustly growing region, achieves better vs. benchmarks Invests in regional large-cap, but also small & mid-cap fast benchmark agnostic Managed by a seasoned team with long tenure, based on the profound understanding of local markets 10+ years track record of strategy
  • 17.
    Karoll Capital’s Emerging EuropeOpportunities Strategy Investment theme: invests across the stock markets of Emerging Europe (Central & Eastern Europe, the Baltics, Balkans) Investment style: blended (value and growth), stock-picking, bottom up combined with top down and sector views Target: to achieve higher return than the market at lower risk Market cap: regional large cap, but also small & mid cap Portfolio components: 70-100 positions Low portfolio turnover and limited volatility Offering format: Separately Managed Account Minimum size of investment: €0.250 mln. Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark Highly-experienced team with long tenure & excellent understanding of local markets Launch: October, 2006
  • 18.
    Outperformance of Strategy vs.benchmark Strategy vs. Benchmark, performance, as of 31.01.2017 1 month YTD 1 year 3 years annualized 5 years, annualized Annualized (since inception) Volatility Beta Alpha MSCI EFM Europe +CIS -0.48% -0.48% 27.26% -1.72% -4.13% -4.12% 23.04% Emerging Europe Opportunities Strategy 2.16% 2.16% 20.53% 1.30% 2.63% -2.19% 12.89% 0.7 2.08% 30 50 70 90 110 130 150 04.10.2006 04.10.2008 04.10.2010 04.10.2012 04.10.2014 04.10.2016 Strategy Benchmark
  • 19.
    Emerging Europe OpportunitiesStrategy Geographic breakdown (31.01.2017) Sector breakdown Top 5 positions % of portfolio Country Sector GMK Norliski Nikel 3% Russia Metals X5 Retail Group 2.4% Russia Retail RICHTER GEDEON 2.2% Hungary Healthcare KRUK S.A. 2.1% Poland Financial OTP BANK 2.1% Hungary Banks 24.0% 18.2% 10.0% 9.1% 7.0% 6.6% 4.0% 3.6% 3.2% 3.0% 2.9% 2.5% 5.8% Russia Poland Hungary Czech Republic Turkey Romania Bulgaria Croatia Serbia Baltics Ukraine Austria Cash 12.4% 10.9% 6.4% 6.2% 5.4% 4.6%4.7% 4.2% 4.6% 3.8% 3.2% 2.7% 25.0% Oil and gas Banks Metals Retail IT Conglomerates Healthcare Agriculture Industrial Transportation Utilities Precious metals Other
  • 20.
    Emerging Europe High-GrowthExporters Karoll Capital’s highest alpha generating strategy Investment theme: to invest in high-growth industrial, outsourcing and ICT companies benefiting from low labor costs, highly skilled workforce and lowest taxes in a fast-growing region with strategic location Investment style: growth, benchmark agnostic, bottom-up Market cap: small and mid cap. Concentrated portfolio: 20-30 positions Low portfolio turnover (<20%) and limited volatility Offering format: Managed Account Minimum size of investment: EUR 0.25 mln. Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark Highly-experienced team with long tenure and excellent understanding of local markets Launch: April, 2013
  • 21.
    Solid outperformance ofThematic Strategy vs. benchmark Strategy vs. Benchmark, performance, as of 31.12.2016 1 month YTD 1 year Since inception Annualized (since inception) Volatility Beta Alpha MSCI EFM Europe +CIS 9.33% 24.58% 24.58% -17.90% -5.15% 23.04% Thematic strategy (Emerging Europe High-Growth Exporters) 4.61% 22.06% 22.06% 100.35% 20.01% 12.21% 0.26 17.31% 0 50 100 150 200 250 4/5/2013 4/5/2014 4/5/2015 4/5/2016 MSCI EFM Europe +CIS Strategy
  • 22.
    Emerging Europe High-GrowthExporters Geographic breakdown (31.12.2016) Sector breakdown Top 5 positions % of portfolio Country Sector CD Projekt 8.26% Poland IT Services & Consulting Uniwheels AG 6.75% Poland Automotive supplies GMK Noril'skiy nikel' PAO 6.19% Russia Metals and mining Novolipetsk Steel PAO 5.73% Russia Metals and mining Fabryki Mebli Forte SA 5.01% Poland Furniture Poland 43.12% Russia 23.03% Turkey 14.61% Romania 7.37% Hungary 4.15% Bulgaria 3.41% Czech 2.40% Ukraine 1.91% IT services and consulting 24.41% Basic materials 19.83% Chemical 9.24% Household appliances 8.90% Machinery 8.66% Wood products Furniture 8.63% Pharmaceutical 6.95% Automotive supplies 6.75% Auto&Multi Utility Vehicles 4.72% Agriculture 1.91%
  • 23.
    Accessing investment opportunitiesin Emerging Europe is often obstructed by various challenges related to language barriers, cultural differences and transparency issues. To help our institutional clients make the most of what the region has to offer we provide a number of analytical tools: quarterly strategy report & flash reports individual sector and stock reports upon request monthly performance statements, attribution analyses conference calls and discussions with investment committee members on-site client visits upon request Analytical Support for Institutional Clients
  • 24.
    Karoll Capital’s UCITSFunds Advance Mutual Funds Family  Stock selection in Bulgaria & Romania  Stock selection in Eastern Europe  Stock selection in Central Europe  Local deposits, fixed income, repo-agreements  Flexible global multi-asset fund
  • 25.
    Emerging Europe –the Overlooked Opportunity
  • 26.
    While Central &Eastern Europe is a diverse region, it offers appreciable scale: 350+ mln combined population USD 4+ trln GDP (1/3 of euro-zone total) 3,000+ listed companies USD 1+ trln total market cap Emerging Europe buoyant region converging with the rest of Europe incubator for thriving companies increasingly participating in European & global supply chains  vast number of companies shifting production here
  • 27.
    Emerging Europe among thefastest growing regions Source: IMF October 2016 outlook 2014 20152016e 2017f 2018f 2019f 2020f 2021f World 3.4% 3.2% 3.1% 3.4% 3.6% 3.7% 3.7% 3.8% Advanced economies 1.9% 2.1% 1.6% 1.8% 1.8% 1.8% 1.7% 1.7% Euro area 1.1% 2.0% 1.7% 1.5% 1.6% 1.5% 1.5% 1.5% European Union 1.6% 2.3% 1.9% 1.7% 1.8% 1.8% 1.8% 1.7% Emerging market and developing economies 4.6% 4.0% 4.2% 4.6% 4.8% 5.0% 5.1% 5.1% Commonwealth of Independent States 1.1% -2.8% -0.3% 1.4% 1.7% 2.1% 2.2% 2.4% Emerging and developing Asia 6.8% 6.6% 6.5% 6.3% 6.3% 6.4% 6.4% 6.4% Emerging and developing Europe 2.8% 3.6% 3.3% 3.1% 3.2% 3.1% 3.2% 3.2% Latin America and the Caribbean 1.0% 0.0% -0.6% 1.6% 2.1% 2.6% 2.7% 2.7% Middle East and North Africa 2.6% 2.1% 3.2% 3.2% 3.4% 3.6% 3.7% 3.6% Sub-Saharan Africa 5.1% 3.4% 1.4% 2.9% 3.6% 4.2% 4.3% 4.2%
  • 28.
    Emerging Europe now amajor production & services hub CEE countries have become major automotive producers  26% of motor vehicles in Europe are produced here Local suppliers steadily moving up the value chain CEE is Europe’s Silicon Valley  IT sector rapidly increasing its share of GDP with fast growing number of employees Booming outsourcing sector  CEE countries in top 20 ranking for Business Process Outsourcing
  • 29.
    Emerging Europe growing muchfaster than developed Europe GDP growth (%) -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Euro area Emerging and developing Europe Source: IMF April 2016 outlook Emerging Europe growing at a much faster pace vs. developed Europe: +3.5% on avg b/n 2005 and 2015 vs. +0.8% for euro-area Trend expected to persist in the following years GDP growth (%)
  • 30.
    Solid performance ofregional economies continued in 2016 -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% -0.6% 0.5% 0.8% 1.3% 1.6% 1.8% 2.0% 2.0% 2.1% 2.6% 3.0% 3.1% 3.1% 5.9% GDP growth Q2'16 y-o-y Most regional economies are growing at a faster pace compared to the euro-zone average thanks to robust domestic consumption growth Romania posted the highest GDP growth rate in the EU in Q2 2016 Recession in Russia is easing as it experienced the slowest contraction in Q2 2016 since it started to contract at the beginning of 2015 Ukraine bottomed out and returned to modest positive growth in Q1 with GDP figures accelerating in Q2 Source: Eurostat, National statistics institutes
  • 31.
    Low levels ofGDP p.c. = solid catch-up potential GDP per capita (EUR), 2015 Source: Eurostat, IMF Rising but still very low levels of GDP per capita: b/n 6 - 51% of euro-zone average 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Euro area Czech Republic Estonia Lithuania Latvia Hungary Poland Croatia Turkey Russia Romania Bulgaria Serbia Ukraine
  • 32.
    Compelling opportunities inEmerging Europe Strategic location of the region  ideally situated for building trade links between Western Europe, Middle East and Asia. Infrastructure has significantly improved in the past years with major investments planned in the mid term  region now deeply integrated with pan-European transport corridors Most countries are current or future members of EU, OECD and NATO  major changes in their economies and business environment. Some have already adopted the Euro. Legal, regulatory and business conditions have marked solid improvement; regulatory framework synchronized following EU accession. CEE boasts well-educated and relatively inexpensive workforce  labor force with tertiary education steadily increasing. Wages on the rise, but still far below EU average. Favorable tax regimes  significantly lower tax rates (e.g. 10% corporate income tax in Bulgaria)
  • 33.
    Stable economies withlow level of government debt Government debt/GDP, 2015 Source: Eurostat, IMF Government debt in CEE at low levels: below 50% of GDP on average for the region vs. 91% for euro-zone 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Euro area Croatia Ukraine Serbia Hungary Poland Lithuania Czech Republic Romania Latvia Turkey Bulgaria Russia Estonia 91% 87% 80% 77% 75% 51% 43% 41% 38% 36% 33% 27% 18% 10%
  • 34.
    Emerging Europe boasts favorabletax regimes Corporate tax rates 55% 35% 34% 30% 30% 30% 25% 25% 22% 20% 20% 20% 20% 19% 19% 19% 18% 16% 15% 15% 15% 10% 0% 10% 20% 30% 40% 50% 60% France USA Brazil Mexico India Germany China Indonesia Slovak Republic Croatia Russia Turkey Estonia Hungary Poland Czech Republic Ukraine Romania Serbia Latvia Lithuania Bulgaria Corporate and other taxes much lower in Central & Eastern Europe vs. developed world and major manufacturing hubs Most regional states provide tax incentives and additional stimulus to attract foreign investors
  • 35.
    Emerging Europe boasts highlyeducated & qualified workforce 17.1 24.1 35.3 15.1 9.2 15.1 11.7 9.5 7.5 26.5 33.1 32.7 27.8 24.3 23.9 20.9 19.7 18.6 14.7 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 European Union Estonia Lithuania Latvia Poland Bulgaria Hungary Czech Republic Slovakia Romania 2000 2015 People with tertiary education (% of population) Share of people with tertiary education in CEE steadily on the rise Source: Eurostat
  • 36.
    Labor costs significantlybelow those in the developed world Labor costs per hour (EUR), 2015 While convergence has been driving wages in CEE higher, they are still far below European averages Min wages range b/n €194 in Bulgaria and €425 in Turkey, compared to €1,473 in Germany and €1,500 in UK Source: Eurostat 51.2 41.3 39.1 37.4 36.2 35.1 34.1 33.0 32.4 32.2 30.0 29.7 28.1 25.7 21.2 15.8 15.6 13.2 13.0 10.3 10.0 9.9 9.6 8.6 7.5 7.1 6.8 5.0 4.1 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Norway Denmark Belgium Sweden Luxembourg France Netherlands Finland Austria Germany Ireland Euro zone average Italy United Kingdom Spain Slovenia Cyprus Portugal Malta Estonia Slovakia Czech Republic Croatia Poland Hungary Latvia Lithuania Romania Bulgaria
  • 37.
    High growth ofemployment in science & tech Human resources in science and technology (% of active population) Science & tech play an increasing role with R&D expenditures rising fast The Czech Republic, Estonia, Hungary, Lithuania now spending over 1% of GDP on R&D While this figure is still low compared to EU average of 2%, it is rapidly rising Source: Eurostat 0% 5% 10% 15% 20% 25% 30% 35% 27% 25% 24% 22% 21% 30% 24% 21% 21% 25% 17% 32% 30% 30% 28% 29% 31% 28% 24% 26% 24% 19% 2005 2015
  • 38.
    Emerging Europe enjoys solidFDI flows Services were the main recipient of FDI flows in the transition period driven by extensive privatization processes + market seeking and supply cost optimization Banking systems and telecom operators now mostly in the hands of foreign investors, primarily from EU FDI in manufacturing have been concentrated in: automotive sector, transport equipment, electrical equipment, food, chemicals & metals Source: UNCTAD
  • 39.
    Emerging Europe abundant resourcesprovided by EU Since these countries became EU members, EU co-financing has become an essential factor for their development  EU Structural and Cohesion Funds accounted for 11.3 - 25% of annual GDP in 2007-2013, fostering regional cohesion Large part of EU SCF financed major infrastructure projects, but also environment projects, renewable energy, SMEs, education & health, information society, increasing the adaptability of workers and enterprises, strengthening of institutional capacity Poland Czech Republic Hungary Romania Slovakia Lithuania Bulgaria Latvia Slovenia Estonia Croatia EU funds, 2007-2013 (EUR, bln.) 67.19 26.3 24.92 19.18 11.65 6.77 6.67 4.54 4.1 3.4 1 EU funds/GDP (%) 17.2% 17.6% 25.4% 13.4% 16.2% 19.6% 16.7% 19.4% 11.6% 18.5% 2.3% Total: €175.7 bln = 16.2% of GDP on average
  • 40.
    EU cohesion policy2014-2020 to provide further boost to regional competitiveness 0 10 20 30 40 50 60 70 80 77.6 32.8 28.6 23 22 21.9 21.5 19.2 15.9 15.5 14 11.8 8.6 7.6 6.8 4.5 3.6 3.1 2.3 2.1 1.5 1.4 1.2 1.2 0.7 0.7 0.6 0.1 EU cohesion policy 2014-2020, allocation by country (EUR bln) CEE to receive over 50% of EU 2014-2020 Cohesion Policy = more than €190 bln EU 2014-2020 Cohesion Policy targets: R&D, ICT sector, sustainable transport, SMEs, renewable energy & energy efficiency, environment, employment and education
  • 41.
    Competitiveness of localeconomies steadily on the rise Country Rank, 2006 Rank, 2016 Change of position Estonia 18 16 2 Lithuania 22 20 2 Poland 56 25 31 Slovenia 42 29 13 Slovakia 32 29 3 Czech Republic 59 36 23 Romania 62 37 25 Mexico 58 38 20 Bulgaria 48 38 10 Hungary 46 42 4 Thailand 23 49 -26 Russia 95 51 44 Turkey 60 55 5 Croatia 115 65 50 Vietnam 75 78 -3 China 89 90 -1 Serbia 78 91 -13 Indonesia 114 114 0 India 116 130 -14 Competitiveness of local economies has registered rapid advance as measured by the Ease of Doing Business Ranking by the World Bank Most CEE countries are in top 50 5 countries hold a position in top 30
  • 42.
    Rising role inEuropean value chains 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 56.7 114.0 54.0 41.6 36.2 15.8 5.7 6.2 8.7 4.8 1.2 4.5 3.2 141.6 135.7 119.1 72.4 61.6 40.2 14.9 14.1 12.8 8.7 7.9 7.7 7.5 2005 2015 Export of Emerging Europe countries to EU (EUR bln) Export of CEE countries to EU have jumped by more than 80% b/n 2005 - 2015 Share in total EU imports now above 37% (2005: 29.8%) and significantly lower before that Most countries export over 50% of production to EU 2015 Czech Republic 83.4% Hungary 81.4% Poland 79.2% Estonia 75.2% Romania 73.7% Latvia 69.5% Croatia 65.9% Bulgaria 64.2% Serbia 63.7% Lithuania 61.3% Turkey 44.5% Russia 44.4% Ukraine 24.2% Share of export to the EU in total export (2015) Source: Eurostat, KCM calculations
  • 43.
    Eastern Europe becoming amajor manufacturing hub for multinationals For 15 years the regions has seen massive inflows of foreign investors Following the GFC there is a clear trend of Emerging Europe establishing itself as a major manufacturing hub Much lower production costs – labor, office rentals, electricity, taxes and other incentives many multinationals shifting production to Eastern Europe Location becoming more important – proximity, both in geographical and cultural terms, favors Eastern Europe over Asia and Latin America EU membership and accession make trading much easier NEARSHORING gaining popularity
  • 44.
    Emerging Europe vs.Asia Eastern Europe increasingly recognizing the importance of quality as a differentiator to low-cost Asian producers Wages have been growing robustly in Asia in the past years with wage gap b/n Eastern Europe and Asia narrowing; wages in China have more than tripled in the past decade Realizing the trend of nearshoring, even Asian companies are investing in the region Emerging Europe now moving up the value chain  from low-cost manufacturing centers, regional economies now facing the challenge to become innovative knowledge-based economies Rather than viewing the CEE region as a cheap production base, multinationals increasingly consider it to be a source of expertise. The trend will continue and a deep supplier base will emerge here as local companies become integrated into global supply chains. Production gains in CEE have come from better management rather than from growing population and capital investment (the Asian case).
  • 45.
    Automotive sector inCEE Assessing the potential of the region, Western European and Asian companies invested in local automakers and established new companies. Fiat acquired Poland’s FSM in 1992; Volkswagen took over Škoda in the Czech Republic in 1991; and Renault bought Dacia in Romania in 1998. Audi, Opel, and Suzuki all opened plants in Hungary; Peugeot, Toyota, and Hyundai established operations in the Czech Republic; and Peugeot Citroën invested in Slovakia. Renault, Toyota, Hyundai, Honda, Ford and Fiat all have production facilities in Turkey. Russia is the top producer in the whole CEE region with sizable production by Hyundai, Renault, Volkswagen, Nissan, General Motors and others. Along with the automakers came automotive parts suppliers, creating automotive clusters across the region. The factory of Audi in Hungary is now the biggest car engines producer in the world. Nearly 2/3 of automotive exports go to EU-15 markets, and 60% of sales are concentrated in Germany, the UK, and France
  • 46.
    Booming car productionin CEE 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 Russia Turkey Czech Republic Slovak Republic Poland Hungary Romania Serbia 1,354,504 879,452 602,237 218,349 613,200 152,015 194,802 14,179 1,384,399 1,358,796 1,303,603 1,000,001 660,603 495,370 387,177 83,630 2005 2015 Motor vehicles production in CEE (units) Car production rose nearly 70% from 2005 to 2015, with Slovakia, Czech Republic and Hungary more than doubling production Renault now with over 35% of total production in CEE Source: International Organization of Motor Vehicle Manufacturers
  • 47.
    Eastern Europe –the new Silicon Valley The human assets of the region make it a major player in technological innovation  Forbes consistently ranks CEE at the top of the world in educational achievement in math, science & technology. In 2013, 16 out of the 24 finalists of Google's annual Code Jam programming competition were from Central and Eastern Europe Solid growth of number of employees in ICT sector (Estonia: +128% in the past 10 years, Romania: +120%, Bulgaria: +84%). Many significant tech businesses have started in CEE: - Skype founded by Estonians, acquired by Microsoft for $8.5 bln - Whatsapp founded by Ukrainian, acquired by Facebook for $19 bln - Prezi launched in Hungary as online tool for creating presentations - Major cyber security companies - AVG Technologies, Avast and ESET, in the Czech Republic and Slovakia Abundant EU funding supports start-ups from the tech sector
  • 48.
    48 Emerging Europe stock marketslagging behind 0.000 50.000 100.000 150.000 200.000 250.000 300.000 ACWI EFM EUROPE + CIS EM ASIA EM LATIN AMERICA EUROPE NORTH AMERICA Performance of MSCI EFM Europe+CIS, EUR as of 31.12.2016 3M 15.46% YTD 24.4% 1Y 24.40% 3Y, annualized -3.91% 5Y, annualized -1.52% 10Y, annualized -5.43% since 2007 peak -49.7%
  • 49.
    Emerging Europe attractive valuationratios across the region Source: Reuters P/E ratios, ttm
  • 50.
    Emerging Europe P/E ratiosby country (ttm) 50 Source: Thompson Reuters, KCM calculations
  • 51.
    Compelling reasons toinvest in CEE -CEE turning into major manufacturing hub -> rising role in global value chains (over 50% of exports to EU) -Major global companies shift production here -> solid FDIs in automotive sector, transport equipment, electrical equipment, food, chemicals & metals -CEE turning into the new Silicon Valley due to highly qualified IT specialists -Booming outsourcing sector -> CEE countries in top 20 for Business Process Outsourcing. -Buoyant region with appreciable scale converging with the West -Growing much faster than developed Europe -Among lowest taxes in the world -Low labor costs –> 27% of euro-zone average -Well-educated & highly qualified workforce -Abundant EU funding boosts competitiveness -Geographic & cultural proximity to the West -Greater focus on quality vs. low cost Asian producers
  • 52.
    Why invest inEmerging Europe now Solid catch-up potential based on lagging performance in recent years Improving sentiment towards emerging markets as a whole has sparked uptrend Attractive valuation ratios with multiples lower than peers and historic averages Low market penetration = solid catch-up potential Improving liquidity Take advantage of the Emerging Europe opportunities with Karoll Capital’s flagship strategies: >>> Emerging Europe Opportunities >>> Emerging Europe High-Growth Exporters
  • 53.
    Contact us at: DanielGanev, MBA Managing Director, Karoll Capital Management E-mail: ganevd@karoll.bg Tel: +359 2 400 8 382 Nadia Nedelcheva, CFA Head of Portfolio Management, Karoll Capital Management E-mail: nnedelcheva@karoll.bg Tel: +359 2 400 8 386 Headquarters Sofia 1 Zlatovrah Str., Sofia 1164, Bulgaria | (+359 2) / 4008 382 | kcm@karoll.bg www.karollcapital.bg
  • 54.
    Disclaimer This presentation isfor information purposes only and does not represent a proposal for buying of selling securities. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Karoll Capital Management makes no representation that it is accurate or complete. The information contained herein is subject to change without notice. Karoll makes no representations or warranties whatsoever as to the data and information provided in any third party referenced website and shall have no liability or responsibility arising out of or in connection with any such referenced website. Karoll does not maintain a predetermined schedule for publication of research and will not necessarily update this presentation. Karoll Capital Management and any of its officers, employees, related and discretionary accounts may, to the extent not disclosed above and to the extent permitted by law, have long or short positions or may be otherwise interested in the investments or securities referred to in this document, or in options on such investments or securities, or in related investments (including other securities of the same issuer). Karoll, or its clients or customers, may trade as market maker in the investments or securities that are the subject of this document, or in related investments, and may have acted upon, bought for their own account or used the information contained in this document, before its publication. In addition, Karoll Financial Group may provide banking, insurance or asset management services for, or solicit such business from, any company referred to in this presentation. Any investments referred to herein may involve significant risk, may be illiquid and may not be suitable for all investors. Investors should note that income from such investments or other securities, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this presentation. This presentation should not be regarded by recipients as a substitute for the exercise of their own judgment. Investors should make their own investigations and investment decisions without relying on this presentation. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this presentation. Before entering into any transaction, investors should consult their advisors and understand the risks involved in these transactions. Investors should make themselves aware of any local laws governing such securities or investments.

Editor's Notes