Eastern Europe’s prosperity is reasonably interdependent with the price of oil, exemplified by equity returns dwindling in-line with oil prices, and export growth has come to a standstill as the regions biggest customers – Eurozone – felt the full brunt of the credit crunch and stopped purchasing goods. In addition to these fundamental factors, negative sentiment towards the region spurred a mass sell-off by foreign investors which accentuated losses.
With the drivers for growth reversing gears the impact on funds has been reflective. Financial Express Analytics unveils seven funds across the IMA UT/OEIC universe with a significant above 20 per cent exposure to Eastern European equities. The average of these funds lost 45.9 per cent over the year whilst posting excessive volatility of 43.9 per cent – meaning those unfortunate enough to have kept Eastern European exposure would have been severely burned.
| Fund | Weighting for Eastern Europe (%) |
1-mth return (%) |
1-yr rtn (%) |
Max Loss over 1-yr (%) |
1-yr Beta against MSCI World Index |
1-yr Ann.Vol.(%) |
| Neptune Russia & Greater Russia |
96.1 | 14.6 | -44.8 | -65.5 | 0.87 | 46.2 |
| Invesco Perp Emerging European | 91.4 | 6.8 | -53.7 | -66.3 | 1.27 | 44.8 |
| JPM New Europe Shares |
84.0 | 13.5 | -53.5 | -68.8 | 1.38 | 50.8 |
| CS European Frontiers |
81.2 | 12.1 | -49.6 | -65.4 | 1.32 | 45.9 |
| Jupiter Emerging European Opportunities |
63.2 | 9.6 | -49.5 | -63.6 | 1.17 | 42.2 |
| Fidelity Emerging Europe Middle East and Africa |
28.9 | 8.1 | -29.5 | -44.2 | 1.11 | 36.3 |
| Allianz RCM BRIC Stars |
23.0 | 13.3 | -40.7 | -56.5 | 1.24 | 41.7 |
| Equally Weighted Average |
66.8 | 11.1 | -45.9 | -61.5 | 1.19 | 43.9 |
Volatility displays a direct linear relationship to exposure and returns – funds with highest exposure were the biggest losers and also those most volatile. Maximum drawdown highlights that in just a month some funds lost up to 70 per cent of their value – and given that a lack of liquidity can exist through monthly pricing it would amplify frustrations for those enduring such a fall.
Funds investing directly in Eurozone on the other hand have been relatively safe from the tumultuous nature of eastern European markets due to restricted mandates – the IMA for example require an 80 per cent allocation to Eurozone stocks for those funds wanting eligibility to the IMA Europe ex UK sector. Eastern European equities are considered similar to any other international exposure and thus highly unlikely to exceed the significant 20 per cent exposure barrier.
Outlook
Financial Express Research highlights that investors having held significant eastern European exposure over the past year would have seen returns dwindle.
The region’s recent equity surge however has led fund managers hit the press with statements supposing that it’s once again the time to invest in eastern Europe – and they collectively favour Russia in leading the haul where equities are believed to be at artificially low levels whilst the fundamentals remain sound.
Elena Shaftan, manager of Jupiter Emerging European Opportunities fund, recently upped her Russian exposure on the belief that this market should be a strong performer over the year as global economic conditions improve. Robin Geffen, CIO of Neptune and manager of the Neptune Russia & Greater Russia fund, shares this sentiment and has been urging investors to draw attention to the region as well.
Nevertheless it’s difficult to forget Russian markets plunging in September 2008 resulting in stock exchanges closing for two consecutive days and the Russian government being forced to pump $20bn into these distressed equity markets.
The health of the global economy plays an important role in the success of eastern European funds as they have emerged to be highly sensitive to the MSCI World index. The average fund in our table posts a one year beta over 1.2 against this index – meaning that if the average world equity returns 10 per cent the average of these funds should return around 12 per cent – in theory – which goes a long way in explaining such funds’ relative outperformance in an environment where global equities see a period of prosperity.
Given the direct relationship between exposure and returns for Eastern European funds the investment decision needs to be one of complete conviction and as fundamental factors driving global markets are yet to highlight a period of sustained recovery the promise of Eastern Europe may not be kept.