Trigon New Europe Fund Extends Its Outperformance as Emerging Markets Continue to Lag
November saw Developed Markets continue their rally while Emerging Markets again underperformed, as has been the trend through 2013. We see investors in general as still bullish on equities, but the Fed’s tapering warning in late summer had a significant impact on the Emerging Markets, which back then took a very significant hit. As a result, short-term money is reluctant to return to EM’s and the valuation gap with Developed Markets has widened.
In respect to our home markets, New European equities mostly moved sideways (Stoxx EU Enlarged TR Index gained 0.6%). Russia continued to underperform – MSCI Russia lost 5.3% in November. Looking forward, we see reviving EU growth, rising investment spending and consumer demand driving Eastern European economies and equity markets; while Russia’s investment case is mostly based on historically cheap valuations compared to other BRIC-countries and compared to their own historical averages. Importantly, we are starting to see significant foreign interest in the Central and Eastern European (CEE) region again, which had been overlooked for the past five years. As the Asian growth story is slowly losing its legs, Emerging Markets investors are looking around to diversify their large Asian positions to other EM’s. Eastern European equities stand to be among the biggest winners of this shift.
Trigon New Europe Fund continued to do well in November as it gained 3.2% vs. 0.6% for the benchmark index (Stoxx EU Enlarged TR). In 2013, the Fund has outperformed the index by an impressive 17.7 percentage points and is up 23.9% YTD. Over the past five years, the Fund has generated an alpha of over 80 percentage points while consistently showing lower volatility than its benchmark index (15.0% vs. 23.1%).
Our strategy remains focused on companies with strong free cash flow generation. At the same time we are gradually shifting our attention away from actual cash dividend yields as we look to benefit from revived growth in the region and as we see the dividend theme becoming somewhat crowded in our region. Therefore, we prefer companies that can re-invest their strong cash flow to their profitable core business and position themselves better for the recovery.
CEE is still significantly cheaper than Western Europe in terms of valuations. The regions are strongly correlated (particularly dependent on the German economy), and given that New European countries have significantly lower debt burdens and stand to benefit from EU structural funds (flows amounting to 2-4% of GDP each year), we believe that the region is set to significantly outpace Western European economies going forward.
Trigon Russia Top Picks Fund declined 2.4% in November as MSCI Russia TR index lost 5.3% and the Small Cap index RTS-2 lost 5.8% (in euro terms). We continue to see Russia as an attractive long-term investment opportunity, which has been out of favour in past years. The valuations in Russia continue to be very cheap indeed, as the MSCI Russia index is trading at an average P/E of 5, showing a discount of nearly 60% to the MSCI EM index. Any significant inflows to Russian equities are likely to result in a sharp upward correction to Russian equities.
Past performance of the fund does not guarantee or indicate future performance of the fund. More detailed data about the performance of the funds in different time periods is shown in the monthly factsheets. The value of the fund units may increase and decrease over time, therefore there is no guarantee that the investors get back the amount invested in the fund. The risk factors of the fund are described in further detail in the prospectus of the fund.