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IC Top 100 Funds update: BlackRock Emerging Europe

Eastern European Trust has changed its investment policy in an attempt to get better performance and is now called BlackRock Emerging Europe.
June 26, 2013

Eastern European Trust (EST) has changed its investment policy and its name to BlackRock Emerging Europe (BEEP). The trust is to reduce the number of its holdings, which has typically been around 50, to between 20 and 30.

The trust says this will enable its managers Sam Vecht and David Reid to adopt a more conviction-based approach, concentrating on their best investment ideas and an assessment of upside potential and liquidity, while unconstrained by benchmark weightings. As a result, the weighting of a company in the portfolio could be materially higher or lower than its benchmark weighting, and performance is likely to diverge from the benchmark, especially over shorter time periods.

The investment policy is being changed because the trust's managers say there are drawbacks with the constraints of the current policy. The trust uses the MSCI Emerging Europe 10/40 Index as a benchmark, and for some time it has been biased towards a small number of large capitalisation stocks in a limited number of sectors such as energy and financials. The managers' aim to control performance volatility against the benchmark index can result in holdings in companies that are not necessarily their preferred long-term investments.

The trust has slightly underperformed its benchmark between when BlackRock took over its management in May 2009 and May 2013, according to analysts at Winterflood, with its net asset value (NAV) rising 79 per cent, against 84 per cent for MSCI Emerging Europe 10/40 Index and 75 per cent for peer Baring Emerging Europe (BEE) investment trust.

But BlackRock Emerging Europe's investment objective remains similar - to achieve long-term capital growth by investing in companies that mainly do business in Eastern Europe, Russia, Central Asia and Turkey. Mr Vecht will select stocks by combining political and macroeconomic insights with fundamental analysis of companies, and by looking for long-term appreciation from mispriced value or growth.

BlackRock Emerging Europe will keep its benchmark, MSCI Emerging Europe 10/40 Index, as a long-term point of reference.

"The trust's manager makes the case for the region well, espousing the long-term structural advantages of lower government budget deficits, well-educated workforces and undervalued currencies," comment analysts at Winterflood. "However, with a small number of Russian companies dominating the benchmark index, even through its capped 10 per cent/40 per cent version, investors had to be comfortable with exposure to a small number of stocks. Consequently, it makes sense to allow him to invest on an unconstrained basis and provide him with the ability to outperform the index on his own terms."

Other changes include scrapping the trust's performance fee from 1 July. Instead, BlackRock Emerging Europe will raise its base fee, currently 0.8 per cent, to 1 per cent a year of the trust's average daily market capitalisation. The trust's board says this provides an incentive to keep any discount as close to NAV as possible. The board is also mindful of the impact of the Retail Distribution Review (which has scrapped commission payments on open-ended funds potentially lowering their charges) on fund charges and wishes to make BlackRock Emerging Europe's charges as simple and transparent as possible.

The investment trust currently has an ongoing charge of 1.21 per cent, which does not include a performance fee as the trust underperformed its benchmark during its last financial year. This means a rise in the base fee could result in the ongoing charge going up.

The trust aims to maintain the discount to NAV below 10 per cent in normal market conditions and since 2010 has used periodic tender offers and share buy-backs to achieve this. However, it currently trades at a discount to NAV of 14.15 per cent, wider than its 12-month average of 11.37 per cent.

The six tenders offers it has conducted since 2010 have also reduced the size and liquidity of the trust which has a market cap of £90m. So, instead of periodic tender offers, it will conduct performance triggered tender offers and periodic opportunities for the return of capital. A tender for up to 25 per cent of the trust's shares will be triggered if after three years it has underperformed its benchmark by more than 3 per cent.

Shareholders will also have the opportunity to exit at NAV less costs at the fifth annual general meeting following the introduction of this new policy, and thereafter will have this opportunity every five years.

Share buy-backs will continue.

Analysts at Winterflood say these features should ensure that the discount narrows over the next five years.

BlackRock Emerging Europe, meanwhile, is conducting one final tender offer for up to 7.5 per cent of it ordinary shares.

Read our interview with Sam Vecht

BLACKROCK EMERGING EUROPE (BEEP)

PRICE229.75pGEARING110%
AIC SECTOR European Emerging MarketsNAV271.07p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV14.15%
MARKET CAP£90mONGOING CHARGE1.21%
SET UP DATE29-Nov-94MORE DETAILSwww.blackrock.co.uk
YIELD1.86%

Source: Morningstar

1 year cumulative share price return (%)3 year cumulative share price return (%)5 year cumulative share price return (%)
BlackRock Emerging Europe6.38-7.08-31.83
MSCI EM Europe 10-40 GR USD7.191.29-11.61

Morningstar as at 24 June 2013

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