Baring Emerging Europe (Ticker: BEE) has announced a proposed shift in its investment policy, which will diversify its current focus away from solely looking at Emerging Europe to incorporate Middle Eastern and African stocks in its mandate.
The investment trust, which currently has an AUM of £84m, has put forward a handful of proposals that will change the composition of the trust, as well as a potential name change to “Baring EMEA Opportunities” in order to better reflect its new look. The decision to end the concentrated approach towards Emerging Europe may be down to the difficulty of mitigating and diversifying risk away from the larger constituents in the trust – Russia, Poland and Turkey – who account for 93.4% of the country weighting as a percentage of the net asset value (NAV), with weights of 71.9%, 13.9% and 7.6% respectively.
The name change will be voted on by shareholders and, if approved, the newly branded investment trust will be benchmarked against the MSCI Emerging Markets EMEA Index instead of the MSCI EM Europe 10/40 Index. The largest country constituents in the new benchmark are South Africa (28.94%), Russia (24.82%), Saudi Arabia (22.78%), Qatar (6.62%) and Poland (5.25%), effectively incorporating Africa and the Middle East into the trust and diversifying the risk on a more global scale. There is also indication that the trust may have exposure in some Frontier Markets, but will have a significant proportion of assets in Emerging Market economies, therefore investors looking for an investment trust with significant Frontier Market exposure may need to look at others instead. Barings closed its Frontier Market fund in October 2019.
Another reason for the move is to shift away from the energy sector and reduce the dependency of fossil fuel producing companies to deliver returns for shareholders. It is likely that Baring EMEA Opportunities will turn to the e-commerce, social media, gaming and FinTech sectors in an effort to take advantage of the growing middle class and increasing internet penetration rates across EMEA. There may also be a significant reduction in exposure in the Communications Services (e.g: telecoms) sector.
The board has also announced that there will be a reduction in the investment management fee, with a cut from 0.80% to 0.75% of the NAV of the trust per annum.
The Board identified six benefits of the proposal to shareholders:
1. Diversification – increasing the scope of the investment universe will reduce the portfolio’s hydrocarbons exposure (currently has a weighting of 25% in energy vs 15.5% in the MSCI Emerging Markets EMEA Index) as well as the concentration of political and country-specific risk.
2. Larger Opportunity Set – there is now more scope for the Company to invest in high growth opportunities outside of Emerging Europe and the energy sector.
3. Leveraging Investment Expertise Of Barings – the experience of the existing Barings EMEA, who currently manage £1.2bn of assets in the region, will be leveraged by the managers of the Baring EMEA Opportunities trust in order to add alpha and beat the benchmark.
4. Attractive Divided And Income Diversifier – the Board is confident that the Company will be able to deliver an attractive level of income once it has gained access to markets with higher yields, as well as diversifying the sources of income as it moves away from fossil fuel energy producers.
5. Differentiation – following the change, Baring EMEA Opportunities will be the only UK listed EMEA-focused investment company, which will appeal to investors who seek to gain access and liquidity to companies in these regions.
6. Strong Discount Control Mechanism – the Board expects that an improved discount control policy will be in place to ensure there are no problems if the Company does not meet its performance or discount targets.
The Board has discussed the proposals with its largest shareholder, City of London Investment Management Company (25.8% shareholder), who have indicated their support of the potential changes. If the proposals are successful, then there will no longer be any “pure play” Emerging Europe investment trusts available to investors, especially after Blackrock Emerging Europe (BEEP) closed in 2018.
Year-to-date, Baring Emerging Europe is down 35% (vs the Benchmark’s performance of -22.6%) and is currently trading at a -13.5% discount.