The table below summarizes CEE’s current Top Ten investment allocations along with historical comparisons:
| Stock | % 6/2007 | % 4/2006 | % 4/2003 |
| Gazprom RU Gas utilities | 9.7 | 9.8 | NITT |
| Lukoil RU Oil and Gas | 7.3 | 10.7 | 4.6 |
| JSC MMC Norilsk Nickel RU Metals and Mining | 7.0 | 4.5 | NITT |
| United Energy RU Electric utilities | 5.2 | 5.5 | NITT |
| Sberbank RU Commercial banks | 4.6 | NITT | NITT |
| Bank Polska PL Commercial banks | 4.6 | NITT | NITT |
| Ceske Energticke CZ | 3.9 | 3.2 | NITT |
| Bank Pekao PL | 3.6 | NITT | 8.4 |
| Telekomunikacja Polska PL | 3.6 | 3.1 | 10.5 |
| OAO Rosneft Ru Oil and gas | 3.1 | NITT | NITT |
- NITT – Not in Top 10.
- In 2003, CEE had 4.7% allocated to Yukos which was later auctioned and the assets ended up with Gazprom & Rosneft.
The big change from a year-ago is the shift away from oil and gas. (Surgutneftegaz, which had accounted for 11% allocation in 2006, is no longer in the top 10 holdings). The realized funds were channeled into investments in the banking sector. There was also a minor geographical shift in allocation during this period, which was the shifting of about 5% of assets from Turkey to Poland.
Compared to allocations from 4 years ago, the change is more dramatic. Telecoms, Banks, and Oil & Gas each accounted for about 30% of allocations then with sizable investments in Telekomunikacja Polska (11.5%), OTP Bank (8.3%), and Matav (7.8%). Many of these have since then been liquidated. Geographically speaking, Poland (40%), Hungary (30%), and the Czech Republic (13%), which together had accounted for more than 80% of the allocations then, now accounts for only 30% (Poland – 20%, Hungary – 5%, Czech Republic – 5%). Russia, which had accounted for 16% of the allocations then now accounts for 57%.
Compared to the benchmark (CECE-45%, RTX – 45%, ICE-30 – 10%), the Turkish allocation (10%) is very much inline. There is roughly a 10% divergence in the CECE and the Russian allocations – Russia accounts for 57% of the assets while the benchmark allocation is only 45% and CECE accounts for 30% while the benchmark allocation is 45%. This divergence is a fairly recent phenomenon within this fund. The fund had followed the benchmark, which was established in April 2003, closely in the years through 2005. The divergence happened early in 2006 and since then the allocations have been steady at those levels. Generally, such divergence happens when the fund manager seeks benchmark out-performance by moving away from the index or if the fund plans to switch to another benchmark going forward. Looking at the history of CEE, it is likely that the fund will announce a new benchmark (CECE – 35%, RTX – 55%, ICE-30 – 10%) in the future.
The shift away from oil and gas into the financial sector is very much in accordance with the fund manager’s stated goal to diversify into consumer sectors. The other major shift for CEE, away from CEE-3 (Poland, Hungary, and the Czech Repulic) into Russia is also in accordance with the fund’s long-term shift in focus to Russia that was initiated 4 years ago. Also, the shift away from Telecoms over the years is a result of the fund acting on the projected slow growth in that sector.
All in all, given the allocation shifts and the current investments, CEE is a good proxy for growth in the consumer sector and general economies of Russia & Central Europe.
Central Europe & Russia Fund Analysis:
- Part 1 - Attractive Discount To NAV.
- Part 2 - Prudent Allocation Shifts.
- Part 3 - A Matter Of Timing.
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