This might seem like a poor moment to be investing in a fund with substantial holdings in Turkey. The lira has fallen 25 per cent against the US dollar over the past week and has lost 41 per cent this year. Turkish companies have built a dollar debt mountain of more than $220 billion, which will be difficult to service. In addition, inflation has hit 15 per cent and the United States has imposed a range of sanctions.
So anyone putting money into Baring Emerging Europe investment trust, which holds nearly 9 per cent of its portfolio in Turkey, might be viewed as a little foolhardy, particularly since the bulk of the remaining portfolio is invested in Russia, which has its own political and economic problems.
Matthias Siller, manager of the trust, said yesterday: “We need to see decisive actions by Turkish policy makers to prevent a crisis. However, from our perspective it’s not too late to stop the currency rout and we think private sector banks are capitalised well enough to mitigate credit risk, even after the depreciation of the Turkish lira.”
A glance at the trust’s recent share price performance would tend to give support to the pessimists. In March the shares were trading at close to 850p, but they have since fallen to 670p. Over five years they have returned a modest 12 per cent.
The past five years have been particularly tough for emerging markets and the Baring trust has outperformed the emerging Europe index in six of the past eight years. It has produced a solid return over three years of 56.7 per cent, against the index return of 39 per cent.
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Mr Siller and his team avoid simply buying stocks that are included in their benchmark and 30 per cent of their portfolio is in non-benchmark companies. They are also boosting their holdings in mid and small-cap stocks, which make up 35 per cent. Although they don’t specifically seek it they are finding that many of the companies their selection process throws up happen to boast a growing dividend. Mr Siller regards this as a positive indicator that corporate governance in these companies is improving.
One effect of this improvement in payouts is that the trust has been able to pay progressively higher dividends. From 10p per share in 2011 the dividend has risen to more than 30p last year. Its yield of 4.8 per cent should broaden its appeal and compares favourably with more traditional equity income funds.
One potential problem is that the trust is heavily skewed towards one country — Russia — which makes up about 60 per cent of the portfolio and includes oil stocks such as Lukoil and Gazprom in its top ten holdings. Mr Siller aims to offset the close link between the Russian stock market and oil prices by buying stocks in other emerging European countries, including Turkey, which are dependent on oil imports. It also aims to benefit from the fact that, however bad the political situation gets in emerging Europe, there will always be individual companies that perform well. Among the stocks that the trust has recently invested in are Detsky, Russia’s leading children’s goods retailer, DP Eurasia, the fast-growing Domino’s Pizza franchise in Turkey and Russia, and Dino Polska, a Polish supermarket chain.
One of the most compelling reasons to invest in the Baring trust is that the shares stand at a discount of 12.7 per cent to their real, or net asset, value. In other words, because investors have been nervous Baring’s portfolio can be bought at a bargain price. Furthermore, the proposed winding up of the Blackrock Emerging Europe trust would make it the only one left in the sector.
ADVICE Buy
WHY This is not for the faint-hearted but a lot of the bad news is in the price. Gloomy news and share falls could be an attractive buying chance
Chemring
The death of an employee at the countermeasures facility of Chemring in Salisbury and the serious injury to a fellow staffer are a sobering reminder of the inherent risks to workers exposed to the explosives industry (Robert Lea writes). Chemring, one of Britain’s leading defence suppliers, is best known for and a world leader in the manufacture of flares, pyrotechnics and chaff put up by RAF Typhoons and Tornados to prevent radar detection. The manufacture of such products means, by nature, dealing with unstable chemicals.
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The explosion last Friday is a sobering reminder too for investors and especially in its timing. Michael Ord, chief executive of Chemring, has been in the business only ten weeks. The current period is Chemring’s last trading quarter before its October year end and its busiest fulfilling orders for customers. The Salisbury plant works almost exclusively for the Ministry of Defence and contractors including BAE Systems.
Chemring, under the four-year stewardship of the recently departed Michael Flowers, was rebuilding a hitherto sketchy reputation. The explosion was the fourth in 19 years at Chemring facilities around the world and the sixth if a plant that the company has since sold is included.
The countermeasures division in this quarter was due to bring in £15 million of operating profits, or 27 per cent of the group’s expected £55 million for the year. The executives’ initial best guess is that between £10 million and £20 million will come off the previously forecast profit for 2018. The unknowns are: how much of the facility will be out of action and for how long; to what extent will the health and safety investigation into Chemring’s procedures delay a return or enforce changes to the full operation; and how much money it will have to commit to nullifying the danger to its staff and instead invest in automation.
The shares closed down 12 per cent, 29p off recent three-year highs, at 207p. The judgment on the stock is finely balanced. “Buy” because it is oversold? “Sell” because of the impact on such an important facility? There are too many unknowns to make a definitive call.
ADVICE Hold
WHY Executives have been cautious but the impact of the explosion remains unknown