 Fund Profile: Eastern European Equity Fund
by Ann C. Logue
India and China are undergoing profound economic changes right now, and investors want clues for what could happen. The best models are probably Russia and Eastern Europe, and the results are mixed: some democracy, some not completely; some economic success, some total failure; some peace, some ongoing wars; and just about everything in between. That everything in between creates investment opportunities, which Guenter Faschang has taken advantage of with the Eastern European Equity Fund.
The fund is small, with $61.4 million in assets as of the end of March 2008. The most recent detailed country breakdown was released at the end of 2007; at that time, 27.56% of assets were invested in Austria, 12.37% in Hungary, and 10.66% in the United Kingdom. The United Kingdom is about as far west in Europe as you can get (Northern Ireland is part of it, after all) but that allocation is deceptive. It includes holdings in closed-end and property funds managed in London but investing in Romania, the Ukraine and the Balkans.
There aren't always great things to buy, though, in these nascent markets. As of the end of March, 23.15% of the fund's assets were held in cash and equivalents. That shows discipline on the manager's part, but investors who are looking for investments in Eastern Europe are paying an equity-fund management fee on a big hunk of cash while losing out on exposure to that asset class.
The fund's largest holding, at 9.33% of its March 31, 2008 assets, is Magyar Telekom, provider of telecommunications services in Hungary, Macedonia and Montenegro. The next-largest position, 4.92% of assets, is Equest Investments Balkans, a London-based holding company for financial services, retail and property companies in Bulgaria, Romania and Serbia. The third-largest position, at 4.82% of assets, is Telekomunikacja Polska SA, a telecommunications company serving Poland. In addition to the large cash allocation, the fund has 19.06% of assets invested in financial services, 18.28% invested in real estate and 18.10% invested in communications.
Historical performance has been good but volatile, and this fund doesn't seem to have enough traction to attract assets. The fund's C class shares are down 2.12% for the year-to-date and down 5.27% for the past 12 months. For the past five years, though, it has been up an average of 25.04% per year. The Eastern European Equity Fund is available in an A class with a 5.75% front load and a 0.25% 12b-1 fee, and in a C class with no front load, a contingent deferred sales charge and a 1% 12b-1 fee. Both classes have high expense ratios (3% for the C class) which is a reflection of the research costs that go along with international investing and, in this case, the small size of the fund.
The Eastern European Equity Fund is offered by Commonwealth Capital Management, which has several small mutual funds marketed under The World Funds brand. The firm subcontracts the management of this fund to Vontobel Asset Management, an institutional money management firm based in Switzerland.
So much of the work of running a mutual fund is getting people into it. There are thousands of two- and three-star mutual funds in Morningstar's database that attract new investors every day. Maybe those investors don't know better, maybe they are simply looking for a place to put their money that beats the banks, maybe they want to get exposure to an asset class that's wholly out of favor for the time being. If the Eastern European Equity Fund were at any of the brand-name money management firms, it would probably have enough assets that its expense ratio would be lower and its performance a little more predictable.
The problem doesn't seem to be that there aren't enough assets to make investing in the fund worthwhile. The prospectus allows the fund to invest in Russia, which has some huge natural resources companies. These may be overpriced right now, but still, big companies exist in this region. More are likely to emerge as companies in the region adopt the euro; they're working on it.
The Eastern European Equity Fund screams with potential, but the size and expenses may be keeping it down. Or maybe, Guenter Faschang will turn out to be a genius for keeping so much money in cash given the current volatile global financial climate.
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