Baring Emerging Europe (BEE) aims to provide capital growth and a high dividend yield from a portfolio of stocks in developing Europe, mainly Russia, Poland and Turkey. The manager, Matthias Siller, focuses strongly on bottom-up stock selection to generate returns, and has produced impressive amounts of alpha over the past five years, higher than all but one of the global emerging markets trusts.
While total return performance has been strong, the income dimension is a more recent feature. Since the start of 2017 the trust has paid semi-annual distributions, been able to pay dividends from revenues or capital and been committed to paying an uncovered dividend where necessary. The dividend yield is therefore an impressive 4.5%, higher than all but one global equity income trust and all but one global emerging markets trust. BEE therefore offers a diversifying source of income from a region which, being an emerging market, offers strong long-term growth potential too.
Emerging Europe, as a region, is trading on depressed valuations, with the forward P/E on the index just 6.7x compared to 11.6x for the mainstream Emerging Markets index, 13x for developed Europe and 15x for Brexit-hit UK. As such, it represents an interesting “Value” opportunity for investors.
BEE is trading on a discount of 7.3%. Although the discount has narrowed after a strong start to 2019, we understand that the trust will need to average a 9% discount or under from the end of April to the end of September to avoid a tender offer early next year. We note that after the announced winding up of BlackRock Emerging Europe, BEE is the only specialist investment trust focused on this region.
BEE has a lot going for it. It offers a high dividend yield of 4.5% from an area to which investors tend to have little exposure, offering diversification of income as well as capital growth potential.
The current yield of 4.5% is particularly attractive, resulting from depressed valuations in the region and a 7.3% discount, as well as improving concerns for minority shareholders’ interests. Matthias has also shown his ability to generate high levels of alpha with a bottom-up approach, reflecting his skill and also the inefficiencies in the market.
The discount has some support on the downside from the buyback programme and from the 2020 tender offer, which will be held should the discount until 30 September not average 7% or less. We highlighted this discount in our portfolio of value opportunities in January, when it was on an 11.4% discount.
|An exceptional alpha-generation track record among emerging market trusts||A volatile region with the potential for political turmoil|
|An attractive yield with the ability to maintain income payments from capital||Exposure to the oil price|
|An attractive discount with a tender offer offering downside protection|