Barings Emerging EMEA Opportunities 24 February 2021

Barings Emerging EMEA Opportunities (BEMO) was known as Barings Emerging Europe until November 2020 when the mandate was expanded. The trust aims to offer a mixture of capital growth along with an attractive and growing level of income, and can pay up to 1% of NAV a year from capital in order to support dividend payments.

BEMO has been managed by Matthias Siller since 2009, who was joined by Maria Szczesna and Adnan El-Araby in 2017. They have generated strong absolute and relative returns in recent years thanks to good stock picking in the eastern Europe region, as we discuss in the portfolio section. The evolution of the strategy gives them a broader opportunity set and brings a number of advantages to the portfolio.

The new benchmark, the MSCI Emerging EMEA Index, is more diversified, with the weighting to Russia falling from c. 70% to c. 40%. Energy is the largest sector in the Russian market, and it has fallen from 25% to 15% of the benchmark. The new benchmark offers greater exposure to materials companies serving the growing electric car and renewables plant markets, meaning BEMO will be less exposed to an industry in secular decline. It also broadens out the opportunity set in the technology, financials and consumer sectors, as we discuss in the portfolio section, as well as offering exposure to Saudi Arabia, with its young and wealthy population.

BEMO yields 3.4% on a historic basis. While dividend payments were reduced in the 2020 financial year, the managers believe their new region offers the potential for generating an attractive level of dividend growth from diverse sources of income.

BEMO’s change of mandate is a welcome move. The previous benchmark was becoming almost a single country fund thanks to the strong relative performance of the Russian market. We believe the managers are in a good position to take advantage of the wider universe. Firstly, they have demonstrated a stock-picking skill in their original region, generating significant alpha from a benchmark-aware, stock specific approach. Secondly, they have the benefit of a large emerging markets team to draw on. Barings has a deep emerging markets team which includes a specialist EMEA team as well as sector specialists and those with a wider perspective.

BEMO is now the only investment trust with a focus exclusively on EMEA, offering access to countries which make up a very small part of the emerging markets index and therefore which many investors have little exposure to. In our view the portfolio offers attractive diversification of growth and income potential: with China and North Asia becoming ever more dominant in the emerging markets index, many of the companies in BEMO’s region are likely to have fallen off the radar.

That said, the portfolio is very outward-looking, which could reduce the diversification benefits. That is to say that many of the picks are plugged into global industries and benefitting from global trends, whether that be in hydrocarbons, the electric car industry or globally-expanding financial services companies, so many macro-economic exposures are global rather than local. However, there is also significant exposure to domestic markets seeing secular growth, particularly in the technology spaces.