Barings Emerging EMEA Opportunities 29 September 2021

Barings Emerging EMEA Opportunities (BEMO) offers the potential for capital growth and income from a diverse region which has little representation in mainstream indices and funds. BEMO was known as Baring Emerging Europe until November 2020 and is run by the same team with the same strategy, but in a wider region with more varied drivers of growth, including both domestic and global themes.

Current key themes driving the portfolio include growing demand for the materials used for electric vehicles and the energy transition from fossil fuels, the growth of ecommerce from low bases in these very different markets, as well as local and regional emerging fintech leaders. These modern, secular trends are allied to the local growth of middle classes and consumption in Africa, Eastern Europe and the Middle East, a more traditional set of emerging market growth drivers (see the Portfolio section for a fuller explanation).

BEMO has been managed by Matthias Siller since 2008. He was joined by Maria Szczesna, with whom he has worked for over ten years, and Adnan El-Araby as co-managers in 2018. They have a strong track record of generating alpha in emerging Europe, as we discuss in the Performance section. They continue to look for high quality growth companies at attractive valuations within their wider mandate. The objective is to find quality companies from emerging Europe, the Middle East and Africa.

BEMO yields 3.2% on an historic basis. While Dividends were reduced in the 2020 financial year, the managers believe their new region offers the potential for attractive dividend growth from diverse income sources. The board can supplement the natural income on the portfolio with up to 1% of NAV per year from capital.

BEMO represents a highly differentiated proposition which we believe could offer attractive diversification to many investors. The global emerging markets index is dominated by north Asia, while the EMEA region makes up less than 10% of the index. As a result, investors are unlikely to have much exposure to these countries. However, they in general display high GDP growth potential, growing middle classes and good domestic growth stories which should be less correlated to global markets than the North Asian giants. In addition, the countries covered by BEMO’s mandate have contrasting economic and other characteristics; and this internal variety helps mitigate risks.

We think it may be underappreciated how plugged in some of the key companies in the region are to global themes too. In particular, investors wanting to play the transition away from fossil fuels have a broad opportunity set in the mining and clean energy companies in the region (including major oil producing countries, Russia and Saudi Arabia). The new universe has increased the number of opportunities exposed to this theme, while also opening up a wider collection of technology and ecommerce companies to the managers.

With the recent China sell-off and growing interest in ex-China ETFs (recently reported by the FT), we think this could be a good time to be considering diversifying into the trust. BEMO is now the only investment trust with a focus exclusively on EMEA, and benefits from the attractions of the structure, including the ability to smooth dividends via revenue and capital reserves. It also has a management team with a strong track record of generating alpha.