Results analysis: Barings Emerging EMEA Opportunities

• Barings Emerging EMEA Opportunities (BEMO) reported a 22.7% NAV total return for the six months ending 31 March 2021; the share price total return was 24%. Both compare favorably to the 16.49% return of the benchmark.
• The trust, previously called Baring Emerging Europe, was renamed during the period. Most of the returns reflect the new strategy adopted on 16 November 2020, which broadened the investment universe to the EMEA region rather than emerging Europe. The benchmark return is stitched together from the applicable benchmarks under both strategies. Much of the excess return during the period was due to stocks listed in the new geographies, as we discuss below.
• Along with the change of strategy, the board negotiated a cut in the management fee from 0.8% of NAV to 0.75%, and initiated a new marketing drive including the publication of regular updates – investors can sign up at www.bemoplc.com
• The discount fell slightly over the period, from 15.5% to 14.7% and has since fallen further, to 12.3% as of 25 May 2021.
• The board has maintained the interim dividend in line with that of last year, despite a fall in portfolio income due to the pandemic. This requires a contribution from reserves, and the board has reaffirmed that it may pay out up to 1% of NAV each year from capital to ensure the dividend income provides a greater part of shareholders’ total return. The board’s expectation is that portfolio income will be higher in the second half of the year as usual. On 26 May 2021, this year’s interim and last year’s final dividend amount to a 3.3% historical yield.

Kepler View

Barings Emerging EMEA Opportunities (BEMO)'s change of mandate has created a more diversified proposition. The good results just reported were contributed to by companies in the old and new universe and in the long run we think this more diversified opportunity set may be able to generate more stable returns – the previous mandate had become dominated by the performance of the volatile Russian market.

The period under review saw the portfolio transition to its new shape. At the close of the period the portfolio retained large positions in Russian oil and financial stocks, whilst banks in Saudi Arabia and Qatar were among the largest single stock positions. The largest position was in Naspers, the South African media conglomerate which has a large stake in Tencent.

In the six months to 31 March 2021, Russian fintech, Tinkoff, was the largest contributor to relative returns as the founder relinquished some of his super voting rights and minority investors gained more control. Sberbank was another major contributor listed in Russia while the IPO of ecommerce player Ozon also performed strongly. In the new portfolio, Saudi-based Al Rajhi Bank and Qatar National Bank were strong contributors to relative returns. South African-listed Anglo American Platinum also outperformed.

This list indicates geographical diversity, which diversifies the risk and return exposures and reduces the specific political and country risks. It also illustrates sector and thematic diversity too. While there is a value tilt to the new universe and to the portfolio – with the high weights to energy, materials and financials – there are growing opportunities in growth sectors such as technology and ecommerce. The benchmark and the portfolio have significant exposure to the energy sector (although less than the previous, Emerging Europe universe). However, via positions in Anglo American and other mining companies BEMO also has exposure to the clean energy revolution, as a number of metals are vital to current clean energy technologies.

One of the motivations for the change of strategy was to seek out dividend growth opportunities outside Russia and in particular the Russian energy sector. This provided a large part of the dividends on the trust’s old benchmark, and the managers believe that a secular shift to higher dividends in that sector has largely completed, meaning the prospects for further growth are limited. The yield on the portfolio of 3.3% is lower than UK equity income yields currently; the AIC UK Equity Income sector has a weighted average yield of 3.7%, although there are many trusts yielding significantly more. However, the board and manager believe that dividend growth prospects in the region are very good, while we note that there may be dividend cuts still to come in UK and global markets as the impact of the pandemic works through income statements. BEMO also offers diversification to income seekers, and the board’s ability to pay up to 1% of NAV out as income should help support the dividend over the coming year.

BEMO is the only investment trust with a focus exclusively on the EMEA region, 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 is capable of offering attractive diversification for both growth and income investors: with China and North Asia becoming ever more dominant in the main Emerging Markets Index, many of the companies in BEMO’s region are likely to have fallen off the radar.

However, it is true that many of the companies in the portfolio 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 macroeconomic exposures are global rather than local. Accordingly, BEMO is likely to be sensitive to a continuation of the current global recovery and the development of these specific trends.

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