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SEB Eastern European Equity Funds Sven Kunsing Head of Eastern European Investment Management SEB Wealth Management 1 Agenda Introduction to SEB Wealth Management Eastern Europe Eastern European equity team & process Eastern European equity products (a short overview) SEB EE ex Russia Fund SEB EE Small Cap Fund Q&A 2 SEB WM in Eastern Europe Presence in Estonia, Latvia, Lithuania, Poland, Ukraine AuM 2.6 bn EUR (July 2007) – Eastern European equities management is most important single business line (AuM €1.33bn) Wide range of local products to local clients Over 500 000 local (Eastern European) clients SEB Eastern European equity mandate – – – – SEB EE Small Cap since June 2003 Full EE equity mandate (4 funds) since July 2005 Redesign of products during 2006 Average Morningstar (3-year) rating 4.33 3 SEB Eastern European Equity Investment Team & Process 4 Why did SEB select us? We have delivered >500% return in <8 years Full SEB EE equity mandate SEB Baltic Fund mandate SEB’s Eastern European equities mgmt fully outsourced to London-based global manager 2003-2005 Partial in-sourcing from Estonian team 2005 onwards: Full in-sourcing from own Eastern European team SEB Growth Fund (Bloomberg: UHIKASV ET) is an Estonian domiciled Eastern European equity fund managed by SEB EE Equity Team 5 Eastern European equity team Wojciech Macro Strategy Alo SEB ex Russia Piotr SEB Östeuropa Raul Materials Dainius Energy Meelis Healthcare & Industrials Wojciech SEB EE SmallCap Sulev SEB Russia Robert Financials Peeter Telecoms & Utilities (left Feb 2007) Taken in Dec 2006. Wojciech Wasilewski (Consumer sectors) joined the team in Jan 2007. 6 The Team Location and market experience Fund managers (avg experience 11 years) Sector sub-portfolio managers (7 yrs) ESTONIA: fund managers ESTONIA: sub-portfolio managers Sulev Raik (12 years) – SEB Russia Fund Basic Materials – Raul Rannaste (10 years) Alo Kullamaa (11 years) – SEB EE ex Russia Fund HealthCare, Industrials – Meelis Angerma (7 years) POLAND: fund managers Piotr Sieradzan (6 years) - SEB Östeuropafond LITHUANIA: sub-portfolio manager Wojciech Rostworowski (15 years) – SEB EE Small Cap Fund Telecoms – Gediminas Milieska (3 years) Tallinn Oil & Gas – Dainius Bloze (8 years) POLAND: sub-portfolio managers Financials – Robert Sobieraj (11 years) Consumer Staples & Disc – Wojciech Wasilewski (2 Vilnius Warsaw years) IT – Piotr Sieradzan (6 years) macro strategist Wojciech Bialek (12 years) 7 Investment philosophy We believe that… capital markets are not always efficient – especially in underdeveloped CEE region, even more so in Russia and in the CEE mid and small cap arena analyzing stocks by sectors rather than by countries provides better insight in our team we need sub-portfolio managers rather than pure analysts combining equity analysis with top-down insight will add value each investment decision should have a good fundamental explanation – fundamental analysis is the key to superior performance 8 Our investment style GARP: Growth At Reasonable Price We seek companies with above average earnings growth potential, but we also have an eye on value – we do not want to overpay for growth prospects “Reasonable price” or value is defined by combination of absolute valuation based on discounted free cash flow (DCF) models and comparative valuation based on applicable valuation indicators (EV/S, EV/EBITDA, EV/Comps, P/E, P/S, P/B etc) 9 Bottom-up process Details of the bottom-up process Bottom-up stock picking forms the basis of our investment process Stock picking is carried out by 7 analysts covering 10 sectors Company visits Understand the business & know management, bear in mind corporate governance issues (extremely important in this region) Preferred valuation method: DCF and modified Gordon Growth Model Comparative ratio analysis Identify long term growth factors/risks, short term catalysts Sub-portfolio manager’s performance evaluated by model portfolio performance vs sector index 10 Company visits integral part of the investment process Sulev visiting Efes Brewery Rostov na Donu Sulev & SS-17/Spanker (intercontinental ballistic missile) Yuzhmash Dnipropetrovsk, Ukraine Sulev & Dainius On Kazakh oil fields Sulev on a Lukoili oil field, Kogalym, Western Siberia Sulev with a gold bullion Uralelektromed, Verhnaya Pyshma Western Siberia 11 Top-down process We use top-down inputs to provide additional insight, but it is not central* to our investment process Identify macroeconomic value drivers – Economic growth – Overall country risk outlook – Interest rate outlook – FX outlook Recommended sector allocation targets * note: the importance of top-down process varies by product from being relatively important for the SEB Östeuropafond to unimportant for the SEB CEE Small Cap Fund 12 Portfolio construction The final responsibility for portfolio construction lies with the fund manager. – Freedom to follow or not to follow exactly the sector model portfolios and top-down process – model portfolios act as idea generators and are interpreted by the fund manager Top-down recommendations Interpretation by fund manager Bottom-up model portfolios Product portfolio 13 Summary: what makes us different? Our Team – We are truly LOCAL – Multinational – Experienced – Talented Our Investment Process – Sector based research (vs country based) – Focus on stock selection Our organization – Fun place to work – no bureacracy – Personal responsibility/accountability 14 SEB Eastern European Fund Range 15 Profit on convergence: SEB Eastern Europe ex Russia Fund Alo Kullamaa Fund manager, ESTONIA 11 years of CEE equity market experience SEB Eastern Europe ex Russia Fund Bloomberg ticker Investment region Benchmark TE guidance Base currency 2007 YTD Performance (Jan 22 - August 31) Benchmark (Jan 22 - August 31) Morningstar rating (3 years) SEBEEUA LX Eastern Europe ex Russia Nomura CEE ex Russia 5-10% EUR +14.7% +14.8% 16 Profit on change: SEB Russia Fund Sulev Raik Fund manager, ESTONIA 12 years of CEE equity market experience SEB Russia Fund Bloomberg ticker Inv universe Benchmark TE guidance Base currency 2007 YTD Performance (as of August 31) Benchmark (as of August 31) Morningstar rating SEBRUSS LX Russia (+CIS countries) RTS index 5-10% EUR -3.1% -3.4% n/a (new fund) 17 Eastern Europe3: SEB Eeastern European Small Cap Fund Wojciech Rostworowski Fund manager, POLAND 15 years of CEE equity market experience SEB Eastern Europe Small Cap Fund Bloomberg ticker Investment region Investment focus Benchmark Base currency 2007 YTD Performance (as of August 31) Benchmark (as of August 31) Morningstar rating (3 years) ABBBASC LX Eastern Europe (broad) Small caps (<500m EUR) none EUR +11.5% - 18 SEB Östeuropafond Bloomberg: SEBOSTE SS Piotr Sieradzan Fund manager, POLAND 6 years of CEE equity market experience SEB Östeuropafond Investment region Benchmark TE guidance Base currency 2007 Performance YTD (as of August 31) Benchmark Morningstar rating (3 years) Eastern Europe (broad) MSCI Eastern Europe 10/40 3-5% SEK +7.0% +7.2% 19 Chinese-style growth with Scandinavian-style risks: SEB EE ex Russia Fund 20 Why invest to the converging equity markets of New Europe? Convergence is more than a date of EU entry, it is an ongoing process. Growth dynamics (of personal disposable income, for instance) is “anchored” by EU averages – provide both momentum and also better long-term macro visibility compared to traditional emerging markets Scope for new EU members to see sustained medium term GDP growth of double “old” Europe growth rate Efficiency improvements in companies as a result of know-how transfers and educated workforce Tax + labor cost competitiveness Massive inflows from EU Structural and Cohesion Fund in coming years to reimburse investments to infrastructure and environmental projects– one of the GDP growth drivers Liquidity and transparency have dramatically improved as regional stock markets mature structurally – many new listings; local pension&mutual funds stronger; more small cap coverage by brokers; EU-compliant regulation etc. 21 Strong GDP growth 14% 12% 11,4% 11,9% 9,7% 10% 8,0% 8% 7,0% 6,5% 8,7% 8,3% 8,2% 8,0% 7,8% 7,5% 6,5% 6,4% 6,0% 5,6% 5,0% 4,7% 3,9% 6% 4% 6,5% 6,1% 5,5% 5,0% 7,7% 7,2% 6,8% 6,7% 6,3% 6,1% 6,2% 6,1% 6,1% 5,9% 5,2% 4,3% 4,0% 4,9% 4,8% 4,8% 4,5% 3,0% 2,8% 2,3% 5,9% 5,7% 5,3% 3,0% 2,9% 2,7% 2% C ze ch H un ga ry Po la nd Sl ov ak Sl ia ov en ia R om an Bu ia lg ar ia Tu rk ey C ro at ia Se rb ia EU 27 a ua ni ia Li th La tv Es to n ia 0% 2006 2007E 2008E 2009E Source: EcoWin, European Commission Spring 2007 Forecast, SEB Nordic Outlook August 2007 22 Economic growth Back to the future – you have already seen this 25 years ago GDP per capita (in SEK) 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 1958 1956 1954 1952 1950 TIME: Nordics 1950 - 2005A 350,000 300,000 350,000 Estonia GDP/capita, SEK 300,000 Sweden GDP/capita, SEK 250,000 Finland GDP/capita, SEK 250,000 200,000 200,000 150,000 150,000 100,000 100,000 50,000 50,000 2026 2024 2022 2020 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 - 1994 - TIME: Estonia 1993 - 2027E 23 Play EU convergence – China-style growth with Scandinavian-style risks! Selling Proposition Invests in strongly growing economies in Balkans, Baltics and Central Europe Focus on EU & Euro convergence themes Geographically well-diversified pan-regional fund Your Value Added Diversification relative to developed markets Limited risk compared to “true” emerging markets Less risk compared to funds targeting only one country in the region Defensively biased – financials dominate, limited exposure to commodities and materials Not benchmark-driven, but active & dynamic management style More exposure to domestic macro rather than to global themes Increased probability of future performance 24 Bumpy road to Monetary Union Inflation LT interest rate Fiscal balance % of GDP 06 Public debt % of GDP 06 Currenc y Currency regime Expected EMU entry (optimistic scenario) Maastricht reference 3,0* 6,4* -3,0 60,0 Smooth participation in ERM II for 2 years Estonia 4,7 n/a, but ok +3,8 4,1 Kroon ERM II 2011 Latvia 7,0 4,5 +0,4 10,0 Lat ERM II 2012 Lithuania 4,2 4,2 -0,3 18,2 Litas ERM II 2011 Poland 1,6 5,3 -3,9 47,8 Zloty Float 2012 Hungary 6,2 7,1 -9,2 66,0 Forint Target zone(EUR) 2013 Czech 1,9 3,9 -2,9 30,4 Koruna Managed float (EUR) 2012 Slovenia 2,6 4,0 -1,4 27,8 Tolar ERM II Already in! Slovakia 3,5 4,5 -3,4 30,7 Koruna ERM II 2009 Bulgaria 6,2 4,3 +3,3 22,8 Lev Currency board (EUR) 2016 Croatia 2,6 4,2 -2,3 42,1 Kuna Managed float (EUR) 2018 Romania 5,2 7,5 -1,9 12,4 Leu Managed float (EUR) 2017 Serbia 8,3 n/a 1,6 34,9 Dinar Free-float 2020? Turkey 10,1 17,5 0,4 60,7 Lira Fee-float 2025? *Referring to the period April 06 to March 07 Source: ECB Convergence report May 07 25 Underweight mainstream, seek opportunities out of benchmark (August 31) Poland Czech Hungary Austria (Pan-CEE) Romania Turkey Bulgaria Lithuania Latvia Estonia Slovenia Croatia Portfolio % Benchmark % Slovakia Cash 0% 10% 20% 30% 40% 50% 26 Sample pick: Erste Bank – CEE financial powerhouse Central European and Balkan financial powerhouse with strong presence in Czech Republic, Slovakia, Hungary, Croatia, Serbia, Romania and Ukraine Core strengths – retail leadership combined with wealth management What makes us excited? Very low valuation - 2008E P/B 1,7 and P/E 11,7 with EPS growing 20-25% in coming years and ROE close to 20% by 2009 Market is too sceptical on Romania what is still very “underbanked” and may be a trigger for the stock Cyclical recovery in Austrian market Management has strong track record of crossborder expansion and delivering on targets Watch out for Economic slowdown in the region Regulatory issues such as lending restrictions 27 Thoughts on mid-term market outlook Potential positives Potential negatives Local macro High & steady growth in Baltics overheated; expected coming years; efficiency gains in companies improvement in Hungary and Turkey does not materialize Global macro Global growth providing no Valuation Flows major disappointments; commodities stay stable With average P/Es in mid- teens, most of large caps still look reasonably valued Local mutual and pension funds increasingly influential Boom continues as M&A Rising USD&EUR interest rates; less liquidity; deteriorating risk appetite; significantly higher oil prices P/B has been rising (>2); some small caps very aggressively valued Foreign investors may prefer other emerging markets Too many IPOs & SPOs balance sheets healthy 28 Eastern Europe3: SEB EE Small Cap Fund 29 Why Eastern European Small Caps? Eastern Europe3 – general Eastern European story, leveraged – More growth – More benefits from structural change – More exposure to development of domestic financial markets – Less efficient valuation of equities = more opportunities SEB ready to benefit due to – Truly local team – Local languages – Contacts to local brokers – Focused on bottom-up stock selection – Active investment management 30 Small certainly can be beautiful 31 Portfolio as of August 31 A very different composition vs traditional Eastern European indices Georgia 1% Bulgaria 1% Turkey Hungary 1% Ukraine 1% Latvia 0% Cash 2% 3% Slovenia 2% Czech 3% Romania 4% HealthCare 4% Poland 32% Kazakhstan 5% Cash 3% Industrials 24% Utilities 4% Consumer Staples 5% Telecom 5% Energy 7% Lithuania 5% Financials 19% Estonia 6% Pan-CEE 8% IT 3% Russia 26% Basic Materials 10% Consumer Discretionary 16% 32 Sample pick: Amrest – leading restaurant operator in CEE region AmRest is the second largest quick service and casual dining restaurant operator in Poland and in other countries from CEE. The company operates a network of 243 restaurants in Poland, Czech Republic, Hungary, Bulgaria and Russia. What makes us excited? Amrest is a true growth story in otherwise defensive sector. The company strives opening 100 restaurants annually, which translates into tripling sales by 2009. Ambitious strategy to run two new brands: Burger King and Starbucks and to expand on the markets of the whole CEE region Recently Amrest acquired a Pizza Nord, which operates 22 KFC and 19 Pizza Hut restaurants in Russia. Further expansion in Russia planned. Booming domestic consumption in Poland and other countries of the region to support strong growth ambitions Watch out for The expansion on CEE and CIS restaurant markets may slow down The profitability may be hit by higher costs related to wages, rental expenses 33 Sample pick: Rambler Media – largest Russian web portal 280m Russian speaking people globally, 145m in Russia Internet penetration has reached 25% (European average 40%) Russia will have largest number of internet users in Europe by 2010 What makes us excited? Largest Russian multi-service internet portal worldwide 62% of internet users in Russia regularly visit rambler.ru - 23.8 million unique users and 1.8 billion page views every month. Internet ad market expected to grow threefold to $500m/year by 2011 and more than fivefold to $850m/year by 2014 EBITDA margin to exceed 35% in 2009 Watch out for Competition from local integrated media and international companies (but go visit www.yahoo.ru too ...) Rambler.ru – yahoo of Russia 34 Thank you! Sven Kunsing Head of Eastern European Investment Management [email protected] +372 6656 645 35