QUAERO CAPITAL has introduced Arrash Zafari’s ‘New Europe’ equity fund into the UK.
The introduction of Zafari’s New Europe fund, extends QUAERO CAPITAL’s existing European small and mid (SMID) cap capabilities to include companies from Eastern Europe, as well as other ‘peripheral’ states, such as Greece, Turkey and Russia.
Zafari joined the QUAERO CAPITAL’s SMID team – run by Philip Best and Marc St John Webb – three years ago and has since been nurturing a New Europe strategy which seeks to take advantage of significant under valuations in East European stocks.
Typically, stocks in Eastern Europe feature single digit price/earnings ratios, price-to-book values of less than one, and dividend yields of more than 5%. As with QUAERO CAPITAL’s wider European SMID strategy, Zafari will be seeking quality companies which are often unrecognised by the market and not covered by analysts.
Zafari has been travelling extensively in Eastern Europe, including in Russia, for the past three years, and has been developing a strong sense of what makes a quality company in a part of Europe that some investors have found difficult to penetrate.
Zafari said: “There are a significant number of high quality, small businesses across Eastern Europe. Among them are those which offer all the advantages that we see from companies in more mature markets but are simply ignored by those more inclined to go for the big names. In my view, these large East European companies are the ones most prone to external risks, including political risk, and that has coloured investor sentiment for the wider market.
“Smaller Eastern European companies are left alone to get on with what they do best, and many are seeking to develop along the same lines as their western European counterparts. I therefore believe that the opportunities offered by New Europe will provide a new dimension to our European small and mid-cap strategies, and a new dimension for investors in the UK.”
In making the case for New Europe Zafari also points to the significant investment currently being undertaken by the European Union particularly in Poland which is receiving over €70 billion of support in the 2014 to 2020 budgetary cycle. Smaller nations such as Estonia, Hungary, the Czech Republic and Bulgaria are also receiving significant levels of support from the EU in a bid to stimulate economic growth.
Yet despite such significant levels of investment New Europe – particularly Eastern Europe – remains largely off the radar of mainstream investors. It has experienced the highest proportion of fund closures of any geography worldwide. Since 2008 total number of funds has reduced by some 35% and until recently capital market activity has been stunted for many years.
“Western Europe still has some orphan stocks, but Eastern Europe has some orphan markets,” comments Zafari.
QUAERO CAPITAL’s New Europe fund is highly concentrated with its 20 top holdings representing some 70% of the portfolio.
Since June 2014, the New Europe stocks, managed by Zafari as a ’sleeve’ within QUAERO CAPITAL’s European SMID strategy, grew some 41% against the FTSE Eastern Europe index, which grew just 7.32% over the same period, and against the MSCI Emerging Europe index, which was down 4.55%, and the STOXX Eastern Europe 50, which was down 7.3%.
In his peer group Zafari calculates that the performance of the New Europe ‘sleeve’ – were it to have been a fully-fledged mutual fund since June 2014 – puts it ahead of all 72 funds in the Morningstar Emerging Europe Equity All Sector index.