Q:  What are the key elements of your investment philosophy? A : Our investment strategy is flexible. We invest in Eastern Europe and the philosophy is to work hard on selecting the right country in the universe, the right sector and company. The goal is to beat the benchmark, the competition, and to preserve the invested capital. I do not believe that the market direction can be accurately predicted all the time and I avoid the unnecessary dependence on market predictions. However, I believe that we can still benefit from the market unpredictability and exploit this to our advantage. Our philosophy is to be prepared for all relevant eventualities. Therefore, we are openminded and not constrained to one aspect of the market. Part of that flexibility is that we do not keep target prices and we can hold large positions in cash as a result of the investment process. Q:  Which countries are in your investment universe? A : It includes Eastern Europe, the new EU entrants, as well as Russia, Turkey, and the ex- Soviet Republics. There are four separate investment cases in this universe - Russia, Turkey, Central Europe, and the new frontier markets. Russia is different because it is a huge country with vast population and a commodity driven market. Turkey is also a large country, but the play there is the economic convergence with the EU economy. Central Europe, which means Poland, Hungary, and the Czech Republic, has already gone way through the convergence with the Western European economy. The last investment case, the new frontier markets, includes markets like Kazakhstan, Georgia, Azerbaijan, and Ukraine. Q:  What are the important factors driving these markets? A : In Russia, the growth in global oil consumption is a primary factor driving the economy. The U.S. consumes 25% of global consumption of 83 million barrels a day. This is followed by the consumption of EU, Japan, China and India. But the oil consumption per capita is even more important. The U.S. uses 25 barrels per year, while Germany consumes 10 barrels per capita. At the same time, the consumption in China is only 2 barrels and in India it is 0.9 barrels a day. The bottom line is that consumption per capita in those markets is bound to increase, even if it never reaches the level of the most developed countries. Just imagine the global effect of the slightest change in Chinese per capita consumption. And this story refers for almost all the commodities. That is the investment case for Russia, which has commodity-driven exports. About 50% of the natural gas import in the EU countries comes from Russia, so I believe that the exposure to Russia is a must for emerging markets investors. Turkey is interesting because it is a highly liquid market, more so than markets in Hungary, Poland, or the Czech Republic. All the domestic sectors are represented in the market and you would be surprised how modern and developed their industry is. In Turkey, another important factor is the sovereign Middle East funds, which are looking to buy banks or insurance companies. The situation with banks and financials changed three months ago, but those companies will again be interesting during the turnaround. Right now everyone is cautious because in the previous financial crises only a decade ago, Turkey was the first to suffer. However, at present, their banks are solid and, more importantly, they have the experience of several crises and banks know how to navigate the current market malaise. Currently, we don’t have much exposure to Turkey because there is still a risk, but it is an interesting market. In Central Europe, Poland still has potential because it is a large country and still a convergence play compared to Western European economies. At the same time, the potential in Hungary and the Czech Republic is limited. There are very few interesting companies. Q:  How would you describe the strategy of the fund? A : The primary aspect of the strategy is selecting the right market and company at any given time. That doesn’t mean that we don’t choose carefully the stocks in Turkey when Turkey is in favor, but the allocation is crucial for the performance. For example, last year Turkey surged 70% in U.S. dollar terms, while Russia gained 20%, so the allocation makes a big difference. The sector allocation is also important because there is always sector rotation. Overall, we have a top-down strategy in selecting countries and sectors, and a bottom-up approach when picking the companies within the country. As a result of the investment process, we can hold large amounts of cash. Currently, we have 53% in cash because we do find enough good ideas to invest in. Overall, we have a flexible strategy. We don’t have a black box or a process that allocates points to stocks or sets price targets. There are too many important factors behind a stock price to do that. Q:  What factors influence your allocation decisions? A : The first and foremost factor is valuation. In Russia, for instance, the valuations at present are very low. The oil sector trades at 2 times earnings, since stocks are down 50%. Although the earning multiple are typically lower in the emerging markets, the Russian oil companies trade at a fraction of the Western ones. The Enterprise value per barrel of reserve is about one tenth of a Western company. For example, the oil giant OAO Gazprom trades at 30% of the market cap of Exxon Mobil even though it has three or five times the reserves. I expect Gazprom to have the same market cap as Exxon Mobil one day. Other factors are stock price momentum, sales growth, foreign direct investments, and all the macro economic factors. If I see that momentum is growing in another country, then I invest in the other country. We aim to account for all possible events and to be on top of the news and events, the regulatory changes, etc. Q:  How many stocks do you hold in the fund, what is portfolio turnover and what benchmarks you measure your performance against? A : I think that diversification is very important because it lowers the risk. I don’t like too much concentration and I prefer to invest 3% in two stocks than 6% in one stock. Our benchmark is mSCI Emerging Europe. The typical number of stocks in the portfolio varies between 60 and 80, sometimes fewer. The portfolio turnover is about 80%. When you are well-positioned in a trend, there is no need to make trade to take full advantage of the market momentum. But recently, I have gone to 53% in cash as I wait for the market to turn. Then I will invest. As I said, I am flexible in my investment approach and If am wrong, I change my stance towards the market. I don’t sell that quickly, but if I have to I will. If that means having to sell stocks five times in a month or a year, it doesn’t matter. The overriding goal is to make money. I don’t have a committee of 10 people that has to agree on the decision, and that flexibility is very good for the fund and its performance. Q:  What are the milestones of your research process? A : In the emerging markets a company that can grow faster than the economic growth rate is expected to gain market share and attain a leadership position. When the economy is growing at 8% or faster, the company that can grow at 15% or more is interesting. I do not like debt on the balance sheet because in the emerging markets the debt is expensive. The cash flow is more important than the revenues in my opinion in emerging markets. Some of the other critical factors are enterprise value, sales, if the company is in a strategic sector, the barriers of entry in the country, the shareholder structure. I don’t invest much in IPOs because, typically, those are too expensive and these companies are always priced at the top of the market. For our research, we use a system called HOLT, owned by Credit Suisse. The research service provides the implied cash flow and investment return that a company must have in the next five years, to justify the current price. I find this tool very interesting and I use it for my balance sheet analysis. For the turnaround stories, I like when you can see the trend. I may not be the first one to invest in the turnaround, because I prefer to miss the first 10% to minimize the risk of being wrong. As part of the research process, I visit the companies - not only their headquarters, but also their operations. It is very important, particularly in Russia, to have an idea at least of what is happening there. For example, two years ago I went to see a helicopter builder, Kazan Helicopters in Kazan, which is a semiautonomous region in Russia. The market cap of Kazan Helicopters was about $140 million and there were 10 new helicopters finished and already sold to Malaysia, Nigeria and other countries. The value of those helicopters was higher than the market cap. In addition, in countries like Russia, the foreign companies typically have to work with a local company to access the market. You cannot start there from scratch. Therefore, the thinking was that, at some point, the big Western helicopter companies, who want a part of the big Russian market, will have to work with companies like Kazan Helicopters. That reasoning is valid for all the sectors and is part of my strategy. I normally do not buy companies in Russia or Ukraine that are not owned by locals. Q:  Can you give us some other stock picks that highlight your investment research process? A : I like Surgutneftegaz, the fourth largest Russian oil producer. It has market cap of below $10 billion, has $12 billion in cash on balance sheet and no debt. It didn’t perform well two years ago because investors were worrying what the company will do with the cash. But that’s an example of a good investment today. Another example would be CEZ, one of the largest utility companies in the region. Electricity shortage is a worldwide problem, from South Africa to China, so the sector is bound to grow. This stock performed very well, but came down significantly in sympathy with the sharp decline in the market. I am sure that when things stabilize, it will be one of the first to rally. The stocks that I avoid include agricultural commodities because I do not believe in investing in soft commodities. It is quite easy to increase production of these commodities and find substitutes if prices surge in a short period. I have been a net seller of these commodities because I expect the price to continue to go down. However, I am bullish on the other commodities, because it is much more difficult to increase production. Opening a new mine takes 5 to 10 years, government approval, environment permits and other hurdles to overcome. Q:  What is your strategy in the current global environment? A : Right now, we are waiting, or bottom fishing. I have been doing some investing in Russia at this level and every week I buy some shares. Today, for instance, I invested 1% of the fund in Sberbank, the largest Russian bank, with majority owned by state and the bank controls between 30% and 40% of the market. The rationale is that now people prefer the state bank because of the low confidence and in the other banks. I am sure that this bank will rally one day. However, I do not expect emerging markets to turnaround until the financial markets crisis in the U.S. is settled. My strategy now is to wait and closely follow the events, but I am ready to invest because these markets may go up 50% in two or three weeks. I believe that one of my strengths is following these markets every day since 1996. The continuous and long term following of these companies is an advantage in this market. In terms of strategy, now I am concentrating on large companies because when the market turns around, these companies are the first one to rally. When retail and institutional investors come back to markets, they will buy the big caps, not the small real estate companies. So, I focus on the very big caps and the liquid names in those regions before reviewing second-tier companies. Q:  In your view, what are the specific emerging market risks and how do you manage them? A : I manage the risk mainly through diversification, staying on top of market trends and events and taking action. If a stock that is doing well starts to struggle, I may trim the position to minimize the risk. If I see that I was wrong, then I buy it again. I believe that you really have to see what the market is doing and take decisions. The decision to hold cash currently is about avoiding risk. However, I cannot be sure if 53% in cash would be enough to avoid risk.