Consolidating and concentrating
There has been a lot of change at Finasta Asset Management over the last two years. In 2009 parent company Finasta Group was sold by Lithuanian heavyweight Invalda to Bank Snoras, which had its own asset management outfit. This division was merged with Finasta Asset Management at the beginning of 2010, creating a rather odd-looking entity that was ripe for ‘synergies’.
“Snoras Asset Management had six funds that were close to what we were already offering, with their emphasis on the Baltic region,” says Finasta AM CEO Andrej Cyba. “Overall we had 16 funds all investing in emerging Europe, which was not such a rational offering - clients could get a bit lost trying to decide which products they needed.”
The acquired company boasted no less than three Baltic equity funds, a global banks fund, a global equity fund of funds and a balanced fund of funds. Alongside these, Finasta itself had a range of funds that had evolved somewhat haphazardly, often in response to particular clients’ requirements.
Its main UCITS-compliant ‘harmonised’ range perhaps needs little explanation. The Russian Harmonized Investment fund (down 16.5% since inception in February 2006, up 45% over 12 months) and the Black Sea Harmonized Investment fund (up 0.8% since inception in March 2008 and 9.8% over 12 months) are straightforward region-specific equity strategies, while the Finasta New Europe Harmonized Investment fund (down 34% since inception in March 2005 and up 27% over 12 months) encompasses Russia, the CIS countries, Central and Eastern Europe and the Black Sea region. Finally, the Finasta Bond Harmonized Investment fund (up 27.8% since inception in January 2004 and 12.5% over 12 months) does the same for government and corporate fixed income instruments.
But things get a bit unwieldy where the firm’s regulated but non-UCITS compliant ‘special’ range is concerned. There is another Central and Eastern Europe (CEE) fund, which is focused on the EU member states and the Baltics and is not subject to UCITS diversification requirements, but is otherwise not easy to distinguish from the New Europe and Baltic fund. And that is before getting to yet more broad CEE equity vehicles - Infinity, Vitality and Integrity. The clue is in the singular names: these portfolios were tailored for a few of Finasta’s larger clients before being offered more widely. Infinity and Vitality are equity funds, Integrity is a balanced fund.
“By the end of this year we are planning to complete a consolidation,” says Cyba. “We want to clarify our product portfolio, create very clear geographic regions for each product and restrict portfolios to 20-25 ideas, so that we can concentrate on very specific stories in our region and build something a bit different from the benchmarks.”
The firm will roll out one umbrella fund with five sub-funds. The first is the Finasta Flexible Strategy, based on a UCITS-compliant fund Finasta launched in 2007 called the Future Harmonized Investment Fund, which invests in a diverse portfolio of equities, commodities and “limited risk investments” like absolute return funds and hedge fund indices, and has returned -6.6% since inception. The other four - the Finasta Global Equity fund of funds, based on the SNORAS product; the pan-regional best-ideas strategy Finasta New Europe Top 20; Finasta Russia Top 20; and the Finasta Emerging Europe - will subsume everything else, including the only sector-specific product, the Finasta Infrastructure Harmonized Investment fund.
“We made a decision that the topic and theme of that fund should remain interesting, but the assets should be consolidated into the New Europe Top 20 portfolio,” says Cyba. “It did not really work as a standalone fund.”
Alongside the new funds, Finasta will continue to offer its second-pillar pension fund range, which accounts for the biggest share of assets under management. There are six funds split into four categories - Conservative (100% bonds), Growing Yield (70% bonds, 30% equities), Active (50/50) and Rational Risk (100% equities) - designed with different risk profiles for customers with different risk appetites or at different ages. Finasta competes with nine other private second-pillar product providers in Lithuania, including international names like SEB, Swedbank and DNBNor. In addition, there is Equity Pension Plus and Bond Pension Plus, funds designed for pension saving by individuals eligible for income tax relief.
In the pension funds, ex-Russia and CEE equity investments are accessed via funds of funds for third-party managers, but all the products tilt towards local markets and exploit Finasta’s experience and expertise in the regions. The firm’s strategy combines top-down country and regional allocation with bottom-up fundamental stockpicking.
“Our strategy for 2011 includes a favourable view on the Balkans,” says Cyba. “Over the past two years Poland and the other large liquid markets performed well, and some smaller illiquid markets, for example the Baltics, did exceptionally well. That leaves us with Romania, Bulgaria and the Balkans that looked relatively weak - but our top-down view is that we think these economies, while not strong, look relatively OK.”
Cyba says that Finasta can still find depressed pricing for interesting stories in these markets, and that it is just a matter of time until fund flows follow those stories. When they do, he reckons that the relative illiquidity in these regions will result in returns this year similar to the Baltics’ numbers for 2010, 50%-plus at the index level.
“As an example, there is E&D Pharma, a pharmaceuticals distributor and retail firm in Romania,” he says. “The company is trading at 5-times EBITDA and pays close to a 6% dividend yield; the fundamentals look sound and the value is there, but at the same time it delivers 20-30% top-line growth. In more liquid markets, like Poland and CEE, we prefer big names with high free cash flow and big dividend payments. This is the big topic for the coming year - the dividend yields of many of the companies in these markets beats the yield on the corporate credit.
“Quality companies in our region look like they offer good value. Companies that we are avoiding include: oil refineries where we see negative free cash flow and overpricing; and, in quantitative terms, low-beta stocks.”