We have invested in the CIS and CEE regions since the mid-1990s. While there over the last decade has been substantial progress made in terms of transparency levels, regulatory reform and market infrastructure, capital markets in these regions remain less developed than their equivalents in Western Europe. These less transparent, less researched and less liquid markets tend to have a higher degree of asset mispricings compared to more efficient markets. At Alpcot, we employ our experience and knowledge to identify and benefit from these mispricings to generate superior risk-adjusted returns.

Background

Securities markets are analyzed by market participants, and undervalued securities are bought and overvalued securities are sold. If all public information is reflected in the market price, markets are regarded as efficient. In theory, if all public information is reflected in the market prices, a portfolio manager would not be able to outperform the market. The reality differs from theory.

Firstly, all information is not reflected in the price and the degree to which the information is reflected in the market price depends on numerous factors. Two important factors are size and complexity. The smaller and the more complex the market is, the more inefficient the market generally is.

Secondly, markets are not efficient since market prices are set by human beings, who are affected by human emotions. Panic and euphoria can lead to significant mispricings over extended time periods.  In today’s financial markets, technical factors like fund flows further contribute to “forced” buying and selling.

Active portfolio management adds limited value in efficient markets since it is a challenge to find mispricings to benefit from. Sometimes it is questionable whether the value added provided by active portfolio management actually covers the fees charged for these services. In efficient markets such as the Western Europe and US equity markets, passive portfolio management incorporated in e.g. traditional index-tracking Exchange Traded Funds (“ETFs”) may be a good alternative for an investor, since keeping annual management fees low is an important factor in order to achieve long-term performance of the investment. It is fair to say, that these passive products are cannibalizing on the research efforts made by other market participants since those efforts are ensuring that the market prices are efficient and fair for everyone. If passive products over time would become too popular, no one would finance the cost of creating efficient and fair market prices, and the occurrence of mispricings would increase. This would mean that active portfolio management could again benefit from finding undervalued securities to buy and the value added from active portfolio management would exceed the fees charged for the portfolio management services.  In essence, there is a balance to be struck between the cost of adding more research capacity to a market and the return from these additional research resources.

Even though developed markets are not Alpcot’s field of expertise, our general view is that equity markets in Western Europe and the US tend to be over-analysed, implying that the cost of adding additional research capacity exceeds the expected return from this additional resource. This explains the very strong development for passive portfolio management products like traditional ETFs. Passive products simply generate higher returns compared to actively managed products after fees for the portfolio management services.

Our field of expertise is Eastern Europe. In inefficient markets, like Eastern Europe which are smaller in terms of market capitalization and more complex in terms of cultural and language barriers, active portfolio management has better chances to provide added value in excess of the fees charged. Alpcot’s view is that Eastern Europe in general, and definitely the Russian and Ukrainian equity markets, are inefficient markets which offer good returns for portfolio managers doing their own research and trying to maximize returns. While there is a clear trend that also these markets are becoming more efficient, active portfolio management still create value for money and will most likely continue doing so over the next ten years. In addition to not reflecting all public information, equity markets in many Eastern European markets are immature with a limited presence of domestic long-term institutional investors. Especially in markets where foreign investors provide a substantial part of the liquidity, these markets are subject to excessive market swings in periods of global market turmoil.

Alpcot’s investment process

Alpcot is convinced of the benefits of fundamental analysis of the investment universe in Eastern Europe. The basis of the fundamental analysis is the investment process, where attractive securities are identified.

Screening process – The investment universe is screened on a regular basis, the aim of which is to identify possible investment opportunities. The screening process is carried out proactively, aiming to at identify investable assets or securities as early as possible.

The investment universe is closely monitored by using primary and secondary research:

Primary research – Extensive travelling, company visits and management interaction are the key pillars of information gathering.

Secondary research – Secondary research products, i.e. research produced by Alpcot’s partners, are an important element in the generation of investment ideas but are scrutinised carefully by the investment team.

Alpcot’s analytical and research efforts provide a model portfolio for all funds under managements. Alpcot has a dynamic decision making process, allowing us to quickly benefit from any identified opportunities. The investment process is governed by risk management restrictions in order to manage exposure to different kinds of risk.

Investment guidelines

Long asset management experience from Eastern Europe has resulted in a few investment guidelines for Alpcot. In our view a well-informed embedded investor can outperform the market significantly.

Long-term – Our investment decisions are long-term. We do not speculate in short-term market movements and we show great patience with our investments as long as we have confidence in the long-term potential of the holdings.

Discipline and integrity – We try to avoid herd mentality and put great emphasis on integrity when assessing investment opportunities.

Geographical focus – The investment professionals have a comprehensive insight and understanding of the unique business cultures and challenges in Eastern Europe. Local presence enables Alpcot to monitor market and political developments locally.

In-depth industry knowledge – Alpcot has access internally and through its contact network to industry experts. It is of instrumental importance to fully understand the potential and challenges of the business models in all different sectors. In-depth knowledge of different sectors gives Alpcot a competitive advantage.

Concentrated portfolio – Undervalued stocks identified in our market screening process will be given a high portfolio weight. We are more comfortable with a big portfolio weight for a company we really believe in, than a small weight in a company which is just part of the index.