Aberdeen slashes holdings in European Frontiers fund

Aberdeen has halved the number of stocks in the £52m European Frontiers fund in the year since it bought the vehicle from Credit Suisse.

On July 1, 2009, the Aberdeen global emerging markets team took over the mandate from Elizabeth Eaton who had been running the high-profile fund since October 2005 and remained at Credit Suisse. 

Mark Gordon-James, an emerging market equities investment manager at Aberdeen who works on the fund, says the portfolio has changed significantly since then, with the number of stocks reduced from 60 to 28. 

Country and sector weightings have also changed to reflect Aberdeen’s high conviction investment process. 

Although the performance of the fund lags behind its closest competitors in the Specialist sector on a one-year view, it has outperformed them in the past three months. 

Morningstar figures show over the past 12 months the fund has returned 32.4%, while Jupiter Emerging European Opportunities returned 48.6% and Neptune Russia & Greater Russia delivered 47.6%. 

Over three months, the Aberdeen vehicle made 5.8% while the Jupiter fund gained 4.3% and the Neptune vehicle returned 4%.

Gordon-James says: “Over the past six months, the material companies have performed quite well, especially in Russia, but we have seen a sell-off recently which has hurt the fund. 

“But we are sticking with our convictions and we are not going to water down the positions in order to chase the market.”

A year ago, the fund had 53% exposed to Russia and 14% in Turkey. Since then, these weightings changed to 44% and 25% respectively. 

Gordon-James says this is due to the number of opportunities the group sees in Turkey compared to Russia. 

“There are some very well-run businesses with great exposure to the domestic demand story in the region on the consumer and banking side,” he says.

The fund has 4.5% in Bim, Turkey’s answer to Aldi, the discount retailer, and a significant position in Turkiye Garanti Bankasi, a Turkish bank. 

From a sector perspective, the fund has become more skewed towards consumer staples with a 13% overweight and healthcare at 5% overweight and is now underweight energy and utilities. Before the takeover, the fund was more in line with the index weightings of these sectors. 

Gordon-James says: “Aberdeen’s investment style is to 

shy away from dirty cyclical stocks that are subject to regulatory risk. 

“We are trying to look for more interesting, consumer-oriented businesses. The miners and steel companies are low cost producers but are still fairly unpredictable in this tax and regulatory environment and have no pricing power.”

In Russia, the portfolio’s exposure to the consumer has increased quite significantly, with first time purchases of two of the largest supermarket chains and a vodka distiller.

Aberdeen’s long-term outlook on emerging Europe is sanguine, says Gordon-James. 

“We think it will remain tough and it looks like Europe will stagnate or, worse still, double dip, which will be tougher for Eastern European countries. 

“That said, there is a lot favouring the countries such as ongoing reform, investment infrastructure and productivity. The markets also look relatively cheap.”