BEF FUND – Successfully finished month – 10.38% return in three months!


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Balkan Emerging Frontiers Fund made 0.59% net return in February and 3.14% net return in March. Net YTD return in first three months is thus 10.38% and total net return in 32 months of investing generated 73.50% return for you.

Value of most main stock indices in region of former Yugoslavia dropped in March, only Croatian CROBEX and Serbian BELEX 15 slightly grew. Although the regional indices are hence lower on average, BEF Fund made great return in March. Main rationale for this is active portfolio management. In contrast to mutual investment funds which mainly act as passive portfolio investors, we employ all possible legal and other means in mitigating risks and maximising returns of investments.

With litigation won on Administrative Court of Montenegro, we have prevented transformation of one of Montenegrin former privatisation investment funds into limited liability Company (the privatisation fund tried to evade obligatory transformation into mutual investment fund) that would left BEF Fund, as one of minority shareholders, worse off. Though this investment represents only small portion of our portfolio, we have decided for litigation, as we are determined to do whatever deemed necessary to protect and increase your wealth entrusted to us. We will endure with such actions in the future on need to be basis. Since ownership of privatisation funds in both parts of Bosnia and Herzegovina and in Montenegro are linked to few financial groups, everybody can get familiar with our persistence in protecting your interests and rights. Our active portfolio management thus enhanced BEF Fund return in March. After lasting negotiations we have also sold shares of privatisation fund Polara from Republika Srpska in Bosnia and Herzegovina. Our average purchase price was a bit below 5 KM per share, while we sold them for 7 KM per share and thus realised approximately 40% return on the investment.

Despite all the panic and pessimism in financial markets, global stock markets are growing (with some minor corrections) for more than four years now (since March 2009). Stock markets in Western Balkans that experienced deepest fall since 2007 have however still seen no significant recovery so far. So, while more and more stock indices of developed and emerging markets are close to or even above their 2007 peaks, some stock indices in region of former Yugoslavia are only on 15% of their 2007 values. Comparing with stock markets that are more comparable from global investors’ perspective, there is indeed huge potential in growth of stock markets in BEF Fund investment region. Below we present growth of indices in MIST countries (Mexico, Indonesia, South Korea and Turkey) and also in countries in the »neighbourhood«, namely Romania and Baltic countries. From personal experience we can claim that majority of foreign investors classify BEF Fund investment region together with the latest two – for them it is all »Eastern Europe« (for somebody from New York or London office all this countries are very much alike and close to one another).

Mexican stock exchange index (IPC) grew almost 160% since its lowest value (March 2009) after the financial crisis began and is nearly 35% higher than highest value (October 2007) before the crisis. Indonesian stock exchange index (JCI) gained almost 350% since its lowest value (October 2008) after the crisis began and is already 75% above its highest value before the crisis (January 2008). South Korean stock exchange index (KOSPI) raised more than 110% above its lowest value (October 2008) after the crisis began and is more than 5% higher than its highest value (May 2008) before the crisis. Turkish stock exchange index (XU100) is already almost 310% above its lowest value (November 2008) after the crisis began and is almost 50% above its highest value (November 2007) before the crisis. From global perspective Turkey is also the market that is close and similar to BEF Fund investment region. As already mentioned, same goes for Romania with stock exchange index (BET) almost 200% above its lowest value (February 2009) after the crisis began. Stock exchanges in Baltic countries also had quite a recovery, as their common index (OMX BBGI) is already 235% above its lowest value (March 2009) after the crisis began. Divergence and undervaluation of stock shares from Balkan is obvious and huge (Please see attached comparison)! Once the regional indices rise from 15% to just one third of their highest values before financial crisis, this will represent 120% growth; when they reach half of their best past values, that will represent 233% growth; and should they return to their 2007 levels, that would mean the incredible 566% growth. We do not claim that such growth will actually occur very soon, however we want to emphasize the difference between past and present stock prices and the difference in development of stock markets in the region and worldwide. Undoubtedly one might post many reasons for such difference. But they might be similar to majority of investors’ 2007 off the cuff explanations on justifiable stock valuations and on expectations of further growth. Or on March 2009 expectations of »global financial collapse«, while actually the large growth of global stock markets began and is (somewhere also with intermediate corrections) still ongoing.

Global investors are getting aware of this potential of Balkan region and foreign investments are already increasing. We believe the investments will increase further and thus influence on higher prices of stock shares. The whole BEF Fund investment region is almost unnoticeably, but for sure getting closer to EU accession (with increasing financial support by international financial institutions and access to EU funds). It looks like investors are getting aware that Croatia will be full member of EU in bit more than two months! According to experience of Romania and Bulgaria accession to EU six years ago, it is very probable that Croatian Stock Exchange will experience significant inflow of foreign portfolio investments that will further increase the value of Croatian stocks. Stock prices on Exchanges in Bucharest and Sofia have marked large growth already in months before entering EU. Even the prices being pretty high at the time of accession to EU they have later grew further on substantially, sometimes to absurd high levels. We see Croatia’s inclusion in EU as a positive signal of European perspective for the whole region. Most foreign portfolio investments will initially come to Croatia, however we expect that when some of it spills over to countries south of Croatia, its effect on the value of regional stocks will be even larger. Since stock valuation and liquidity on other regional Exchanges are even lower than in Croatia any larger inflow of money will further increase stock values. It should also not be forgotten that the final strong growth of Balkan financial markets before the financial crisis was contributed mainly by Croatian investors. The growth began mainly through investments from Slovenia; while for the larger part of the extreme growth at the end of 2006 and in beginning of 2007 are due to cash flows from Croatian investors, partially directly from Croatia and partially indirectly via other foreign banks. Once the Croatian market will rise again, local investors will be once more looking for investment opportunities in the neighbourhood, with the viewpoint: »What has not risen yet?«.

As past experiences show, once the growth starts it might soon be too late to participate in excellent returns. Due to presently still low liquidity in the region, market will perform with at least 50% – 100 % return before majority of investors will get aware of that and join to investments. The longer the decline of stock indices lasts, the stronger will be the growth when it comes. History of stock exchange markets undoubtedly showed with numerous cases that the longer the market persists downwards, the stronger is than the growth, once the turnaround happens.

Time to invest is now! Once the Balkan will be on front pages of the news it will be too late! By then you will reap superior returns!

Kind regards,

Balkan Emerging Frontiers Fund

Telefon/fax +41 22 518 02 39

The Fund is a Segregated Portfolio of JP SPC 5, a segregated portfolio company with limited liability.

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