Julian Mayo, whose Eastern European stock holdings helped his mutual fund outperform all of his U.S. peers since 2000, bought shares of...
Julian Mayo, whose Eastern European stock holdings helped his mutual fund outperform all of his U.S. peers since 2000, bought shares of Turkish companies for the first time on optimism the country will join the European Union.
Mayo added shares such as Turkiye Garanti Bankasi, the country’s third-biggest investor-owned bank, to the U.S. Global Investors Accolade Funds Eastern European Fund in the past four months.
The Istanbul-based lender now ranks as the 10th-largest investment in the $650 million mutual fund.
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The possible entry into the EU, which may be at least a decade away, “cements our view that Turkey is a much-improved economy,” Mayo said in an interview from his office at Charlemagne Capital in London.
The economy grew 8.9 percent last year, more than any of the EU’s 25 member countries.
Mayo’s mutual fund gained at an annual rate of 24 percent in the past five years, ranking first of 38 U.S.-based emerging-markets funds tracked by Bloomberg.
The fund rose 21 percent in the past 12 months, including reinvested dividends, beating the 17 percent advance of the MSCI Emerging Markets Europe Index.
Istanbul’s stock market reached a record in February, two months after EU leaders agreed to begin membership talks with Turkey, vowing to promote Turkish economic growth and build a bridge to the wider Muslim world. The Istanbul Stock Exchange National 100 Index climbed 25 percent in the past year.
Counting on EU process
Turkey has 70 million people and economic output per capita that’s 28 percent of the EU average.
The nation is counting on the entry process to boost investors’ confidence, and help reduce unemployment and financing costs on $220 billion in debt.
Mayo must have at least 80 percent of his fund’s assets in shares of Eastern European companies. On Jan. 31, he had about 32 percent in Russia, 14 percent in Hungary and 14 percent in Turkey.
His biggest holding was OAO Mobile TeleSystems, a Russian provider of telecommunications services, at the end of March, accounting for 9.2 percent of the fund’s assets.
Funds with limited investment options and small regional focuses can be “extremely volatile,” said Dan Lefkovitz, an analyst at Morningstar, a research firm in Chicago.
“We’re pretty skeptical of any fund that cuts its universe too narrowly,” Lefkovitz said.
“As these countries prepare to adopt the euro, they could keep going up, but we think there are better ways of getting international exposure.”
Low price-earnings ratio
Lefkovitz recommends investors seek broader, more diversified international funds. Mayo’s fund is particularly risky because so much of its assets are in individual stocks such as Mobile TeleSystems, he said.
“If that stock happens to tank, it’s going to take the whole fund down,” he said.
Mayo said Eastern Europe still has attractive investments.
The companies in his fund have a price-to-earnings ratio of 14.6, less than the 40.1 of companies on the MSCI Emerging Markets Index and the 19.1 for companies on the Standard & Poor’s 500 Index.
“We consider the whole region well-priced,” Mayo said.
Poland, Hungary, the Czech Republic, Slovakia, Slovenia and three Baltic nations joined the EU on May 1, along with Cyprus and Malta.
The European Bank for Reconstruction and Development forecast in November that the new states’ economies were growing twice as fast as older members such as Germany and France.
Mayo and his five co-managers typically meet with company managers before buying shares, and once they take a stake, they meet with the company four times a year. Mayo estimates the team collectively attends about 800 to 1,000 meetings a year in about 20 different countries.
Stake in Russian telecoms
The fund managers focus on companies with sound management that are reporting higher earnings, sales and cash-flow growth than their competitors. The fund owns about 40 stocks, with the 10 biggest holdings accounting for 59 percent of assets.
Banks, including Garanti, are the fund’s largest investments, as Mayo bets that an increase in personal income boosts consumer borrowing and spending. Dogus Group, Garanti’s owner, last month said it will renew efforts to find a buyer for the company after a planned sale to Banca Intesa, Italy’s largest bank, fell through in 2004.
Mayo boosted his stakes in Russian telecom-service providers Mobile TeleSystems and AO VimpelCom in the first quarter. Moscow-based Mobile TeleSystems, Eastern Europe’s largest mobile-phone company, added 7.5 million new subscribers in the fourth quarter, the company said last month.
Mobile TeleSystems has been expanding services in regions such as Uzbekistan and Ukraine. Shares of the company, also known as MTS, rose 2.1 percent in the past 12 months.
The fund doubled its position in VimpelCom to about 9 percent of assets from 5.2 percent since the end of 2004. Shares of VimpelCom climbed 1.9 percent in the past year.
Sell-off “an overreaction”
“It had a bit of a sell-off for rather erroneous reasons at the end of last year,” said Mayo, who began his career at Schroders in Hong Kong and holds a degree in economics from Bristol University in the U.K.
Shares of VimpelCom plummeted 22 percent, the sharpest drop in six years, on Dec. 8 after it was disclosed the company had received a claim for back taxes, penalties and fines for 2001. The shares rebounded to end the year up 48 percent.
“That’s what I call an overreaction,” Mayo said.