Fifteen years of CEE Equity Fund

posted in: BTA blog | 0

This year, Concorde CEE Equity Fund turned 15 years old. During this time, many better and worse years have passed. It was founded around the middle of the burst of the American dotcom bubble, and after an initial bad period, some better years commenced up to the 2008/2009 stock exchange crash – the most severe of the last decades. After that, private pension funds were nationalized in Hungary, and Europe was in a prolonged crisis, but the last 2-3 years of this 15-year period were somewhat calmer. This period is probably long and diverse enough to exclude the significance of coincidences and instead truly reflect the achievements of the think tank of Concorde Asset Management.

How has the CEE Equity Fund performed?

Those who stood with us in the last 15 years made 13.67% profit annualized, as the graph above shows, they increased their initial assets sevenfold in total. According to BAMOSZ (Association of Hungarian Investment Fund and Asset Management Companies), no other asset management in Hungary that dates back before the 2008 crisis can claim a two-digit return since their founding. As the following table shows, Concorde Asset Management outperforms not only its competitors, but also stock-indexes – be it regional (which are in the focus of the Equity Fund) or global.

Annualised return from start (HUF) Daily average market volatility
Concorde CEE Equity Fund 13.67% 0.84%
BUX 10.40% 1.53%
WIG (Warsaw) 8.00% 1.39%
PX (Prague) 10.90% 1.43%
Eurostoxx 50 3.16% 1.44%
S&P 500 6.29% 1.38%

*(2001.03.29-2016.12.14)  Source: Bloomberg, Concorde Asset Management

Furthermore, this exceptional performance is not the result of taking higher risks than our competitors. The Fund has kept far less equities than indexes; it kept about the fifth of its total assets in short state securities. The deviation of the Fund is significantly less than the indexes’.

What made this exceptional long-term performance possible?

Numerous studies have shown that the performance of about 80 percent of all funds falls behind its benchmark index. This is can be explained by the inevitable fees, which decrease returns, and the fact that asset managers do not make good decisions in the long-term. Studies have also proved that funds with a composition significantly different from the benchmark stock-index tend to perform better.

This is our primary principle while managing Concorde Equity Fund. Our approach is absolute; the composition of indexes is not relevant. We are starting from the bottom, selecting shares that we deem cheap in absolute terms, whether or not they are in any index.

Uniqueness on its own is not enough to excel. Fifteen years of good performance proves that our value-centered and contrarian investment philosophy – which has remained essential for us since the start of the Fund – works. Of course, it does not shine every year and every period of the market cycle, but in the long-run, it does. The key to our strategy is trying to focus on countries and sectors that are not favored by others, so they are undervalued. Usually, it is due to a minor setback in their past performance, which, we believe, can be corrected. We also try to avoid companies that lately have been working exceptionally well, increasing investors’ enthusiasm – while it is already reflected in the price of a share. A substantial crisis or a disadvantageous coincidence at such time could lead to significant price drops due to the high expectations. Less popular shares, however, can better weather such events. We believe, this also contributes to the low risk of the Fund, in comparison to others in the market.

What are the causes of mispricing?

As we see, mispricing is developed when capital market participants are forced into a region or asset class. A portfolio manager’s hands are tied if an asset becomes too popular and capital inflow is significantly increased. So we believe that flexibility and expertise together lead to better performance. For example, during the 2008-crisis, convertible bonds of OTP and MOL became extremely attractive.In terms of risk-return trade-off they were more attractive than the underlying shares. This situation made us switch some of the the Fund’s risky instruments from stocks to these bonds for a couple of years.

However, the freedom of investment – in geographical sense – can be disadvantageous above a certain level. For example, if we tried to look for investment stories in South America, our chances for success would be slimmer. We are too far from that market in space, time, and culturally as well. Visiting a management whenever we felt it necessary would be quite complicated and we would not be familiar with the investment market– and these are just two examples of the difficulties that we would have to face. It is said that the further we go from home, the less is our potential to outperform. This is particularly true for developing countries, where local relations are far more crucial than the business opportunities of a given industry.

Bearing this in mind, at the beginning, we selected under-priced assets from the Hungarian market for Concorde Equity Fund. However, ten years ago, as we saw that the Hungarian stock market has lost some of its potential, we shifted our focus to Central-European markets. These countries are very similar to Hungary. They are not too far, and  their EU member status, their economic development and culture enable us to better understand them, which would not be true for South America or even Russia.

Europe’s economic issues during the last couple of years have led to low prices on the continent’s markets, which we believe to be more and more promising. We consider this part of the world to be also within our reach, so as investors, have a place here too. This way, Western European shares have appeared in the portfolio of the Fund, of course, with smaller weights  than the companies in our region.

Of course, for a broader focus we need higher analytical capacity. To keep up, we have been building one of Central Europe’s largest portfolio manager and analyst team.

Good opportunities will always turn up in different places, and we will try to profit from them for our clients. However, the majority of assets in the Fund will be from Central Europe. Is this disadvantageous? It might be, if our region will become one of the most expensive equity market in the world. If it happened, we would have to consider how much of the benefit from geographical proximity we would give up. However, we do not have to worry about that for now –our region is still a cheap market.