GO
Loading...

Three Ways to Invest in Emerging Europe

Peter Adams | Riser | Getty Images

In my previous post, I outlined the economic policy highlights that have led to private market development and a rapidly rising standard of living in the former Iron Curtain countries of Central and Eastern Europe (CEE). For the intrepid investor there are ways to consider Emerging Europe for your portfolio. There are three principal approaches: the use of open-end mutual funds, closed-end funds or exchange-traded funds (ETFs); the assessment of individual companies utilizing stock purchases on the foreign exchange or the use of an American depositary receipt (ADR) traded on an American exchange such as the New York Stock Exchange; or purchasing the shares of large, publicly traded multinational companies active in the region.

Let's take a look at the funds first. In the table below you will find a representative sample of the funds offering for the region:


Eastern European Funds As of 5/1/13

Fund
Symbol/Type
Inception
Price
$ in
Millions
Dividend
Yield
5 YR
Performance
% in
Russia
RNE/closed-end 1996 $16.72 $58.04 0.27% (10.75%) 56%
CEE/closed-end 2007 32.63 423.1 3.36 (4.66) 69
EUROX/open-end 1997 9.04 166.1 0.66 (9.36) 46
GUR/ETF 2007 40.96 80.74 2.53 (6.24) 57
ESR/ETF 2009 24.26 21.75 3.58 - 74
Source: Delta Trust Investments, Inc. analysis

While these funds offer some "diversification" on paper, in reality, they are small in size and are heavily weighted toward Russian equity exposure. Russia entails completely different economic and political risks compared with the other smaller (CEE) economies. Thus, these funds are less appealing.

To assess individual company performance, one may turn to an annual evaluation, "Top 500 Central Europe" published by the global accounting giant Deloitte. This annual review provides an investor an overview of sector performance in emerging Europe and ranks the top companies in each sector. From there, one can determine the ability to build a diversified portfolio across principal sectors and countries utilizing ADRs.

While it is possible for the serious investor to invest directly in emerging markets, one has to consider U.S. laws on foreign brokerage accounts, account transaction expenses, account set-up costs, and access to adequate and timely information. By utilizing ADRs, a U.S. investor is afforded lower-cost trading access utilizing one's existing brokerage account.

Naturally, one has to remain aware of liquidity and tax-related matters. And in every instance, investors are cautioned to do their homework. Following this second approach, one can find some access to some of the companies on Deloitte's largest company list by market capitalization as follows:

Deloitte’s Top Ten in the CEE

Deloitte's Top Ten
in the CEE
Company
Country
Market Cap ($)
Sector
ADR
1. CEZ Czech Republic 16.6 Billion Electric Utility No
2. PKO BP Poland 13.7 Banking Yes PSZKY
3. PGE Poland 10.0 Electric Utility Yes PGPKY
4. Pekao Poland 13.2 Banking Yes BKPKF
5. KGHM Poland 10.9 Metals Yes KGHPF
6. PZU Poland 11.4 Insurance Yes PZAKY
7. MOL Hungary 7.7 Energy Minerals Yes MGYOY
8. PGNIG Poland 10.9 Energy No
9. Komercni Banka Czech Republic 8.0 Banking Yes KMERF
10. TPSA Poland 2.7 Telecom Yes PTTWF
Source: Deloitte “Top 500 Central Europe 2011”; Delta Trust Investments, Inc. analysis

A third approach one should consider is investing in large, multinational firms active in the region. For example, in the telecom sector, Deutsche Telecom (DTEGY-ADR on the NYSE) owns 100 percent of PTC/T-Mobile Poland, Poland's largest mobile operation with 29.6 percent market share; 60 percent of Czech T-Mobile, the largest mobile phone provider in the Czech Republic; and 59 percent of Hungarian Telecom, the largest mobile carrier in Hungary.

(Read More: The 'Miracles' of Hungary and Poland: European Tigers)

In the energy sector, as in the U.S., Europe is catching "gas shale" fever. Poland is believed to have one of the largest European shale deposits. New technologies like hydraulic fracturing will be key to recovery. According to Ernst & Young, most of the shale gas resides in the Baltic Sea Basin and the Lublin Basin. Currently, Poland is a net importer of gas—principally from Russia. These domestic unconventional sources could produce an exceptional economic opportunity for Poland. Joining the Polish company, Orlen (ADRs were just discontinued at the end of 2012), are Exxon Mobil, Chevron, Marathon which have assembled concessions. Others active in the area are Poland's natural gas utility PGNIG, 3 Legs Resources (on London's AIM Market "3 Leg," a subsidiary of Lane Energy Poland) and Canada's Talisman Energy.

Of these three approaches, combining the identification of select local CEE ADRs and the ADRs or traded securities of large multinational companies active in the region will help structure a diversified portfolio representative of the CEE economies. And this combination approach will avoid the costs of the funds and the unattractive overweight to Russia. As in all investment endeavors, ensure you have the right temperament for emerging-market risk and perform your due diligence.

—J. French Hill is founder and chief executive officer of private banking company Delta Trust & Banking Corp. (www.delta-trust.com). He served as Deputy Assistant Secretary of the U.S. Treasury from 1989 to 1991; subsequently, he served on President Bush's White House staff as Special Assistant to the President for Economic Policy. This is the second of two CNBC columns by French Hill about Eastern Europe's success.

Disclosures: Delta Trust Investments Inc. clients hold shares of XOM, CVX, MRO, and TLM. French Hill's spouse holds shares of XOM. Delta Trust Investments, Inc., member FINRA and SIPC, is a wholly owned subsidiary of Delta Trust and Bank. Additionally, the Trust Department of Delta Trust and Bank holds shares of XOM, MRO, and CVX for their clients.

The information in this piece is derived from sources that we believe reliable. Past results are not indicative of future performance. This is not a recommendation to purchase securities. Investments listed herein may not be suitable for all investors. Please consult your investment professional before investing.

CNBC and YPO (Young Presidents' Organization) have an exclusive editorial partnership. A key component of this partnership is regional Chief Executive Networks in the Americas, EMEA and Asia-Pacific. These networks are made up of cross-sections of YPO's unrivaled global membership of 20,000 top executives on the front lines of the economy, running companies that collectively generate $6 trillion in annual revenues and employ 15 million people in more than 120 countries.

Latest Special Reports

  • Financial advisors stress that now is the time for investors to get serious about year-end financial planning checkup.

  • Is an active twist on passive investing the right portfolio move? An inside look at the rise of ETF strategists.

  • The nexus of technology -- cloud, social, mobile and data -- are transforming user behaviors and creating new businesses.