Wednesday, May 30, 2007

Romania tipped by AA-rated Drinkall

Published: May 2007
By Philip Haddon, European Funds Reporter

Balkan specialist Tim Drinkall of the Swedish Gustavia boutique believes soaring domestic consumption could propel returns from Romania.

Drinkall has invested 21%of his Gustavia Balkan fund in Romanian stocks. Turkey makes up 25%, Croatia 15%, Serbia 13%, Bulgaria 10% and Bosnia 2%. He also holds small positions in Greece and Austria.

Although Drinkall, an Indiana-born American now living in Stockholm, sees himself as a bottom-up stock picker he still uses top-down macro filters to analyse particular areas.

‘Places like Bosnia, for example, are quite illiquid so we only have 2% of our portfolio there,’ he says.

With no Balkan-oriented benchmark available, Drinkall has a free rein as regards his country allocation. Gustavia Balkan’s biggest position is in Turkey but he regards that as an underweight.

‘By market cap, Turkey should really be about 70% of the Balkans’, he says.

In contrast Drinkall is enthusiastic about Romania which he regards as an up-and-coming country following a similar path to countries like Poland.

‘Romania is a play on domestic consumption. Poland developed into a strong economy by being domestically focused. Romania has the potential to do that too,’ Drinkall says. ‘If any of these countries are going to become important European economies, then it could be Romania’.

Foreign investors continue to pour money into the region, lured by the promise of low wage labour, the Gustavia manager says. And indeed, according to Drinkall, wages in Romania are only 30% of the average EU wage.

The rate of growth in the Balkans is sustainable and set to continue, Drinkall believes. ‘Economies in this region are all growing at a rate of 5-7% per annum. I think there is no reason why this cannot continue.’

On the subject of political risk in the region, Drinkall accepts it exists but is not too concerned by it.

‘There is political risk everywhere- there is even political risk investing in the USA,' he says.

'The drive of Balkan countries to enter the EU is making them more stable than they have been for a long time. All of these countries are aspirants for joining the EU. Even in places like Serbia the majority of the parties are pro-western, pro-EU and pro-reform’.

Drinkall has a great deal of experience in eastern Europe having worked for Austrian firm Creditanstalt in Hungary and Poland in the nineties. He also spent four years at Deutsche Bank as head of eastern European equity research and so is comfortable with the travel demands of his position. He generally spends two weeks of every month on the road meeting companies in the region.

‘I firmly believe in getting out and seeing the companies. I try and see our top ten to twenty companies two or three times a year,’ Drinkall says.

Having come from a company as huge as Deutsche Bank to a small Swedish boutique, Drinkall appreciates the benefits of being at a small firm. ‘We are flexible and agile, we do all the work ourselves. I think boutiques have more of an entrepreneurial spirit, we can dig up our own ideas.’

Not only does he dig up ideas for the Balkan fund on his frequent travels, but he also manages the Gustavia Greater Russia fund which invests in former CIS countries.

Drinkall, is the top ranked manager in Europe for his total returns in the equity emerging markets Europe sector. In the three years he has managed the Balkan fund it has returned 250%, far outperforming the 146% return of the sector’s average manager.

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