Investment Philosophy

Karoll Capital’s Investment philosophy - The 5 Investment Pillars:

Investment Process

Our Investment universe

Selection Filters:

3,000+ listed companies in CEE

Mkt cap & Liquidity

Investment Universe - 1,500

Corp Governance, Transparency, ESG

750

Sector Outlook & Company Competitiveness

500

Financial Strength

250

In-house Valuation

Survivors
150

Investment Constraints:

The Four S's of our Investment Process

Screen

1
  • In-house / external screening tools (Bloomberg, Reuters, X3, etc.)
  • Sourcing ideas from 3rd party research
  • Conference attendance
  • Company visits
  • ESG sector exclusions
  • Market intelligence

Study

2
  • In-depth analysis conducted in-house
  • Assessing sector dynamics
  • Studying business model and company’s ability to generate return > cost of capital
  • Identifying companies with improving margins and low debt levels
  • Calculation of intrinsic value employing DCF method; Fair value calculation based on peers comparison ► target price
  • Analyst proposal to PMs

Shape

3
  • Investment Committee decides on country and sector allocation limits
  • PMs decide on inclusion of stocks in portfolios and weight in line with mandate constraints and risk parameters
  • Benchmark unconstrained approach – at a country and individual stock level

Supervise

4
  • Regular review of portfolio components’ fundamentals
  • Exit discipline: excessive valuation; unexpected deterioration in fundamentals; loss of confidence in management; better alternatives
  • Monthly attribution analysis to determine how performance is affected by country/sector/stock selection and quantify true alpha 
  • Risk management: oversight by CRO and investment committee

Investment team meetings

Weekly meetings
PMs and analysts interact and exchange ideas
Monthly meetings
Portfolio reviews of mutual funds / managed accounts, attribution analysis Overview of market development ► modify portfolios if necessary
Quarterly meetings
In-depth analysis of investment portfolios Strategic asset allocation decisions
Ad-hoc meetings
Reaction based on trigger from the in-house surveillance system

Emerging Europe
buoyant region converging with the rest of Europe

  • incubator for thriving companies
  • increasingly participating in European & global supply chains - vast number of companies shifting production here

Central & Eastern Europe is a diverse region offering appreciable scale:

  • 350+ mln combined population

  • USD 4+ trln
    GDP (1/3 of euro-zone total)

  • 3,000+ listed companies

  • USD 1+ trln total market cap

Emerging Europe
among the fastest growing regions

 2015201620172018f2019f2020f
World3.4%3.2%3.7%3.9%3.9%3.8%
Advanced economies2.1%1.7%2.4%2.5%2.2%1.7%
Euro area2.0%1.8%2.4%2.2%2.1%1.7%
European Union2.4%2.0%2.7%2.5%2.1%1.8%
Emerging market and developing economies4.2%4.4%4.7%4.9%5.1%5.1%
Commonwealth of Independent States-2.2%0.4%2.1%2.3%2.2%2.2%
Emerging and developing Asia6.7%6.5%6.5%6.5%6.5%6.5%
Emerging and developing Europe4.7%3.2%5.9%4.3%3.6%3.3%
Latin America and the Carribean0.1%-0.6%1.3%1.6%2.6%2.8%
Middle East and North Africa2.6%5.0%2.2%3.5%3.9%3.5%
Sub-Saharan Africa3.4%1.5%2.8%3.4%3.8%3.8%

* Source: IMF WEO July 2018

Emerging Europe
boasts lowest taxes & labor costs

Corporate tax rates

Labor cost per hour ( E ), 2017

Taxes much lower in CEE vs. developed world

States provide tax incentives & additional stimulus to attract foreign investors

While convergence has been driving income growth, wages are still far below European averages

Min wages range b/n €194 in Bulgaria and € 425 in Turkey, vs. €1,473 in Germany and €1,500 in UK

Emerging Europe
stock markets lagging behind

 
 MSCI EFM
Europe+CIS, €
30.09.2018
MSCI EFM
Europe+CIS
ex RU, €
30.09.2018
YTD-6.07%-20.18%
1Y-3.24%-16.64%
3Y,
annualized
+5.28%-2.31%
5Y,
annualized
-3.72%-6.16%
10Y,
annualized
-2.22%-3.99%

Emerging Europe
compelling valuations

P/E 2018f

P/B, mrq

Div Yld

P/E per country, ttm