A: That’s an important point and a good question. If we have a really great story in the market and we definitely want to take a position, we may decide to invest in a basket of companies with smaller weightings to mitigate the risk of incompatible or incomplete financial statements. We normally look at the debt situation and cash flows for such companies. We know that there might be a risk for the companies in the countries that aren’t close enough to Western European standards, so we create baskets in different industrial areas to reduce portfolio risk. If we identify eight companies in a sector, even if one or two of them go bankrupt, you can live with that because, at the other end, companies can quadruple or more with growth of 600% - 700%. We have companies that have closed due to bankruptcy, but that has not particularly hurt us because of the minimal exposure.

If we like a certain small-cap stock, even one with only a 100 million euro market cap, which reports according to local accounting standards, we would maintain extremely close contact with company management. That means frequent conference calls, visits, and “bugging” the management often.

Q:  Do you find the management meetings in those countries useful?

A: Yes, and sometimes we have very interesting discussions where we almost act as unofficial consultants. For example, we own shares in a company which finances investments only with cash. We gave them a primer on the use of debt to provide opportunity for external growth. These conversations are very different from traditional management meetings, where you meet experienced people and it’s hard to get any information. So we find the meetings with smaller companies extremely helpful for both sides. They are very rewarding as opposed to talking with the CEO of a major automobile manufacturer, for example, who has several hundred meetings a year and is “coached” by a professional investment relations department.

Q:  How do you manage the fund in terms of portfolio construction?

A: We invest only in listed companies. Currently we have around 60 companies that trade in 10 or 11 markets. The bulk of the portfolio is in ADRs but in the less developed markets, you have no chance to find an ADR, so you have to look for listings in the local market.

Our portfolio structure is stable, not too risky, and doesn’t ignore any large caps. That’s why we research large stocks, but not with the same intensity as the smaller ones. We concentrate the bulk of our research efforts on small companies to discover them before the market does. They are an important part of our portfolio, representing about 20% to 25% of our ideas and positioning. Although each company is a small part of our portfolio, as a whole they contribute immensely to the fund’s performance and diversification.

Q:  What is your view on the specific risks in the region?

A: The major risks are mostly political. At the end of this convergence process, you have winners and losers in the population, which can lead to a radical change in the political landscape. That doesn’t mean that there will be riots on the streets, but there are risks for fiscal stability and monetary policy coming from the political side.

Nationalist parties that highlight the risks of convergence are becoming more popular in the region, as some have not benefited from the EU accession. That’s something that I had not expected, at least not this early. On the other hand, young people are extremely optimistic. They believe that we are in a completely new decade and do not have the concerns of their parents. The political shift is the main risk at the moment, although it doesn’t mean leaving the EU, but it may mean shifting the focus away from meeting EU requirements, and that will affect the markets. Right now, the outlook for GDP growth is quite bright, with the exception of Hungary, so market participants are neglecting political changes and uncertainties.