limestone yearbook 2011_small
TRANSCRIPT
-
7/31/2019 Limestone Yearbook 2011_small
1/40
1
-
7/31/2019 Limestone Yearbook 2011_small
2/40
2
Printed on CyclusPrint Recycled
-
7/31/2019 Limestone Yearbook 2011_small
3/40
3
Northern StarNorthern Star is a global mul-bouque asset manager specializing in acve investment management and strategicpartnerships with clients. Established in Helsinki by a senior team of nancial industry professionals, Northern
Star is striving to become a leading internaonal investment management business with scale and instuonal
credibility. Leveraging its partnership with Limestone, Northern Star is pioneering in introducing responsible
invesng in worldwide emerging and froner markets.
Limestone Investment ManagementLimestone is a specialist Emerging European equity fund manager based in Tallinn. The company was founded in
2007 and is managed by its owners. We focus exclusively on delivering outstanding investment performance to
our clients. Our home region and investment universe, Central and Eastern Europe, is one of the most dynamic
investment markets in the world. Limestone is one of the very rst New Europe based investment managers that
integrates the concepts of socially responsible investment and sustainable development into fundamental research
process as essenal factors for long term performance and risk management.
The European SRI Transparency logo signies that the Limestone commits to provide accurate, adequate and mely informaon to enable stakeholders, inparcular consumers, to understand the Sustainable Responsible Investment (SRI) policies and pracces relang to the fund. Detailed informaon about the
European SRI Transparency Code can be found on www.eurosif.org, and informaon of the SRI policies and pracces of the Limestone SRI Fund can be found
at Limestone website. The Transparency Code are managed by Eurosif, an independent organisaon. The European SRI Transparency Logo reects the fund
managers commitment as detailed above and should not be taken as an endorsement of any parcular company, organisaon or individual
Limestone is a signatory to the United Naons Principles for
Responsible Investment (UN PRI) and European SRI Transparency Code
InteractionTransparency
KnowledgeValue
-
7/31/2019 Limestone Yearbook 2011_small
4/40
4
If there is one clear message to learn from the nancial crisis that has rocked the world for the beer part of last
four years, it is that change is needed. From the sudden understanding that borrowed welfare is not an asset butliability, to the realisaon that the sacred rangs that the enre nancial system relies upon are nothing more than
more or less educated guesses, there are signs everywhere that the current Western nancial model is not enrely
sustainable. Find-the-greater-fool in highest possible frequency has become an ever more popular game in stock
markets, places that were created to mediate capital between investors and entrepreneurs, diversifying the risks
and distribung the gains. We believe it is me to return to the very basics of invesng, to do it in a way it was
meant to be.
Limestone took up the task of introducing sustainable invesng pracces in Eastern Europe four years ago.
Meanwhile, we found a like-minded partner in Northern Star and decided to create together something truly
unique: a global mul bouque investment house with common sustainable investment framework. Northern
Star Group brings together Limestones team with experience from emerging Europe and ambious internaonal
investment professionals with their own experiences from all over the world. This creates synergy that will lead
to a all new type of investment culture with sight and focus on long term gains arising from sustainable growth,
something that will always outperform eventually.
Limestone New Europe Fund has reached three year milestone, oen considered by instuonal investors the
minimum proof of meaningful performance history. Meanwhile, Northern Star Group has launched two new funds,
dedicated to deliver the best there is from other emerging regions of the world. A concept, contrarian to the
mainstream world-view, of looking at the emerging world as a collecon of investment themes driven by long
term demographic and social shis, as opposed to a polical map of separate countries, is the underlying idea of
Globetroer Fund. Northern Star Russia was created to answer to the demand for a more sophiscated view on
Russia than presented by the usual index driven mega funds playing the ever more virtual commodies-game.
While GDP in most rich economies is sll below its level at the end of 2007, emerging economies output has
jumped by almost one h over the same period. The rich worlds woes have clearly hastened the shi in global
economic power towards the emerging markets. The long-term outlook for emerging economies remains bright,
with less debt, more growth and huge potenal to li producvity. Investment ows will follow. Northern Star was
created to accommodate that shi in a pioneering way. Building on long experience from global capital markets andgrass root level ground work pracce, Northern Star and Limestone team has something novel to oer.
We sincerely hope that this book will achieve its primary goal and convince you that it is not only possible to do
things dierently but it is also necessary in order to survive and prosper in these turbulent mes. The world is full
of opportunies.
Alvar Roosimaa
CIO, Limestone
Tomi Lngstrm
CEO, Northern Star
Dear Reader
-
7/31/2019 Limestone Yearbook 2011_small
5/40
5
Northern Star Group: Nourishing the Best of Bouque Culture
Responsible Invesng Makes Sense From Day One
Nothing Sacriced and Whole Lot Gained
Leveraging Limestones Three Year Success Track
Best Risk Management Tool for Emerging Markets
Integrated Research as Yin and Yang of Successful Invesng
Limestone New Europe Fund
Update And Outlook
Globetroer Unlocking the Undiscovered World
What Are Froner Markets?
Clear Invesng Principles: Key to Success
Investment Themes in Focus
In Russia, Governance Is Everything
Integrated Research the Only Way Forward
Country Focus: Serbia, the Last European Froner
Development and Challenges
Capital Markets and Corporate Governance
Companies in Focus
Why Governance Maers: From Invesng To Ligaon in A&D Pharma
Northern Star Group Responsible Investment Principles
Framework for ESG Evaluaon
Evaluang Corporate Governance
6
8
8
8
8
9
10
11
14
14
16
17
19
21
25
27
28
29
32
34
34
36
Contents
-
7/31/2019 Limestone Yearbook 2011_small
6/40
6
The post crisis investment community is looking for new
soluons with beer alignment of movaon between
investors and managers and more straighorward value
and risk proposion. In the boom days when funds
could pick and choose investors and assets piled up
without too much eort, these were easily overlooked
unless things went horribly wrong.
Recent investment innovaon has focused on themes
like new asset classes and allocaon techniques, new
risk and return enhancing tools, theme invesng, and
new business models. Instuons that have gained the
most from that innovaon had strong investment beliefs
which they were able to implement in a disciplined way,
oen beneng from early mover advantage.
Instuons that lost the most were vicms of theirherd insnct combined with low engagement with their
asset managers. Usually these were lacking also skills
and were embedded with poor internal governance to
enter into anything complex or risky.
The recognion is universal that even when it is obvious
that small management controlled investment teams
have higher movaon and potenal to outperform,
business risks oen outweigh that prospect. People
who are good at trading or invesng are not necessarily
good at running businesses. Growth is hard to achieve
now without building a robust infrastructure with high
quality internal controls.
Northern Star has been created to tap this opportunity
by creang a mul-bouque asset management house:
a base where talented fund managers could operate and
share resources. A ight to quality and size oen means
a ight to boring, or benchmark-hugging strategies entrepreneurs supported by instuonal infrastructure
are the soluon. By partnering up with Limestone,
Northern Star Group:Nourishing the Best of Boutique Culture
-
7/31/2019 Limestone Yearbook 2011_small
7/40
7
Northern Star got to an instant start with licensed
Luxembourg based infrastructure, and a talented team
that had been building instuonal quality service for
the last three years.
Creang something new is an opportunity to combine
all the newest and best innovaons into one. In addion
to modern business concept, Northern Star is focusing
on the integraon of two other areas of invesng that
promise to be market share winners in the coming
years: responsible invesng and emerging markets.
Non-nancial risks demand strong human judgement,
disciplined processes and high engagement with
investment targets. Mere lip service, such as having
signed a global principle, can be a good start, but
unfortunately too oen leaves everything else
unchanged within the investment process. Responsible
invesng is not so recent innovaon, but is undergoing a
transformaon to adapt to real needs by real investors.
There is sll a rather small group of asset managers and
instuonal investors who take it seriously. Ahead of
the crowd, Northern Star is being ESG implementaon
pioneer in new geographical areas and in new ways to
integrate ESG into tradional valuaon methodology.
Over the coming years, massive debt burdens will be
a drag on rich countries growth. At the other end, the
long-term outlook for emerging economies remains
bright, with less debt, more favourable demography
and huge potenal to li producvity. Invesng in
developing markets is tradionally considered to carry
a higher degree of risk, and the main reason is the
informaon problem: company specic data is notreadily available. The pricing ineciencies created by
that are an opportunity for investment managers with
analycal resources and investment infrastructure
capable to collect and process non-standardized data,
including non-nancial informaon.
Asset managers with success have oen had strong
overlay of human judgement in risk models and
investment processes. The example of Limestone
investment team being a pioneer in East Europe is
broadened up to be the core element of the whole
Northern Star group and its products and services.
Our mul-bouque business model is determined to
be decisively outward looking and more ideas seeking.
Special insights and foresight will be driven from
learning-by-doing, learning by experimentaon and
learning from others.
We may not be able to change the world, but we willseek to be beer by pung into acon such investment
beliefs which we believe to create an alignment of
interest with our long term clients and ourselves. One
such belief is having integrated ESG as unique value
driver. Northern Star products are oen classied as
high alpha seeking against indices. We believe that by
being benchmark agnosc against tradional indices
can actually lead into less risky porolios when ESG is
fully integrated into investment process.
Creating something new is anopportunity to combine all the
newest and best innovations
into one.
-
7/31/2019 Limestone Yearbook 2011_small
8/40
8
Northern Star has taken on a unique challenge to build
up an emerging markets mul-bouque plaorm with
a dedicated focus on sustainability and responsible
invesng. There are no readymade soluons towards
that goal and, as with every new thing in an established
environment with scky tradions, more threats and
immediate problems are on the visible surface than
quick wins.
Nothing Sacriced andWhole Lot GainedMainstream investment community sll views anything
that has to do with social responsibility or sustainability
with a fair share of suspicion. Being pioneers in the area,
we have had to spend considerable amount of eortto demysfy the concept of ESG research and social
responsibility in invesng. It is the one of the basic
traits of human nature, the present-bias, that needs to
be taken good care of in order for SRI to break out into
mainstream. Prevailing view of SRI invesng is that it
requires for immediate sacrices in the performance
and selecon of opportunies, for the sake of doubul
benets in the unclear future. This should not be the
case. Our minimum exclusion and integrated researchapproach adds value from day one without any
sacrices. We hope that by increasing the size of our
business we reach more investors and help turn socially
responsible invesng concept from frown upon into
smiled upon.
Leveraging Limestones Three YearSuccess TrackLimestone New Europe Socially Responsible Fund has
since 2008 served as a real life experiment. Nobody had
tried to do fundamentals driven all-cap acve invesng
in Emerging Europe with integrated environmental,
social and governance analysis before. The rst three
years have proven highly successful: funds long term
returns are at the top of CEE ex-Russia peer group
without having to compromise on our standards. The
track record has also been characterized by a constant
search for more eecve ways of assessing the extra-nancial side of companies. The approach has earned
praise from several investors, encouraging Northern
Star to strive for a group wide sustainable investment
policy development.
Best Risk Management Toolfor Emerging MarketsAll investment porolios would benet from managing
ESG risks, but it is in emerging markets where the
degree is most acute. Gathering and assessing
environmental, social and governance informaon,
and liming exposure to risks associated with extra
nancial factors signicantly reduces tail risk the
risk of unlikely events causing catastrophic damage.
The real challenge hereby is the signicant informaon
problem. This can only be tackled by building up an
inhouse research process that is capable of gathering
the necessary informaon from outside the public data
vendors services, and to integrate it into company
valuaon methodology.
Responsible InvestingMakes Sense FromDay One
-
7/31/2019 Limestone Yearbook 2011_small
9/40
9
The Yin and Yang of
Investment AnalysisA dynamic, unified relationship exists between financial and extra financial
information. Omitting either part leads to insufficient knowledge about the
company and creates exposure to unforeseen risks.
Weak financials diminish
opportunities for innovation
and sustainable development
Balanced analysis can be
achieved by evaluating both
parts. Tensions in both parts
can be creative and
constraining
Poor corporate governance
and management of
environmental and social
risks leads to fines, bad press,
loss of customers, and
valuable employees
reflected in financials.
RationalVisible
Hard Facts
Intuitive
InvisibleSoft Facts
Financial strength
Financial results
Corporate governance
Environmental and
social sustainability
Managerial strength
YIN
YANG
9
-
7/31/2019 Limestone Yearbook 2011_small
10/40
10
Limestone New Europe SRI Fund celebrated its third
anniversary in August 2010. Launched in the wake of the
worst nancial crisis in modern history a few weeks
before Lehman Brothers bankruptcy ling the fund
was the rst equity fund managed from New Europe
to incorporate sustainability factors in its investment
process. The fund has been equally successful in
pioneering in corporate social responsibility in
New Europe and producing strongly outperforming
investment returns.
The fund has a simple and straighorward purpose:
to nd the best companies with the highest upside in
New Europe, and invest investors funds in their publicly
traded stock at the best possible terms. The ulmate
goal is to outperform any compeve peer and
investable market proxy in any three year me period.
To achieve that goal the management team employs
rigorous boom up investment process, which is based
on an in-house developed research framework and
tools, including unique ESG factor integraon serving
primarily as a risk management tool.
Limestone New Europe Fund
20
40
60
80
100
120
140
July
08
Oct
08
Jan
09
April
09
July
09
Oct
09
Jan
10
April
10
July
10
Oct
10
jan
11
April
11
Limestone New Europe Fund
STOXX EU Enlarged Total Return
Source: Bloomberg
-
7/31/2019 Limestone Yearbook 2011_small
11/40
11
Looking back to last year, and reviewing year-old
forecasts, it feels like deja vu. The nal run-up to
Limestone New Europe Funds three year milestone
was again characterized by uncertainty about the
sustainability of global recovery. Plenty of one o
threats and hurdles kept popping up, like US debt ceiling
debate, earthquake in Japan and of course the Greeks
keeping the nancial markets all over the world their
hostage, threatening to blow up Eurozone. No wonder
then that external factors were heavily prevailing over
local progress reports in seng the senment for
Central and Eastern European markets.
Looking beyond the generic risk-on and risk-o market
view that dominated investment ows, New Europe has
shown surprisingly strong recovery from the crisis. From
economic to polical spectrum, all signs show healthy
restructuring and quick return to convergence path with
growth returning to long term double-the-EU-average
already in 2011. While the world was holding its breath
during most of the spring and summer over Eurozone
and US debt, news from New Europe grew constantly
more posive.
The European Council concluded that Croaa is ready to
become the 28th member of the European Union and
accession treaty should be signed during 2011, whichwill enable the country to become a full member state
in 2013. Moodys raised the credit rang of Bulgaria
from Baa3 to Baa2 with a stable outlook. The increase
is a consequence of the connuing scal discipline, the
improved instuonal stability as well as the relave
exibility of the nancial system, the report reads.
Bulgaria is eecvely running a balanced budget and
has very low levels of the public debt, something that
is quite rare these days. In addion, Moodys assessed
the public nance and the Bulgarian banking system
to remain out of the inuence of the Greek debt
crisis owing to the considerable liquidity and capital
buers. EBRD revised upward its forecast for Romanian
economic growth, saying it expects harsh austerity
measures implemented under a mullateral nancial
program will pay o. And again, EBRD also assessed
Greek inuence and concluded that Greeces seemingly
turn for the worse is unlikely to push Romanian economy
into recession. And Serbia, the last European outcast
with size, made a giant leap towards EU accession whenit caught the last missing war criminals and handed
them over to Hague court.
Update And Outlook
While the world was holding its
breath during most of the spring
and summer over Eurozone andUS debt, news from New Europe
grew constantly more positive.
-
7/31/2019 Limestone Yearbook 2011_small
12/40
12
The above selecon of news delibaretly focuses to
the Southern part of New Europe, the least liked by
investors in the crisis aermath and therefore the
most neglected. Most markets in that region trade
not much higher than at the boom of the crisis in
Spring 2009. We see it as an extraordinary investment
opportunity, something alike the second half of 2009
when the fund nearly doubled its unit price. Our strictly
fundamentals-driven porolio has throughout 2011
shied more weight to the newest members of EU and
the next two hopefuls, together oen characterized as
the periphery of Eastern Europe. This is where we
nd the cheapest companies with the most to benet
from both the short term recovery and the longer term
convergence. With careful liquidity management andrigorous boom up research we are certain that for our
porolio the fundamental risk is not signicantly higher
in the Balkans than it is in Warsaw or Prague. But the
room for future growth denitely is.
The importance of Eurozone stability for New Europe is
hard to overesmate. At the same me it is important
to understand the dierence between the direct
impact on domesc economy of CEE countries and
the potenal damage that would come from another
wave of risk aversion and renewed general percepon
downgrade, would Greek crisis escalate further. The
former is relavely moderate and the eects have
already run their course. The laer, however, is what
moves nancial markets and short term asset prices;
the risk o trade that pushed prices lower in CEE is
the direct consequence of that.
Naturally, all depends on the scale of crisis escalaon.
A real renewed economic slowdown in the Eurozone
would cause stronger decline in CEE exports and growth
in whatever other areas of the local economies will not
be able to make up for that. In addion, investments
into the CEE region largely come from the Eurozone, and
would therefore be negavely aected in such a case,
too. Even though there are indicaons of a recovery
that should shi in the coming months and years from
export-driven growth to more balanced growth, the
economic recovery will connue to rely on externalfactors from the Eurozone. While CEE countries with a
larger domesc demand base may be able to counter
some negave external eects more eciently than
Recent nancial crisis and subsequent reforms have turned New Europe into a
nancially sound and very compeve region within the borderless European Union.
In the periphery of Eastern
Europe we find the cheapestcompanies with the most to
benefit from both the short
term recovery and the longer
term convergence.
Poland
Czech Rep
Romania
Bulgaria
Hungary
Croatia
Serbia
Estonia
Slovenia
Lithuania
New europe (10)
Euro area (17)
share of...
COUNTRY, 2011E
38.2
10.5
21.5
7.4
10.0
4.3
7.3
1.3
2.0
3.1
106
332
32%
POPULATION
MN
70%
91%
44%
47%
69%
65%
40%
68%
103%
63%
66%
100%
66%
GDP (PPP)
PERCAPITA
11.5
15.9
6.8
5.6
11.5
11.6
5.0
12.3
20.0
9.7
11.0
38.6
28%
NOMINAL GDP PER
CAPITA 2012F
3.6%
2.9%
3.5%
3.5%
2.8%
1.8%
4.0%
3.7%
2.4%
3.8%
3.2%
1.8%
178%
2011F
%YOY
904
1069
472
353
880
1043
493
792
1405
614
803
2450
33%
WAGE/MONTHS
54
40
35
16
80
55
42
8
36
37
40
81
50%
PUBLICDEBT
%GDP
-3.2%
-3.8%
-4.0%
-2.1%
-3.6%
-4.8%
-3.0%
-1.8%
-5.0%
-4.5%
-3.6%
-4.0%
BUDGETDEFICIT
2012F
418
27
82
98
55
256
90
15
34
38
1113
STOCKS
118
32.7
13.4
5.0
17.7
19.2
8.7
1.3
3.2
5.5
207
6 700
3.1%
MARKETCAP
MN
WIG20
PX
BET
SOFIX
BUX
CROBEX
BELEX15
OMXT
SBITOP
OMXV
DJ STOXX
STOXX 600
MAININDEX
45%
40%
20%
25%
53%
30%
20%
30%
25%
30%
42%
79%
FREEFLOAT
-39%
-48%
-55%
-81%
-38%
-63%
-81%
-44%
-38%
-75%
-49%
-42%
RETURNFROM
07 HIGH
Source: GDP: World Bank , GDP Forecast: IMF World Economic
Outlook April 2011, Budget Decit: Eurostat
-
7/31/2019 Limestone Yearbook 2011_small
13/40
13
smaller and less diversied economies in the future,
the overall region will connue to depend on economic
trends in the Eurozone, and especially Germany. CEE will
not only mirror the chances stemming from connued
convergence but also the risks of a slowdown in growth.
Considering that New Europe is a relavely small
investment region with open economies and strong
es to Western Europe, it is unlikely to decouple from
general trends in global markets. What it oers, is a
large long term outperformance if and when European
economy recovers, with near-developed market risk
and near-emerging market growth rates. Limestone
New Europe Fund management team will connue
to do what we know best: nding the most aracve
companies in the region and construcng a unique
porolio to deliver the outperformance.
Working in equity markets from 1996 as equies trader
and porolio manager, Alvar joined Suprema Fund
Management in 2000 as a fund manager. In 2003 Alvar
started in Hansa Investment Funds where he iniated
the set up of CEE investment management team and
a porolio of funds including the Morningstar 5*
rated Hansa Eastern Europe Equity Fund. In 2007,
Alvar co-iniated the setup of Limestone Investment
Management, an independent specialist Eastern Europe
equity funds investment manager, where most of the
team from previous employer eventually followed.
He was nominated the Fund Manager of The Year inEstonia in 2005 and 2006. Alvar has a MSc in Finance
degree from London Business School.
For the rst me ever, risk of CEEMEA, as measured by CDS spreads, has dropped below Western
European level. This would suggest that convergence of asset valuaon levels should converge, too.
Source: Bloomberg
AlvarRoosimaa
HeadofEasternEuropeanEquie
s
50
100
150
200
250
300
350
Jan10
Feb10
March10
April10
May10
June10
July10
Aug10
Sept10
Oct10
Nov10
Dec10
Jan11
Feb11
March11
Apirl11
May11
June11
July11
Itraxx CEEMEA
Itraxx Western Europe
-
7/31/2019 Limestone Yearbook 2011_small
14/40
14
For those with the skill and paence to choose carefully
and a strong view on how the world will look like in the
coming years, global froner markets provide excellent
opportunies. There are many unexplored markets with
exceponal value and growth opportunies that the big
money has not found yet. Accessing these markets in
earnest requires experience and takes a lot of ground
work, research, and network building. That is what the
Globetroer fund was created to do.
What Are Froner Markets?Northern Star denes froner markets as the most
inecient emerging markets with historically low
correlaon with major global markets. Mainstream
research coverage from investment banks and brokers
does not reach these markets and that, along with
other reasons, keeps the mass of foreign investors away.
This lack of investor base overlap with global markets
systemacally creates asset mispricing and that givesremarkable opportunies for investors who are capable
of conducng a deeper research on the grass-root level
as well as assessing the so values and companys
interacon with the environment around it.
There are many, both objecve and subjecve, reasons
for the ineciencies to pop in these markets. There are
some markets that have not been found yet because
they are very new or very small and investors just
havent noced them yet. Some markets are restricted
from foreign investors, which provide opportunies for
those who have the capability to dodge the restricons.
Good examples of these are Chinese and Saudi Arabian
local markets that Globetroer has access to, thanks tothe local network created over many years of acvity
in the region. Then there are markets like Russia, and
Globetrotter Unlocking the Undiscovered World
The lack of investor base
overlap with global marketssystematically creates asset
mispricing in frontier markets.
-
7/31/2019 Limestone Yearbook 2011_small
15/40
15
Central Asian and Eastern European smaller countries
that suer from reputaonal downgrades that have
lile to do with real developments, thus oering
extraordinary opportunies for investors with deeper
local knowledge.
Selected countries in Globetroerfroner market universeQuite oen, froner markets funds base their porolio
construcon on indexes and geographical borders. This
usually means that large countries and regions have
large weights and small ones have small weights, no
maer what the outlook. Stock-wise, biggest companies
in the market that are added to indexes usually get
more aenon. In the end of the day, everybody is
doing prey much the same thing and earning the same
money because they let someone else decide where
and how much to invest.
That approach will not capture the true potenal in
froner markets. Some large countries are way too
expensive during some periods while small markets
could have tremendous potenal. But higher risk
prole that comes with big potenal makes it seem to
be safer to keep away while it really only requires morehomework. Moreover, the companies operang in
these high-potenal markets are in the beginning of or
already going through their fast growth phases where
the highest returns come from. Indexes consider
adding the companies remarkably later, long aer such
prosperous gains.
Racing the index does not necessarily make anybody
rich either. A fund can outperform a benchmark index
but sll give a negave return. Who would win in
this case? Working on ones own speed, having only
the target performance in sight will create value for
investors and increase their wealth.
Parts of the world considered froner are going through
the fast-growth-phase and large structural changes, but
not equally in all sectors and all markets. That is where
the theme-invesng comes in.
Companies operating in the
high-potential markets arein the beginning of their fast
growth phases where thehighest returns come from.
Cambodia
China
Congo, Dem Rep
Egypt, Arab Rep
Ghana
India
Indonesia
Iran, Islamic Rep
Iraq
Kazakhstan
Kenya
Kuwait
Liberia
Malaysia
Mongolia
Mozambique
Nigeria
Qatar
Saudi ArabiaUnited Arab Emirates
Vietnam
181,035
9,596,961
2,344,858
1,001,450
238,533
3,287,263
1,904,569
1,648,195
438,317
2,724,900
580,367
17,818
111,369
329,847
1,564,116
799,380
923,768
11,586
2,149,690
83,600
331,210
14.3
1,341.0
62.6
75.5
23.5
1,182.1
234.0
76.9
30,399.6
16.1
37.5
3.5
3.8
27.6
2.8
21.4
148.1
1.5
27.7
8.9
86.9
6.5
9.6
6.5
1.0
13.7
8.2
6.2
0.0
9.6
5.9
5.7
5.3
5.9
5.5
9.8
7.5
6.9
20.0
7.5
3.3
6.3
6.5
9.5
6.0
4.0
7.3
7.8
6.5
3.0
12.6
5.6
6.5
5.1
9.8
5.2
7.1
7.8
6.6
7.1
3.0
3.8
6.8
-11.4
5.7
-2.8
-2.7
-6.8
-3.7
0.9
11.7
-3.2
5.8
-9.3
39.4
-37.6
11.4
-13.3
-12.0
14.6
36.1
19.8
10.4
-4.0
8
38
84
7
12
29
47
8
77
19
33
35
20
17
13
13
31
12
5
15
44
147
79
175
94
67
134
121
129
166
59
98
74
155
21
73
126
137
50
11
40
78
690
86,000
4,007
5,083
947
63,974
5,042
8,442
2,272
15,079
2,066
429
1,849
1,908
4,787
3,505
1,378
2,347
22.8
45.2
35.2
42.8
51.5
30.1
53.7
69.5
66.4
58.5
22.2
98.4
61.5
72.2
57.5
38.4
49.8
95.8
82.1
78.1
28.8
88
19
128
21
69
66
39
31
44
29
84
10
112
6
29
142
138
11
21
7
24
Area km
Population,
mln, 2010GDP growth,
2011 est
GDP growth,
2012 est
Balance on
Current
Account, % of
GDP, 2011 est
Time required
to start a
business, days,
2010
Ease of doing
business
(1=best,
183=worst)Railways, km,
2010
Urban
population, %
of total, 2010
Mortality rate
under-5, of
1000
Source: IMF, World Bank, CIA, FAO
-
7/31/2019 Limestone Yearbook 2011_small
16/40
16
The idea of invesng themacally is to capture the
maximum growth in the selected areas of economy while
not dragging the lagging parts of it along. The strategy is
to idenfy those themes that benet rst and pick up the
future winning companies in each theme, wherever they
operate in our universe or where they are listed. That
helps achieve real diversicaon benets in the fund.
While dierent parts of the froner markets are in a
dierent phase of development, the themes to benet
are also dierent. As changes take place, the winning
themes change, so modicaons should also be done in
the porolio in order to stay ahead of the market.
The beneng themes are usually quite well protected
during the mes of market turbulence, because the
big money has not reached them yet or does not careabout them. Only smaller number of focused investors
is involved in the beginning.
Clear Invesng Principles:Key to SuccessFalling in love with companies is quite easy when doing
as much work with them as froner markets require.
Knowing them so well and seeing the opportunies
they oer could lead to buying assets that are relavelyfairly priced. To prevent that, quite straighorward
invesng principles have to be set in place.
The whole investment process of Globetroer is based
on fundamental and geopolical analysis as well as
grass root level research while also adding so values
like environmental, social and governance factors. All
the markets in froners universe are very dierent,
there are no homogenous areas. All markets have
dierent polical regimes and cultural characteriscs.
They all have dierent risks involved. Before invesng,
all these aspects must be considered and measured
accordingly. This is the one place where geographical
borders actually do maer and are reckoned with.
In Globetroer, the most important principle while
building the porolio is having at least 50 percent
upside for each theme and each company over the
next 6 to 18 months. That is clear enough to prevent
making hasty investment decisions and together with
inecient market approach, will give enough downside
CASH
LOCAL CHINA MARKET
CHINA LUXURY GOODS
FSU BANKING
EE LAGGARDS
FOOD
ASIAN NEW TIGERS
CENTRAL ASIAN COMMODITY RESERVES
CEMENT
OIL SERVICESAND EXPLORATION
AFRICAN CONSUMER
MIDDLE EAST RECOVERY
SAUDI ARABIA OPENING GATES
Investing thematically capturesthe maximum growth in the
selected areas of economy
while not dragging the laggingparts of it along.
-
7/31/2019 Limestone Yearbook 2011_small
17/40
17
protecon during dicult mes while providing an
excellent upside.
Clearly, nobody has a crystal ball in the oce. Even if
all the fundamentals support the upside principle and
inecient markets approach, the performance can turn
out to be less than expected. But it can also turn out
to be much beer. There are themes that will probably
bring some disappointment but there are some that
will go through the roof. Following the principles makes
it less probable to get stuck in themes and companies
that could probably end up being on the losers side.
In accordance with the Northern Star group wide
principles, no investment is done without thorough ESG
consideraons. Discussions of sustainability issues form
an integral part of management and analyst meengs
and play important role in assessing the long term
business prospects of most companies. In choosing its
investment themes, Globetroer prefers developments
that support local sociees and improve peoples living
condions. ESG factors are integrated to nancial
models in the calculaon of the target price. There is no
intenon to punish companies that do not disclose their
ESG pracces but rather engage with them, explain the
mutual benets, and encourage them to open up. In
froner markets, the challenge is big most companies
do not have a habit of disclosing their ESG informaon,
the reasons can be anything from cultural to the fear
of compeon or clients reacon. Among many good
causes the ESG integraon serves, it is also a vital risk
management tool against damaging event risks in an
environment where public informaon availability isunderdeveloped.
Investment Themes in FocusTo give example of some out of more than ten
investment themes in the porolio, food and cement, as
basic crucial necessies in froner markets, make good
cases. Food, one of the latest addions to Globetroer,
is a crucial issue everywhere, but especially so in the
According to Risklab research,
tail risk, the risk of unlikelyevents causing catastrophic
damage, can be reduced nearly
40 percent in an emergingmarkets portfolio that has
limited its exposure to ESG
risks.
The most important principle
is to have at least 50 percent
upside for each theme andcompany over the next 6 to 18
months.
-
7/31/2019 Limestone Yearbook 2011_small
18/40
18
Ari-Pekka is one of the most experienced froner
market investors in the Nordic investment industry.
With over 23 years of total experience in equity markets
and porolio management, he rst started invesng in
emerging markets in early 1990s. A-P has managed
funds of various size and style, including 1.5 billion euro
emerging/froner market equity porolio in Finnish
Varma. Prior to Varma, from where he le to co-found
Northern Star, A-P worked as the Head of Equies for
instuons like LGPI and SEB Private Bank Luxembourg.
AP has acted as a seed and anchor investor for numerous
emerging market funds, including the rst China A shareFund, and funds in Iraq, Iran, Vietnam and Cambodia.
Ari-Pe
kkaHilden
HeadofFronerMarketEquies
developing world, where populaon growth is strong
and urbanizaon pace rapid.
There are 925 million undernourished people in the
world, according to Food and Agriculture Organizaon
of the United Naons (FAO) esmate for this year,
with most of them, 62 percent, living Asia and Pacic,
followed by Sub-Saharan Africa with 26 percent of
worlds hungry people. Along with the very poor, very
hungry people, come the newly rich people or those
who have the benet of increasing personal income
together with the development of the broad economy.
Higher disposable income reects on the kitchen-table
quite fast products with higher quality or even more
shiny labels have high aracon factor. These people
live, addionally to the regions menoned above, also
in Middle East and Eastern Europe with the last one
having recorded the most rapid growth in per capita
consumpon of basic foods in recent years.
Approaching the companies through the eyes of
responsible invesng, we look for evidence that the
producon is clean, traceable and sustainable, that
the companies create new jobs and give their share in
improving living condions of local people or customers.They also have to preserve local environment and take
steps to reduce their negave inuence.
Cement theme has its main focus on emerging Asia and
Africa. These regions are stepping in the era of big social
and structural changes in the coming years. In China,
social housing construcon plan foresees building 36
million housing units in the next ve years, and local
cement producers are due a prosperous period.
Even bigger changes are expected in Africa where
infrastructure development is picking rapidly. Nigeria
has a housing decit of 17 million homes and poor state
of infrastructure, both which the countrys Vision 2020
plan intends to relief. Currently, Nigeria has one of the
lowest annual cement consumpons per capita in Africa
of 57 kg. That compares to South-Africas 210 kg and
Gabons 330 kg consumpon per capita. The country is
currently in cement decit that is expected to end by
2013 when only local producon will be sold. That also
means beer returns for the producers.
All of the companies we have chosen to our Cement
theme have very modern technologies and waste
management to reduce environmental eects. They
are big employers and take iniave in the local social
projects.
-
7/31/2019 Limestone Yearbook 2011_small
19/40
19
Russia, always the land of plenty and full of promise,
has yet never really fully delivered. Blame it on diculthistory or bad luck, the Russian market has retained
its reputaon of being risky and opaque. And yet, for
skilful investors, there have been periods over the last
decade when substanal outperformance could have
been extracted. Northern Star, in the search for the
right model in Russia, has turned its main aenon
to corporate governance of Russian companies, as a
natural source of much needed porolio risk reducon.
It is generally accepted that governance issues are
one of the most important factors dierenang great
companies from poor ones but also one of the biggest
hurdles that investors must overcome in Russia. A
recent study by Aton, a Russian investment bank, shows
strong relaonship between the quality of corporate
governance and company market performance. When
100 leading companies were ranked according to their
corporate governance scores weighted by market
capitalizaon, the top ten companies delivered a
growth of over 2,700 percent starng from 2002 up to
2Q 2011, and over 400 percent since 2009. Conversely,
the boom ten companies increased shareholder value
by mere 583 percent and 145 percent, respecvely.The RTS index rose 613 and 190 percent during
these periods. Stascs prove clearly that selecon
from corporate governance viewpoint makes a large
dierence in performance.
Unfortunately, there are a number of companies in
Russia that have no understanding of trust between
shareholders and companies. They are having hard
mes to comply even with the very minimum legal
requirements enforced by the exchange. Good thing is
that the regulaons are improving, slowly but surely.
For example, insider trading became criminal oence in
January 2011 and according to new reform, dividends
In Russia, Governance Is Everything
A straightforward strategy
for investors with a long term
investment horizon in Russia:concentrate on firms with solidcorporate governance
-
7/31/2019 Limestone Yearbook 2011_small
20/40
20
must be paid in 60 days instead of 6 months allowed
earlier. It is unfortunate that oen companies that
underperform in terms of governance make public
spotlights, and that creates a biased image of the whole
market.
When invesng in Russia, it is vital to know the controlling
shareholders background and their ambion with
regard to the company. Cases of speculators who wrap
up poor businesses in aracve packages in order to
make a quick sale are not uncommon. At the same me,
there are plenty of new generaon entrepreneurs truly
interested in long-term value creaon. Making a clear
disncon is crucial but denitely not an easy task.
The main obstacle to make things easier is the sll poor
informaon disclosure habit in Russia. Among the main
reasons behind that is the Russian legal and nancial
infrastructure that is sll underdeveloped. Also, tax
legislaon is decient, which makes companies afraid of
disclosing informaon as it is not clear what is allowed
and what is prohibited: anything can potenally be used
against you. And what is most important, the general
understanding of the potenal benets of improving
the image of the company is just not yet entrenched
the business-community. Old habits die hard, especially
when the top down environment in the form of rule of
law is hardly supporve.
A closer look reveals, however, that there are amazingly
many Russian companies that aspire to become a
modern company by means of governance and investor
relaons. They have moved out of the comfort zone
and working in the name of gaining foreign interest and
having an internaonal investor base. In many cases,
they just do not know how to communicate their eorts
to the public. This is where dedicated research and
engagement based analysis can make a big dierence.
Management meengs and thorough homework will
help to nd the true gems in the market.
A veteran of the Russian nancial markets, Maxim
was advising Pohjola Asset Managements OP 650m
EUR OP Russia Fund prior to joining Northern Star in
2011. During his tenure with Pohjola from 2008, OP
Fund was rmly at the top of peer group rankings.
Previously, Maxim was Director of Internaonal Equity
Sales at Deutsche Bank, Moscow. Having more than 20
years of experience in Russian and emerging market
equies from New York, London, Moscow and Helsinki,
Maxim deep knowledge of the Russian equity markets
and boasts a unique network of connecons in local
business community.
Maxim
Achkasov
HeadofRussianEquies
There are amazingly manyRussian companies that aspireto become a modern company
by means of governance and
investor relations
-
7/31/2019 Limestone Yearbook 2011_small
21/40
21
Research is the cornerstone of Limestone, and the
whole Northern Star Groups, investment process.
While necessarily eecve in its tradional fundamentalfocus, the true uniqueness in the approach lies in
the connuing development of the integraon of
environmental, social and governance (ESG) research to
fundamental valuaon.
Since the last Yearbook, we have developed further
the concept of including ESG assessment to company
valuaons and have been able to reach remarkable
results. Our approach to responsible invesng isobviously integraon, dened as an inclusion of
ESG consideraons to tradional nancial analysis.
Theorecally, integraon should belong under the broad
SRI umbrella that is regarded to lead to mainstreaming
of the process. Emerging markets are not broad based
enough to enable themac approach that is regarded
more fashionable in the developed world. Therefore,
already before the launch of Limestone New Europe
Fund, it was obvious to us that while tradional approach
provides a starng point for ESG implementaon to
fundamental analysis, it did not oer any readymade
soluons.
In previous Yearbooks we have described the grading
mechanism that is implemented in calculaon of cost of
capital, which has been developed in order to providedisnct tools for our research analysts for uniform
assessment of ESG factors. In addion to in-house
work, we have been communicang our message and
have become even more visible in the SRI community.
Our presentaons in several high prole responsible
investment conferences and investor events have
received a lot of posive feedback. It is understandable
that our structured and scalable soluon to integraon
raises widespread interest among industry professionals
Integrated Research the Only Way Forward
Development opportunities
in this field are endless,providing further prospects
for streamlining of the
methods and practices we usein investment decisions that
take into consideration ESGaspects.
-
7/31/2019 Limestone Yearbook 2011_small
22/40
22
who have mostly seen and been sold tradional rangs-
based qualitave assessment methodology that has
lile to do with investment analysis.
Our methodology in the nutshell is the following: an
ESG matrix is developed, where the analyst can rate
each company by these three factors that combined
will create an overall ESG score of the company. To
make the building blocks simple, a rang score from
1-5 is applied, where the score of 3 will not ignite any
changes to the cost of equity and each notch below or
above respecvely adds or subtracts basis points from
cost of equity. In the selected scale of adjustment, the
cost of equity can vary by 240 bps on scores from oneto ve. Screening of the investment universe and fund
porolio at one point indicated that the average score in
the universe was 2.85 and that of the porolio was 3.9.
Therefore, although 3 dierent analysts were granng
the grades independently, the average company in the
universe was graded slightly below average, and the
fund porolio constuents were doing signicantly
beer. Altogether, the grades give a snapshot of the
management quality and awareness of environmental
and social issues, as there cant be perfect environmental
management and a total disregard of social issues
within one company.
Having built that assessment mechanism, without
addional tools, every individual result would depend
only on single analysts subjecve view, which would
not ensure the comparability of results that is needed
for porolio construcon purposes. Thus, although
the analyst responsible for assessing companies knows
more than anybody else on the subject and is most
qualied for granng the grades, supporng tools for
reaching a certain degree of uniformity in nal grades
are required.
For building the tools, the starng point would be the
assessment of informaon, analycal equipment and
concepts that we had at hand. One of the key building
blocks we derive from screening of the investment
universe is sector based risk level assessment. Obviously,
oil companies have higher environmental risk thanbanks, whereas social risk is higher in construcon
and retail than in technology, for example. Therefore,
mapping of risk on Environmental and Social scale
for each company in the universe serves as the core
concept in construcon of risk assessment tools.
There are better and worse
companies in the investmentuniverse and their respective
risk levels are taken into
account in assignment of
target price through cost ofequity calculation.
Tourism & Leisure
IT ServicesMedia
Telco Finance
Real Estate
Construction
SocialRisk
LOW
HIGH LOWEnvironmental Risk
Automotive
Retail
Pharma
FoodUtilities
Oil & Gas
Metals & Mining
Source: Limestone
-
7/31/2019 Limestone Yearbook 2011_small
23/40
23
The risk prole of dierent sectorsPosion of sectors in Environmental and Social scale
is arbitrary and in real life the dierences between
risk levels are narrower than can be deducted from
the graph above. Inherent company risk level provides
only the rst step for assigning ESG grades andadjustment to cost of equity. When the starng point,
or base risk as we call it, is set, the risk evaluaon will
be adjusted. Informaon required for evaluaon is
gathered by sector analysts that have the widest set of
informaon available and are therefore most qualied
for such task. Quality of governance and approach of
execuve management towards ESG issues are the
prevailing criteria aecng all relevant metrics. In
addion to implementaon of relevant policies and
availability of documentaon on governance, social
and environmental aspects are analysed. In addion,
community support, stakeholder relaons and charity
work are also taken into consideraon. Descripon of
the methodology is depicted on the following graph:
In New Europe and emerging markets in general the key
risk factor is management quality or governance in more
broad terms. Therefore, assessment of management
quality is the decisive factor behind ESG risk assessment
in every step and analysts will pay signicant aenon
to it throughout the process. It is the dominant factor
and in every step of evaluaon governance is the silver
lining that at the end will be decisive. The base risk
can move to both posive and negave side, meaning
that e.g. inially low risk prole of nancial companies
can also be downgraded, i.e. the risk level can also be
increased from the base level when our analyst has proof
that e.g. social aspects of the business are disregarded
or there is evidence of inferior management quality.
Also here governance is decisive. For adjustment of
risk level, based on addional informaon gathered
and processed by analysts, we introduced a descripve
tool Risk Adjustment Levers or RAL, as illustrated on the
picture below.
Risk Based Grade
Environmental Risk
Social Risk
Risk Based Grade Modified Grade Cost of Equity
Factors In-House
Research
Environmental RiskHIGH LOW
HIGH LOW
HIGH LOW
GOVERNANCESocial Risk
Management Quality
23
-
7/31/2019 Limestone Yearbook 2011_small
24/40
24
Rein is heading the research process at Limestone and
Northern Star Group. Before co-founding Limestone in
2007, Rein run the research team in Hansa Investment
Management, the largest investment manager in
the Balc region, and managed Hansa Central Asia
Equity Fund, the rst dedicated UCITS fund invesng
in the region. Started as an equity analyst at Suprema
Securies in 1997, Rein later held the posions of Senior
Analyst, Associate Director and Director unl 2006. He
parcipated in a number of landmark M&A deals and
IPOs in the Balc region with main responsibility areas
of valuaon and structuring. Rein is a CFA Charterholderand holds MSc in Economics and Business Administraon
degree from University of Tartu.ReinO
javere,CFA
HeadofResearch
Risk Adjustment LeversThe underlying principle in RAL is that every company
is put on respecve scale from environmental and
social perspecve, based on a pre-assessed sector risk.
Separate issue is managment quality that is given its
respecve posion on the weak-versus-strong scale.Unlike environmental and social evaluaon, there is no
pre-set base, and evaluaon is already based on available
detailed informaon, not just sector risk. So, the levers
are moved towards posive or negave side of the axes
according of the results of research. Final posion of
the company on these three measures will serve as the
foundaon in assigning of grades and adjustment to
cost of equity. Accordingly, posion at the high risk area
by environmental and social risk indicates grades 1-2 on
our ESG matrics for these items, 3 is average and 4 and
5 indicate already superior performance and lowering
risk posion. Praccal applicaon has proven that
we have very few companies with grades in extreme
posions like 1 or 5.
In essence, each companys starng posion is
determined by the industry risk prole, and then the
analyst starts to look for juscaons for moving the
levers in either way, preferrably towards lower risk.
It is not uncommon that companies will be given the
nal grade that is less than their starng posion.
This happens when we have proof of irresponsible
development, e.g. there might be labour relaons
issues in certain telecom companies that usually should
be of low risk, or predatory lending pracces in banks
that by default have low sector ESG risk. That will lead
to increase in cost of capital and lower fair value target.
Through adaptaon of risk adjustment levers we have
provided our investment team an addional tool to
beer grasp risk proles of the companies and to
further enhance the integraon of ESG principles into
nancial modelling and investment decisionmaking.
However, the road does not stop here and we expect
the work on research process to connue. The goal
is to get the environmental, social and governance
research completely out from the so values closet
and make them a natural and fully accepted part of
everyday decisionmaking. Now, with the Limestone
New Europe SRI Fund having 3 years of excellent track
record to present, we have even more condence in therighteousness of our path.
There is no doubt in our minds
that ESG integration is really
the only way forward.
-
7/31/2019 Limestone Yearbook 2011_small
25/40
25
Serbia
-
7/31/2019 Limestone Yearbook 2011_small
26/40
26
Republic of Serbia is a landlocked country in the
south-eastern Europe, covering the southern part
of the Carpathian basin. Serbia has borders with
seven countries: Bosnia & Herzegovina, Croaa and
Montenegro to the west, Kosovo and Macedonia to the
south, Bulgaria and Romania to the east and Hungary to
the north. Covered with rich ferle plains in the north,
limestone ranges and basins in the east, and ancient
mountains and hills in the south-east, the total territory
of 77,474 square kilometres ranks Serbia the 117th in
the world.
Serbia oers a range of natural minerals. As of
January 2010, it has proved reserves of oil and gas
of 78 million barrels and 50 billion cubic meters,
respecvely. Addionally, the surface holds coal, iron
ore, copper, zinc, gold and silver reservoirs, to name a
few. Agricultural products such as wheat, maize, sugar
beets, sunower, raspberries, beef, pork and milk are
produced.
The capital of Serbia, Belgrade, has a populaon of
close to 1.5 million out of 7.3 million in the country.
Serbian naonal identy began emerging in the 8th
century, with the ruling of prince Vieslav. The countrys
territories expanded unl being defeated by the Turks
in 1389. In the next century, Ooman Empire exerted
complete control over all Serb lands for nearly 4
centuries. Serbia formally gained independence in
1878 at the Congress of Berlin which was regained in
2006 aer a number of polical and military struggles.
In 2009, Serbia submied its applicaon for European
Union membership.
Country Focus: Serbia, the Last European Frontier
-
7/31/2019 Limestone Yearbook 2011_small
27/40
27
Development and ChallengesFollowing the democrac changes in 2000, Serbian
economy witnessed relavely high annual economic
growth rates of 5.7 percent on average from 2000 to
2008. The average growth in Western Balkan region was
5 percent. That supported one of the highest levels offoreign direct investment inows in Serbia during that
period. Due to severe impact of the nancial crisis,
the Serbian market has been largely abandoned by
internaonal investors in the past three years. Together
with the posive signs of recovery, interest is, though,
returning.
The biggest challenges for the Serbian transion
process for becoming an open-market economy and
a modern European state seem to be behind by now.
The painful and violent break up process of Yugoslavia
in 90s, climaxed by extensive NATO bombing of Serbia
in 1999, set the country lagging its regional peers. Over
the last few years Serbia has made great eorts to shrug
o the legacy of that unfortunate period, including the
much publicized catching and extrading alleged war
criminals.
The business infrastructure modernizaon is sll in
early stages. Governance regulaons and enterprise
restructuring laws, and compeon policies are already
recognized at the highest levels as the important pillars
of sustainable future growth. World Bank in its report
has praised Serbia for some reform achievements
as already having very posive eect on the private
businesses operang environment. Last building blocks
soon to be put in place, not least because the promise
of eventual EU membership, we share the opinion that
Serbia will be one of the greatest European success
stories in the coming years.
In the Ease of doing business business climate
rankings from IMF, Serbia sll ranked just 89th of 183
in the world (Poland at 70, Croaa at 84, Greece at 109,
and Russia at 123) in 2010. Companies operang in the
country have brought up issues of polical instability,
pracces of informal sector and limited access to
nance. Dedicated eorts to tackle the issues hindering
a beer ranking were started in 2009 and are at their
nal stages of implementaon.
Another tool to strengthen and accelerate the
transion is the EU integraon process. It provides a
unique incenve for polical and economic reform and
aims to bring the country up to European standards in
all areas covered by EU treaes. Following free travel
arrangements from 2010, accession talks have begunin 2011 and an ocial opinion regarding Serbias
membership is expected by 2012. Based on our hands
on experience from the region, this kind of run up
Nominal GDP (EUR bn)
Real GDP (% YoY)
Industrial production (% YoY)
Unemployment rate
CPI, year end (%)
Monthly average gross wages (EUR)
Gross nominal wages (% YoY)
Foreign direct investment (% of GDP)
Budget balance (% of GDP)
Public debt (% of GDP)
Trade balance (% of GDP)
10-year interest rate (avg)
20.4
5.6
0.7
20.8
171.0
307.7
24.1
5.9
0.7
-20.3
5.6
2005
23.6
5.2
4.7
20.9
6.0
377.2
24.4
14.4
-1.5
-20.5
5.5
2006
29.1
6.9
3.7
9.7
11.0
484.4
22.0
8.6
-1.9
31.0
-22.8
5.6
2007
33.4
5.5
4.5
13.7
8.6
561.1
17.9
6.0
-2.6
27.0
-22.6
6.4
2008
30.0
-3.1
-12.1
16.1
6.6
470.3
8.8
4.7
-4.3
34.0
-17.0
5.7
2009
29.5
1.8
2.9
19.2
10.3
460.5
7.5
3.4
-4.5
43.0
-16.2
3.9
2010
34.3
3.0
4.8
19.0
8.5
502.4
8.0
4.0
-4.1
42.0
-15.6
5.5
2011F
36.4
3.8
6.0
18.5
5.7
532.0
9.0
7.0
-3.5
43.0
-15.4
5.5
2012F
Source: Erste, Raieisen, IMF
-
7/31/2019 Limestone Yearbook 2011_small
28/40
28
period to EU membership could be very rewarding for
investors willing to take on some liquidity risk.
Capital Markets andCorporate GovernanceBelgrade stock exchange is considered one of the oldest
exchanges in Europe, having been founded in 1894
to promote, facilitate and regulate trading in various
commodies. In the beginning of 20th century, the most
wanted and stable securies listed on the exchange
were government securies. The rule to observe was if
you want to eat well, invest in shares. But if you want to
sleep well, invest in government bonds, according to
the exchanges homepage. In 1953 the stock exchange
was closed to be reborn again in 1989 as Yugoslav
Capital Market that changed its name to Belgrade Stock
Exchange three years later. The BELEX trading system
was launched in 2001.
There is a corporate governance code in place for listed
companies or others who wish to get acquainted with
and implement corporate governance principles. It
depicts a set of rules and principles expressed through
recommendaons which should be implemented.
The code was adopted in 2008. On stock markets
home page, there is Corporate Governance Scorecard
introduced for companies to ll and evaluate theircorporate governance pracces on dierent aspects
of the issue. That helps them improve their knowledge
about corporate governance factors and also see where
their eorts are sll lacking.
Corporate social responsibility (CSR) approach is
relavely new to Serbia. Although awareness of this
exists, it is mostly on the level of concept-formaon
rather than on the level of locally realized pracce. Yet
it does not encompass all of the companies.
In order to promote the emerging interest in CSR in
Serbia, many projects have been put together. In 2004,
Responsible Business Iniave was introduced and in
2008, Business Leaders Forum was established. While
the rst one was founded to inspire, instuonalize
and put into pracce the concept of corporate social
responsibility, the forum actually gathers Serbias
socially responsible companies to one network. These
companies have a shared goal of promong CSR and
operang in a sustainable way to benet the interests
of the whole community. On one hand, the forum is
designed to encourage Serbian companies and their
employees to contribute to social and environmental
causes as part of their everyday operaons. On the
other side, it also has a task of connecng business
leaders to government representaves to idenfy social
and economic problems and nd appropriate soluons.
Its a start.
We have met many managersduring our company meetings
in Serbia who are very wellaware of the values of CSR
and are pursuing the practices
in their companies for all the
right reasons.
Serbia is the last country
in Europe with critical scalefor financial investors to go
through the accession process.
-
7/31/2019 Limestone Yearbook 2011_small
29/40
29
Companies in FocusTigarA company established in 1935 in the southern Serbian
town of Pirot, has transformed itself from the simple
car re manufacturer for the enre Yugoslavia into
world class rubber footwear and technical rubber
specialist. Being historically the largest producer of car
res, the management realised in the early stage that
in highly compeve internaonal environment with
ever expanding R&D budgets of major competors,
there is no place for a small independent re producer.
Therefore, more than 10 years ago the Company started
to look for strategic partner and in 2001 Tigar formed
a joint-venture with Michelin that was nancially
supported by EBRD and IFC. By 2009 the Company
exited the re business and focused on producon of
rubber footwear and technical rubber products.
With an investment of over 23 million Euros in
development, reengineering and upgrading of
manufacturing facilies, the company has created a
compact and well-equipped industrial complex, Tigar 3,
which enjoys a surface area of some 22 hectares, and
encompasses cung-edge industrial capacies in one
of the regions largest industrial zones. Tigar operates
now in aracve sector, as market share of rubber
boots on global scale is increasing, as leather boots are
signicantly more expensive. Also compeve situaon
is favourable, as there is only one competor le in
Europe and there is some compeon from China.
During the years Tigar has acquired several brands
and has developed its own brands and introduced
specialised footwear retail chain in Serbia. Overall, the
revenues from rubber footwear sales are expected to
more than double in 2011.
Tigar also owns and operates the only naonal chain
of car service staons and distributes res, baeries
and motor oils in Serbia. This forms a unique asset withhigh potenal for disposal to strategic investors that are
expanding their operaons in the CEE region, where
-
7/31/2019 Limestone Yearbook 2011_small
30/40
30
Serbia is the natural next market to enter. In addion to
excellent compeve posion, the Serbian market will
also witness high growth, as only from 2011 all cars are
obliged to use winter res.
Tigar has made good progress in the eld of CSR. It
has implemented ISO and OHSAS cercates, as well
as established modern, highly ecient producon
facilies with low level of energy use and minimum
waste. In 2010 the Company commissioned the plant
for producon of recycled-rubber products. Corporate
Governance pracces are of high standard, developed
in cooperaon with IFC, and they are exceeding the
requirements of local stock exchange. Tigar is also
considered to have one of the most professional investor
relaon services in Serbia, which Limestone team has
experienced several mes in company meengs during
our trips to Serbia.
AIK BankaFounded in 1976 as the internal bank for the Agro-
industrial Combine of Nis, AiK Banka has emerged
into one of the leading wholesale banks in Serbia. AIK
Banka obtained the license from the Naonal Bank of
Yugoslavia in August 1993 and was restructured as a
joint-stock company in June 1995. From October 2005
company`s shares are listed on the Belgrade Stock
Exchange and in September 2006, Greeces ATE Bank
became the major shareholder in the Bank by acquiring
20 percent stake. Current network of 66 branches
enables AIK Banka to be present in all important regions
of the country. As a typical wholesale bank, AIK provides
various banking services across all main business
segments. Its retail banking services include various
accounts, credits, and deposits while corporate banking
oers short term credit, credits for both export nancing
and development nancing, as well as corporate
deposing products. Great variety of payment cards,
safe-deposing, money transfer, and electronic banking
services are also on the oer. The bank has also built a
reputaon of a strong dealer-broker company on local
capital markets. Among other Serbian banks, AIK Banka
especially dierenates from the rest of the group by
its exceponal capitalizaon level with CAR above 30%,
together with excellent operaonal eciency: cost to
income rao is well below 30%.
Such a strong market posion combined with
remarkable development potenal of the country itself,
adds further responsibilty for AIK Banka in order to
step up as a pioneer in shaping sustainable values in
local society. Although there is a long way to go, the
awareness is there, as Limestone team concluded aer
meeng the newly appointed Chairman in Belgrade
in spring 2011. Strength of the capital base, massiveearnings potenal and extremely low valuaon make
AIK an exellent case for any investor who is looking to
get exposure to Serbian development.
EnergoprojektEnergoprojekt is the largest engineering and
construcon group in Serbia. Through its network
of regional branches, subsidiaries, joint ventures
and other corporate enes, Energoprojekt controlsprojects in 24 countries across four connents. From
the Yugoslav days, Energoprojekt has retained its
posion as one of the major design, engineering and
construcon companies in the South-eastern Europe.
With a solid reputaon, and revenues of approximately
200 million per annum and annual contracts in excess
of 400 million, Energoprojekt presents a very good
plaorm for regional expansion. The investments in
infrastructure and energy projects in Serbia and South-
Eastern Europe are expected to exceed 3bn over the
next several years, from which the company will get its
fair share. From July, 2007, Energoprojekt is listed on
-
7/31/2019 Limestone Yearbook 2011_small
31/40
31
the A List of Belgrade Stock Exchange, which contains
only three other companies.
The vision of Energoprojekt, as stated by the company,
is to be one of the internaonal leaders in the elds of
engineering, construcon, and project management,
so that the investors, partners and clients will perceive
them as an integral part of their own success, sased
employees, shareholders, and sharing the responsibility
towards the society as a whole. The Company is
regarded as one of the best employers in Serbia and
has outstanding reputaon in this eld, as knowledge
and experience of employees are the factors that give
Energoprojekt decisive compeve edge. Operaons
in a number of countries on several connents require
top scale quality control and adherence of strict
environmental regulaons. Therefore, the Company
has adopted the ISO quality management system.
Energoprojekt supports the objecves and the ten
principles of the Global Compact and has formally
joined The UN Global Compact Iniave. The Power
Engineering magazine, in December 2010, declared the
project HPP Tekeze in Ethiopia, depicted on the above
picture, as the project of the year in the category of
sustainable projects.
-
7/31/2019 Limestone Yearbook 2011_small
32/40
32
A&D Pharma (ADPH) is the leading pharmaceucals
distribuon and retail company in Romania, listed on
London AIM in Global Depositary Receipt format from
2006, when sole owner raised more than 100 million
EUR through secondary public oering, which brought
in no new capital for ADPH. One GDR was priced and
sold for 12 EUR.
The company, inially struggling with operaonal
and management issues, went through a complete
turnaround in 20072009 when new management was
installed, costs structure and operaons restructured,
and strategy renewed. Results were becoming evident
by mid 2009 and success of the restructuring clear in
2010.
Limestone team had been following the company
since the lisng and conducted several meengs with
the management over the years. We always believed
that the company should be able to capitalise on their
unique market posion, but were not convinced unl
managerial capacity was boosted. In 1H10 report, sales
were up 30% over last year, and net prot was 17.5mEUR for the period, represenng 80% of consensus full
year 2010 esmates.
Minority SqueezeADPH was always considered as an obvious takeover
target, and with nancial success the potenal to aract
strategic interest obviously increased. The majorityowners, allegedly approached by interested pares,
become too greedy to share the success with public
shareholders and designed a scheme towards the end
of 2010 how to squeeze out GDR holders and take over
the company. The plan was revealed at Christmas me
2010, and was carried through by February 2011.
Limestone was one of the iniators of minority
shareholder revolt against the buyback and was among
the applicants in legal proceedings against the majority
shareholder in Dutch court.
Why Governance Matters:From Investing To Litigation in A&D Pharma
There were two main shortcomings from the
investors side in this case, which made it easy for the
management and majority holder to take control.
First, the lax legal environment of London AIM
market, which gives the Depositary Receipt holders
no protecon usually enjoyed by the stockholders.
Second, companys board members, except for one,turned out to be not independent and in fact quite
directly ed to majority shareholder.
-
7/31/2019 Limestone Yearbook 2011_small
33/40
33
December 17 2010
Public announcement:
December 21 2010
Final Applicants:
Limestone
Kairos
BankInvest
Henderson
T.Rowe Price
East Capital
SEB
Lupus
et al
Legal Councel:
Baker & McKenzie
A&D Pharma Holdings N.V
Proposed Delisng of GDRs and Terminaon of Depositary Agreements
Proposed Purchase of GDRs and Reducon of Share Capital Announcemen of Board Changes
From owners of 65% of GDRs / 24% of the Company:
1. Leer to the Board of Directors of A&D Pharma Holdings N.V.
2. Leer to the Cibank (holder and issuer of the GDRs)
3. Enquiries with Banks financing A&D Pharma, indirectly also the buyback
4. Enquiries with global industry peers to search for alternave offer
5. Enquiries with London stock Exchange
6. Applicaon to Dutch Courts Commerce Chamber
Responses:
1. Company claimed that liquidity on AIM is low, lisng is costly and it is me consuming to
market the company for public investors
2. Ci referred to prospectus small print
3. Banks were unwilling to take any stance without court decision
4. Stock exchange: formal rules are not violated
5. Court referred to prospectus small print where risk of delisng is always menoned, and
that no exisng law is broken
Shareholders meeng on January 31, 2011 decided to delist the company, end the GDR
agreement with Ci , and provide liquidity facility for the investors @4.50 EUR/GDR.
Thus, the majority shareholder used 45m company money to buy back shares it sold 5 years
earlier for 120m for its own benefit. The company, valued @150m at the buyout is worthsignificantly more when sold to strategic investor.
Dear fellow investors,
Limestone is 100% commited to fight the delisng, even if for the
principle; their acons is cynical, ugly and a grand violaon of all the
ethical standards we stand for.
As it is clear from INGs preliminary study, straight forward legal means
are scarce. We lack previous experience in such cases but the first
opon coming to mind is approaching the banks that, according to the
announcement, have veto power. Could any of you who has beer
access to experienced legal counseling, come up with addional ideas?
Looking forward to fruiul discussion and producve acon.
Kind regards
Alvar Roosimaa
Fund Manager
Limestone Investment Management
33
-
7/31/2019 Limestone Yearbook 2011_small
34/40
34
As an integral part of its duciary duty towards its
clients, Northern Star (NS) integrates environmental,
social and governance (ESG) issues into research,
ownership and engagement policies and procedures.
NS engages with companies or funds in which it invests,
or is considering for investment, with regard to their
ESG risk management policies, strategies, performance,
disclosure and management capabilies.
Proxy vong is an important engagement tool through
which we not only seek to protect our investment value
when it may be at risk, but also acknowledge good
corporate governance of the companies where we are
shareholders. Consequently, NS employs proxy vong
primarily together with engagement to support and
sustain engagement results.
Framework for ESG EvaluaonEvaluaon of the ESG factors at NS starts with assessing
the quality of corporate governance. We believe that
good corporate governance is a fundamental element
for ensuring that the management of a company either
has the understanding of material ESG challenges or
possesses the willingness to explore and manage the
risks the organizaon faces from environmental and
social factors.
In order to examine ESG performance of companies,
our analysts are evaluang all three factors separately
using their professional skills and tools provided bythe company, supported by internally created cheat
sheets for sectors and regions. The laer should ensure
that the evaluaon process is standardized enough to
make the results comparable across companies, sectors
and markets. Inial informaon gathering for analysis
is conducted using public sources, such as company
websites, reports, media and info vendors. If public
sources provide inadequate amount of informaon,
the analysts are expected to engage the company
directly for more informaon and address unanswered
quesons during company meengs.
Northern Star Group Responsible Investment Principles
-
7/31/2019 Limestone Yearbook 2011_small
35/40
35
Lack of public information/need for clarification
Company meeting/correspondenceto address:
- ESG issues
- Management quality
- Profitability
- Strategic development etc.
Information analysisIntegration of ESG factors to financial models
Target price assignment
Discussion at investment Committe
Engagement and Proxy Voting
Investment Desicion
No investment/
Further analysis
Inclusion into
portfolio
All info publicly available
Investment Idea selection based on
investment potential and good governance
Evaluation of Environmental and Social Factors using publik sourcesUsing internial cheat sheets for sector and region specific ESG issues
Integral Elements of Responsible Investment at NS Group:
Investment Potential and Good Governance
Responsible Investment Methodology
35
-
7/31/2019 Limestone Yearbook 2011_small
36/40
36
Corporate Governance PrinciplesThe Global Principles of Accountable Corporate
Governance create a framework by which Northern Star
(NS) executes its proxy vong. In addion, the Principles
provide a foundaon for supporng our corporate
engagement and governance iniaves to achieve long-
term sustainable risk adjusted returns.
Corporate objecveThe overriding objecve of the corporaon should be
to opmize the returns to its shareholders over me.
Where other consideraons aect this objecve, they
should be clearly stated and disclosed. To achieve this
objecve, the corporaon should endeavour to ensure
the long-term viability of its business, and to manage its
relaonships with stakeholders eecvely.
Disclosure and transparencyCorporaon should disclose accurate, adequate and
mely informaon, in parcular meeng market
guidelines where they exist, so as to allow investors
to make informed decisions about the acquision,
ownership obligaons and rights, and sale of shares.
Vong rightsThe exercise of ownership rights by all shareowners
should be facilitated, including giving shareowners
reasonable noce of all maers in respect of which
shareowners are required to or may take acon in
the exercise of vong rights. Boards should treat all
corporaons shareowners equitably and should ensure
that the rights of all investors, including minority and
foreign shareowners, are protected. Corporaons
ordinary shares should feature one vote for each
share. Corporaons should act to ensure the owners
rights to vote. Divergence from a one-share, one-
vote standard which gives certain shareowners power
disproporonate to their equity ownership should be
both disclosed and jused.
AuditAnnual audits of the nancial statements carried
out on behalf of shareowners should be required for
all corporaons. The audit should be carried out by
independent, external auditors who should be proposed
by or with the assistance of