Saturday, May 16, 2015

A unique and cheap buy from the ruins of Romanian Communism

It is getting more and more and difficult to find undervalued situations with decent upside potential. The continued printing of money by just about every major central bank has led to historical low  rates of return that goes back centuries in some cases. As I have said before one has to become a speculator in this type of environment if one is to get a return on ones money. However, just because we are forced to speculate and go further afield from our home country and comfort zones does not necessarily mean we cannot find decent value and special situations.

One such situation is the recent listing on London Stock Exchange of Fondul Proprietatea. FP is a closed end fund that trades on the Bucharest Stock exchange. The fund was created in 2005 as way to compensate Romanians that lost property during the previous communist regime. Victims were given shares in lieu of compensation and shares began trading on the exchange in 2011. The shares have historically traded at a discount to net asset value. The current discount is 27.61%. The fund manager is Franklin Templeton Group and has been buying back shares over time as a way to narrow the discount to NAV as shown on the most recent fund fact sheet.

The listing of Global Depository Receipts on the London Stock Exchange in late April now gives smaller investors in the US a way to participate as the fund manager continues to seek to buyback shares and lower the discount. 

I like this fund as it gives me a way to play an emerging Eastern European market at only .70 cents on the dollar. Top Hedge Fund manager Paul Singer who runs Elliott Associates has upped his firms stake in FP to 20% and said the following about the fund:

The price of Fondul Proprietatea, a closed-end fund listed on the Romanian stock  exchange, rose during the quarter, accompanied by a narrowing of its discount to net  asset value from 32% to 25%. In early July, the fund completed a significant asset disposal, generating additional cash for deployment toward share buybacks and other  distributions to shareholders. The partial return of the shares’ nominal value to each  shareholder was paid, as expected, in late July. The fund completed its third share  buyback program during the quarter and launched a larger fourth program in late  September. The fund manager also announced that a tender buyback would be considered  in order to accelerate this fourth buyback program. In addition, a resolution proposing a  fifth program was included on the agenda of a shareholders’ meeting to be held in  November.

In other developments, the fund manager recently held discussions with its  local regulator concerning modifications to current regulations necessary to permit the  secondary listing of the fund on the London Stock Exchange, which has already received  shareholder approval. Finally, a new two-year management contract for the fund manager became effective September 30, which formally incorporated a target discount to net  asset value of 15% as proposed by Elliott. 

So basically the largest shareholder has impressed upon the fund manager that they would like to see the discount brought down to the 15% range. I think this is a great 3-5 year hold that will see both increases in NAV and a shrinking of the discount via buybacks. I am placing FP in the investment portfolio. The shares trade on the LSE in US dollars and each GDR represents 50 shares in the fund. I use Interactive Brokers and had no issues getting my limit order fulfilled. 

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