Expat Capital is a Sofia-based asset management company that offers investors a family of unique ETFs based on the major CEE local equity indices.
Specifically, the firm runs ETFs based on the leading country indices in: Poland; Bulgaria; Slovakia; Slovenia; the Czech Republic; Greece; Macedonia; Croatia, Serbia; Hungary and Romania.
Zhasmina Ivanova, Portfolio Manager with Expat Capital, explains that the firm’s core business is managing assets for clients from 50 countries worldwide and investing in a wide range of financial instruments.
“Two years ago, when we were going over the universe of financial instruments, we realised that the CEE region was under-covered and decided we could start creating ETFs so that international investors could construct a portfolio according to their diversification needs and requirements,” she says.
The ETFs are traded on the Frankfurt Stock Exchange and the ETF following the major index in Sofia, Expat Bulgaria SOFIX UCITS ETF, is also listed on the London Stock Exchange.
“It’s been a long journey because the region has its eccentricities with multiple exchanges, currencies, languages and settlement systems,” Ivanova says. “You have to know how to deal with all these issues. We now have that infrastructure and are well-positioned in the region, but that didn’t happen in a day. It’s been a steep learning curve. High entry barriers to these markets and a variety of technical issues keep major ETF providers at bay.”
Institutional investors wishing to invest in the Expat CEE ETF range can invest directly on the primary market, subscribing or redeeming through the fund manager or through authorised participants (AP).
“This gives them the opportunity to invest large amounts of money without worrying whether there will be enough quotes in the secondary markets,” Ivanova says. “It provides better and deeper liquidity so that they don’t have to worry about investing or divesting quickly if need be.”
With direct access to the primary market possible, what matters for investors is the size of the underlying market, and not the size of the open-ended fund itself. The index market capitalisation of the underlying markets ranges from EUR2 billion to EUR80 billion. This allows Expat’s ETFs to easily absorb subscription and redemption orders in millions of Euros at any moment in time, Ivanova says.
Another innovation Expat Capital brought in is the ability of institutional investors to settle primary market orders in cash rather than through a basket of securities, without a surcharge for the choice of subscribing or redeeming in cash. This is important for markets where not many investors have direct access and can trade and keep the underlying securities required for the index basket, Ivanova explains.
“When we started our first ETF, we also had our worries what would happen if we had a massive investment of a few million euro and it happened two months after we launched the SOFIX index ETF,” Ivanova says.
Liquidity was an initial concern because the market capitalisation of the exchange in Sofia, even now, is EUR1.7 billion, which makes it smaller than the others.
A subscription order came in for EUR 10 million in a single day.
“We realised that this is quite possible and managed to do it without creating a bubble because in frontier markets there are a lot of investors who are not actively participating in the stock exchange on a daily basis,” Ivanova explains.
“They trade when they see something going on, such as our ETF, they quickly jump in and provide that liquidity. They sold their underlying index equities and some of them bought the ETF, and when we needed to buy any constituents of the index we could do this because those people were open to that. We were also able to easily rebalance the ETF with adjustments in the index on several occasions, which required the sale of exiting constituents and the purchase of the new entrants, each position worth a few million euro, within a single day.”
This hidden liquidity responds to what Ivanova calls a ‘wake-up’ call, which energises local retail and other investors.
The Expat ETF range is open to institutional and retail investors who want access to the Central and Eastern European markets, with expected 2018 GDP growth of 4 per cent as opposed to Germany, for instance, with 2.5 per cent, according to the IMF estimates.
“The market cap of the index in Bulgaria was up 40 per cent for the first 12 months after the ETF launch and the average daily volume tripled,” Ivanova says. “The smaller the market, the larger effect an index ETF will have on it. We seek to replicate that effect for the other markets we are following. It’s not an example of a bubble, but a steady improvement of the stock exchange itself. The highways for capital flows linking the local exchanges to the markets in Frankfurt and London, which we have built with those ETFs, are beneficial for local as well as foreign investors.”
