EM Fund With 30% Return Bets on Turkish Small-Caps

(Bloomberg) -- A top-performing emerging-market fund is betting on a rally in Turkish small-cap stocks as the country brings down inflation.

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The Evli Emerging Frontier Fund, which has beaten 99% of similar funds in the past five years, has snapped up shares of Escort Teknoloji, an investor in tech startups, as well as electricity company Orge Enerji.

“For patient, long-term capital, it’s looking more attractive,” Ivan Nechunaev, an investment adviser to the $270 million fund, said in an interview.

Nechunaev, who advises the fund along with Burton Flynn, said Turkey’s shift back to conventional economic policies will draw investor cash back to the country. Turkey accounts for about 13% of the fund, which also owns shares of retailer Desa Deri Sanayi ve Ticaret AS and infrastructure conglomerate Global Yatirim Holding AS.

At a time when investors are souring on emerging and frontier markets after years of poor returns, the Evli fund stands out an exception. It’s gained about 30% in the past 12 months with a focus on stocks in Saudi Arabia, Turkey and Kuwait. By comparison, the broad MSCI gauge of developing nation stocks is up 11%.

The fund, run by Helsinki-based Evli Plc, has seen Escort Teknoloji shares jump 170% in euro terms since May 2022, while Orge climbed 146% since October 2022. The fund posted an annualized return of about 17% over the past five years.

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Nechunaev said the fund’s investors were “very concerned” when Turkey’s President Recep Tayyip Erdogan pushed ahead with unorthodox policies, insisting on slashing interest rates while triggering an unprecedented bout of high inflation and tense relations with the West.


The picture has changed drastically since Erdogan won another term as president a year ago and installed a market-friendly team to steer economic policy, while mending ties with the West.

Since then, the central bank boosted the benchmark rate to 50% from 8.5% and built up foreign currency reserves and Treasury & Finance Minister Mehmet Simsek started to tighten fiscal policy. The central bank predicts inflation will end the year at 38%, compared with 69.8% last month.

Even after suffering defeat in March’s local elections, the president has repeatedly vowed to stay the course. Foreign investors have responded, pouring in a net $4 billion into Turkish equities since June 2023, according to weekly flow data compiled by Bloomberg.

The Evli fund shields itself from the lira’s depreciation and has profited from lira futures contracts over the past two years. Even a hedging cost of 20% is “more than compensated by stocks that can more than double in a year,” Nechunaev said.

“Volatility means opportunity in mispriced stocks,” Flynn said. “If we had been looking at Turkey from a top-down perspective, we would have never bothered.”

--With assistance from Tugce Ozsoy.

(Corrects title of advisers in the third and fourth paragraphs.)

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