Limestone Yearbook 2011_small

7/31/2019 Limestone Yearbook 2011_small

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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


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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


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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

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25

27

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32

34

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36

Contents


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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


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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.


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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


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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


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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.


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


STOXX EU Enlarged Total Return

Source: Bloomberg


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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.


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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


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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


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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.


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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


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.


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.


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.


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


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


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.


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


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


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.


25/40

25

Serbia


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


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


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.


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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


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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


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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.


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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.


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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


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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


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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


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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

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