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NESTOR Osteuropa Bond: Investing in the Eastern European bond market

NESTOR Osteuropa Bond: Investing in the Eastern European bond market. General information on Eastern Europe. This region comprises countries whose economies are in markedly different stages of development and which come in a variety of shapes and sizes

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NESTOR Osteuropa Bond: Investing in the Eastern European bond market

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  1. NESTOR Osteuropa Bond: Investing in the Eastern European bond market

  2. General information on Eastern Europe • This region comprises countries whose economies are in markedly different stages of development and which come in a variety of shapes and sizes • New EU member states: 10 countries including the Baltic states, Bulgaria and Romania • Then there are the 12 independent states of the former Soviet Union, with the main focus on Russia, Ukraine and Kazakhstan. • Plus South-Eastern Europe: Croatia, Albania, Bosnia and Herzegovina, Macedonia and Serbia

  3. Macroeconomic trends in Eastern Europe: Russia • Economy is expected to experience a V-shape recovery amid positive external factors and improving local consumption

  4. Macroeconomic trends in Eastern Europe: Russia • Historically solid structural position remains, despite sizeable budget deficits in 2009 and 2010

  5. Macroeconomic trends in Eastern Europe: Ukraine • Ukraine was hit the hardest by the economic crisis in 2009. An improvement is expected for 2010. Its external position has stabilized

  6. Macroeconomic trends in Eastern Europe: Ukraine • Political stabilization and a new IMF $15b programme are very positive for country’s fiscal situation and deficit financing ability, thus solvency

  7. Macroeconomic trends in Eastern Europe: Kazakhstan • Kazakhstan was the first victim of the financial crisis. It is now leading the recovery • Outflows abroad should stabilize in 2010

  8. Macroeconomic trends in Eastern Europe: Kazakhstan • Budget deficits and currency reserves are within reasonable ranges. Reserves are growing steadily • Borrowing from abroad will fall in 2010 as the foreign debt of the banking sector is restructured

  9. Macroeconomic trends in Eastern Europe: recovery in industrial output • The clear trend in the CIS region has been one of fundamental economic recovery since 2Q09. The very last few months demonstrated some slowdown of recovery, but no double-dip • Only in Kazakhstan, however, has industrial output reached pre-crisis levels. • Kazakhstan's growth is being driven by the oil and gas sectors and by increasing economic ties with China.

  10. Eastern European credit markets I

  11. Eastern European credit markets II • CIS debt market performance YTD as represented by family of TDI* indices • High-beta markets (e.g. Ukraine and Kazakhstan) strongly outperformed amid strong investors’ risk appetite and country-specific drivers: • In Ukraine - political power consolidation and successful cooperation with IMF • In Kazakhstan, finalization of banking sector’s restructuring • May’10 has been the only month on Russian debt market with negative performance during the last 17 months • Activity on the primary market has been elevated, as Russian issuers placed almost $20bn in Eurobonds, while companies from Ukraine and Kazakhstan borrowed ca. $4bn in total • Still no representative index of Central-Eastern Europe debt markets available

  12. NESTOR Osteuropa Bond performance • Fund’s official benchmark* significantly outperformed (7.5% vs 2.3%) in 7m10 • Among peers, NESTOR Osteuropa Bond Fund has a long track-record and solid performance • The Fund has demonstrated comparable annualized return at lower volatility since inception compared to peers, justifying its benchmark-unaware style • * 6-months Euribor + 3%

  13. Peer Funds´ Indexed Performance

  14. Peer Funds´ risk and performance characteristics since inception • Return calculated as annualized return since each fund’s inception date (y-axis). Risk expressed as standard deviation of daily one-year returns for each fund’s lifetime (x-axis)

  15. NESTOR Osteuropa Bond composition Media and telecommunications, 3.8% Real estate and construction, 3.0% Chemicals, 4.7% Retail, 2.6% Energy, 4.8% Net cash, 15.3% Industrials, 7.8% Transportation, 8.2% Banks and financials, 37.7% Oil and gas, 12.1%

  16. Latvia, 4.5% Hungary, 4.3% Bulgaria, 3.0% Poland , 6.2% Net cash, 15.3% Estonia, 7.5% Georgia, 9.1% Russia, 23.3% Kazakhstan, 12.9% Ukraine, 13.9% NESTOR Osteuropa Bond composition

  17. Bank CenterCredit, Kazakhstan, Moody’s Ba3, Fitch B; maturing on 2 Feb 2011 • Kazakhstan’s fourth largest bank with a wide network of 200 branches across Kazakhstan with a focus on retail and SME • The largest bank of South Korea Kookmin Bank (A1/A/A) together with IFC jointly control the bank (51.9% ownership) • The bank enjoys best asset quality among peers and no government stake, as the bank refused to accept governmental support in the time of systemic crisis • Low leveraged systemically-important bank which benefits from strong shareholders, long-term profile of its debt and overliquidity: • 43% of assets in cash and government bonds! • Loans/Deposits 91% • Status of bond in fund as at 30 July 2010: YTM 6%, term of 0.49 years

  18. Bank of Georgia, Georgia, Moody’s Ba3, S&P B, Fitch B+; maturing on 8 Feb 2012 • Largest private bank in Georgia by far (around one third of market share); has to some extent the characteristics of a monopoly • Strong support from IFI, EBRD, IFC and OPIC through the provision of comprehensive long-term loans and subordinated loans at favourable conditions • Overcapitalized, overliquid bank with a capital ratio of 32.2% and cash of 38.7% • No significant repayments before the Eurobond issue matures • Status of bond in fund as at 30 July 2010: YTM 9.3%, term of 1.4 years

  19. Azovstal, Ukraine, Moody’s B3, Fitch B-; maturing on 28 Feb 2011 • One of the largest steel plants in Ukraine: key asset of vertically integrated steel holding Metinvest (part of Mr. R. Akhmetov-controlled SCM Group) • Exports over 80% of its products, partly to affiliated companies located in Western Europe • Political environment is extremely beneficial after presidential elections, as the owner Mr. Akhmetov has a strong influence in the now ruling Party of Regions • Low leverage: Debt/EBITDA constantly below 2x • Recent Metinvest bond issuance improved liquidity of the group, making it easier to redeem Azovstal bond in February • Bond repayment is a matter of Group reputation (Metinvest aims to tap global financial markets for an IPO). In addition, the new Metinvest bonds include cross-default on Azovstal debt • Status of bond in fund as at 30 July 2010: YTM 12.3%, term of 0.6 years

  20. Gazprom Russia, Fitch A-; maturing on 1 Feb 2020 • Gazprom is one of the world’s largest integrated oil & gas companies with operations in CIS and Europe. Besides, it owns and operates the world’s largest gas transportation, storage and processing system exceeding 159 thousand km • Gazprom is a pure quasi-sovereign issuer, as under the Gas Supply Law the state will maintain a majority ownership stake in the company going forward • Despite weak operational environment, its debt/EBITDA ratio at the end of 2009 was moderate – 1.5x • Gazprom is well recognized borrower, as it was the first CIS company able to borrow on Eurobond market following a Lehman Brothers collapse • Bond valuation in fund as at 3 July 2010: YTM 6.3%, maturity of 3.1 years

  21. Structural portfolio – changesin 7 months 2010 I • In 2010-to-date, the driving themes in the portfolio have been: • Riding the cyclical recovery and booking gains when undervaluation disappeared (e.g., banking, metals and mining) • Adding positions outside CIS, which lost the clear undervaluation status during the period • Reinvest in instruments selected on a bottom-up basis to reduced the beta of the portfolio

  22. Structural portfolio – changesin 7 months 2010 II • More specifically, across sectors the following changes took place: • Banking sector (our favorite at the start of 2010) has significantly decreased (from 60% to 40%) due to redemptions (Ukrsots’10, Russkiy Standart’10) and sold/reduced positions (Bank of Georgia, Halyk, Privatbank, VTB, BTA) • Metals and mining have also significantly reduced (by 9%) as we took profits in Severstal, Raspadskaya, Kazakhgold (in the former two cases excellent timing of trades) • Media (Polish TVN), transportation (Georgian Railways) and oil&gas (Alliance oil) have been increased the most in the Fund, but bottom-up factors rather than industry views have been the drivers • New sectors: utilities (Zagreb Hld.) and energy (Eesti Energia)

  23. Structural portfolio – changesin 7M10 IV • In terms of countries: • Our 2010-start top-pick Russia was reduced most (8.6% to 25%), “exotic” Azerbaijan eliminated (put option used on Technikabank) • Increased/new countries – Poland (+4.7%), Estonia (+3.7%), Georgia (+3.5%) • As the attractive short-duration opportunities matured/rallied, the overall portfolio duration increased from 1.9 to 2.6 during the period

  24. Investment process New issues Internal investment universe review (bi-weekly) Third party research Idea list to buy Idea list to sell Idea screening for further investigation (weekly meeting)=> Weekly agenda for analysts Internal rating assignedFair spread assigned Internal rating revisedFair spread reassessed Undervalued => include in buy-list Overvalued => include in sell list PORTFOLIO Weekly portfolio movers review

  25. Investment process • Our investment process is completely benchmark-unaware • We seek and evaluate opportunities on a stand-alone risk/return merits • The selection process used follows a bottom-up approach. The starting point is knowledge of the local conditions coupled with internal research findings and bond-specific considerations • Internal ratings are assigned, as are fair spread levels based on market data (valuation score <1 implies undervaluation, >1 implies overvaluation) • Buy and sell signals are derived as a result

  26. Investment process example 1Total return = 37.2% (40.3% p.a.) • Raspadskaya 7.5% 21012 • Russia's second largest coal producer • One of strongest credits in Russian metals & mining segment with debt/EBITDA at 0.5x FY08 and 1.3 FY09 • Bought 18.5.2009: 81.00 (valuation score 0.68x) • Sold 20.4.2010: 105.50 (valuation score 1.29) BUY Actual spread – 1340bp Internal rating – Ba3 Fair spread – 913bp Valuation score – 0.68x SELL Actual spread – 341bp Internal rating – Ba3 Fair spread – 43\8bp Valuation score – 1.29x

  27. Investment process example 2Total return = 43.4% (51.6% p.a.) • Severstal 9.75% 2013 • One of the world’s leading vertically integrated steel and mining companies with key assets in Russia, the US and Europe • Conservative debt and liquidity management with cash surpassing short-term debt at all times • Bought 12.5.2009: 81.75 (valuation score 0.53x) • Sold 15.03.2010: 110.50 (valuation score 1.06x) BUY Actual spread – 1382bp Internal rating – Ba2 Fair spread – 726bp Valuation score – 0.53x SELL Actual spread – 440bp Internal rating – Ba3 Fair spread – 465bp Valuation score – 1.06x

  28. Investment process example 3Total return = 16.3% (50.1% p.a.) • Kazmunaigaz 11.75% 2015 • Kazakh vertically integrated national oil&gas champion which consolidates around a fifth of country’s oil production • High importance for the country and healthy cash generation. Was undervalued relative to Gazprom and local peers, but started to leverage up its balance sheet significantly • Bought on 11.08.2009: 106.00 (valuation score 0.49x) • Sold out on 08.12.2009: 119.25 (valuation score 0.62x) BUY Actual spread – 747bp Internal rating – Baa3 Fair spread – 368bp Valuation score – 0.49x SELL Actual spread – 503bp Internal rating – Baa3 Fair spread – 311bp Valuation score – 0.62x

  29. Outlook for 2010 I • We expect global deflationary environment along with further quantitative easing policies to continue and to support emerging market debt also in H2’2010 • Fundamentally, credit-risk metrics are still generally favourable for emerging market debt relative to developed markets • In Eastern Europe, this is clearly the case for Russia, Kazakhstan, Poland • In Ukraine, the radical change in political environment along with the new IMF program expected to further normalize macroeconomic environment, fiscal and external balances • In the short-term, however, technicals may cause market corrections, which we think should be used to “buy on dips”: • Yields of many debt instruments are at their all-time lows • But credit spreads are still wider than before the start of the crisis

  30. Outlook for 2010 II • In sum, while we see further upside to the market over medium-term, the period of “easy money” appears to be behind us • In relative terms, in Eastern European debt markets we continue to prefer Ukraine and Kazakhstan to Russia, yet in all markets security selection has become increasingly important • As usual, in Central Europe’s eurobond market bottom-up approach is the basis for investing

  31. Strategy for 2010 • Strategy of the Fund remains largely unchanged from the start of the year • We will continue to concentrate on bottom-up approach, i.e., careful issuer-specific fundamental analysis will remain the backbone in security selection => • Industry and country allocations are a by-product, not a determinant • Duration depends on credit opinion about a certain issuer – for some we prefer short duration, for others long duration instruments

  32. Strategy for 2010 • However, the general trends in the Fund are expected to be: • Gradual reduction in Ukraine weighting as instruments achieve their fair levels • Further reduction of the less liquid positions (e.g., Estonia) • Overall portfolio duration (now at 2.6) expected to remain roughly unchanged • Each primary corporate debt placement will continue to be carefully assessed • CEE opportunities evaluated on a case-by-case basis, more exposure in these more stable markets may be acquired

  33. Contact details • Distributor:NESTOR-Fonds-Vertriebs-GmbH, Ottostraße 5, D-80333 MunichTel.: +49 (0) 89 / 54 59 03 80Fax: +49 (0) 89 / 54 59 03 85E-mail: Tobias.Pfab@nestor-fonds.de • www.nestor-fonds.comwww.nestor-fonds.com/en (English)www.nestor-fonds.com/fr (français) • Investment company:NESTOR Investment Management S.A., B.P. 858, L-2018 LuxembourgTel.: +352 / 42 70 42Fax: +352 / 42 74 54

  34. Legal notice • This document was produced by NESTOR Investment Management S.A. (NESTOR). It is aimed exclusively at those recipients to which NESTOR has specifically made the document available. If this document is made available to a client, only that client shall be the recipient, even if the document was handed to a member of staff or representative of the client. The recipient may not publish this document nor make it available to a third party or allow a third party access to it. This document does not constitute and shall not be construed as an offer or an invitation to make an offer. It may be used only as guidance and to illustrate potential business activities. No claim is made as to the exhaustiveness of the information contained in this document, and it is therefore non-binding. Any statements made in this document about prices or interest rates or any other indications that are given relate exclusively to the time that the document was produced and do not contain any statements about future trends or in particular about future profits or losses. While the content of this information was accurate at the time the presentation was produced, it may have since become out of date as a result of subsequent events without the document having been modified. In addition, this document does not constitute and shall not be construed as advice or a recommendation. Before concluding any transactions shown in this document, you should always obtain client and product-specific advice from your advisor. Detailed product information can be found in the current full version of the prospectus, the simplified prospectus and the annual and interim reports. These documents set out the sole binding conditions for purchasing investment units. They can be obtained free of charge from the registered office of the investment company NESTOR Investment Management S.A., 2 Place Dargent, L-1413 Luxembourg), or the paying and information agents (M.M.Warburg Bank Luxembourg S.A., 2, Place Dargent, L-1413 Luxembourg; M.M.Warburg & CO KGaA, Ferdinandstr. 75, D-20095 Hamburg; Bank Austria Creditanstalt AG, Am Hof 2, A-1010 Vienna or NESTOR-Fonds-Vertriebs-GmbH, Ottostraße 5, D-80333 Munich).

  35. Legal notice • The tax treatment depends on the individual circumstances of the investor and is subject to change. More detailed information on taxation can be found in the prospectus. Anyone wishing to buy, hold or sell investment units should therefore consult a tax advisor about the individual tax implications arising from the purchase, holding or sale of the investment units described in this publication. Performance is calculated using the BVI method, i.e. the load is excluded. Past performance, simulations and forecasts are no indication of future performance. Future performance depends on a number of factors including capital market trends, interest rates and inflation and cannot therefore be forecast. For the advisory services, the intermediary receives a fee from the load and the management fee. The intermediary or NESTOR can provide detailed information on request. NESTOR accepts no liability for any losses arising from the use and/or distribution of this document. NESTOR Investment Management S.A.- Management -

  36. Appendix, Citadele Asset Management Andris Kotāns Fund Manager Citadele Asset Management Igors Danilovs Bond Analyst Citadele Asset Management Edgars Lao Bond Analyst Citadele Asset Management

  37. Appendix, Citadele Asset Management • During Parex Bank restructuring process, the name of Parex Asset Management changed to Citadele Asset Management effective August 1, 2010. Shareholding/legal form/operations of the investment managed have not been affected by this change in any way • The leading investment specialist and asset manager in the Baltic states • Strong track record of successful product launches in Eastern Europe • Eastern European bond and balanced funds • Russian, Ukrainian and Baltic equity funds • Local presence in Ukraine, the Baltic states, Russia, Kazakhstan and Germany

  38. Appendix, Citadele Asset Management • Asset management for clients in different regions: Main objective is to generate absolute returns under all market conditions • Leading local supplier of a complete product range for regional private and institutional clients • Financial products from all leading global asset managers, with comprehensive offering of all asset classes and investment strategies spanning the entire globe • A team of 70 experts with local and international experience

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