SE01A-ANG EAST CAPITAL SWEDISH FUNDS reports/Swedish/east_capital... · Shares of the airline...

Annual report including audited financial statements as at 31st December 2014

East Capital Russian Fund

East Capital Baltic Fund

East Capital Eastern European Fund

East Capital Balkan Fund

East Capital Turkish Fund

Important Notice Historic yields are no guarantee for future yields. Fund units can go up or down in value, and investors may not get back the amount invested. Key investor information documents and prospectuses are available at www.eastcapital.com. This Annual Report is a translation from the original Swedish version, the latter being the official version, approved by the auditors. In the case of discrepancies between the English translation and the Swedish original, the original takes precedence.

Contents

3

East Capital Russian Fund ........................................................................................................................................... 4

East Capital Baltic Fund .............................................................................................................................................. 7

East Capital Eastern European Fund ......................................................................................................................... 10

East Capital Balkan Fund ........................................................................................................................................... 13

East Capital Turkish Fund ......................................................................................................................................... 16


* The annual report and half year report of the Master Fund are available at the registered address of the Management Company.

East Capital Russian Fund 4

Important Note From 1 October 2013 the East Capital Russian Fund (the "Fund") is a feeder Fund that invests in the Master UCITS East Capital (Lux) - Russian Fund (the "Master Fund"). For full details of the Master Fund portfolio constituents and related charges please refer to the financial report of the Master Fund which can be found online at www.eastcapital.com. * Pursuant to the Swedish Investment Fund Act (2004:46), East Capital Asset Management S.A. has been appointed to act as Management Company of the Fund.

Management report The Fund declined 45% during the year, while the benchmark index lost 31% (both in SEK). The net asset value was 2 915m SEK as of 31 December 2014, to be compared to 7 444m SEK as of 31 December 2013. Net outflows during the year amounted to 1 865m SEK. Market update Last year will be remembered as one of the most difficult for the Russian market. The first couple of weeks actually started off quite well, but then the conflict with Ukraine quickly escalated causing a major sell off on the back of a wave of sanctions from the EU, US and other countries. However, after the initial correction the market somewhat ignored the sanctions and we saw a strong rebound from March to June. The next hit was the falling oil price that almost halved from the summer to the end of the year. The mix of falling oil price, sanctions and investors panicking led to initially a slow and gradual fall of the rouble, but this accelerated and in December we saw the rouble weakening 18.6%. The Russian Central Bank was, unfortunately, not handling the situation particularly well. The government instead stepped in and forced some of the state owned exporters to buy roubles. This initially led to the rouble strengthening, but also to very high volatility, which in itself probably lead to even further weakening. The Russian market was down 35.1% in EUR due to the rouble weakening 37.6% i.e. in local currency terms the market was close to flat. Many of our key bets in 2014 have rouble revenues and hence took a large hit due to this. A key part of our investment philosophy is to be exposed to the consumer related, high growth companies. These are typically privately owned, and hence better run than the state owned export companies. Unfortunately this systematic bias led us to be underweight in the export companies that have hard currency revenues, and hence the Fund significantly underperformed the index. This is part of a long term investment strategy and there will be difficult years. But if we look on what happened after the 2008 crisis the consumer related companies that were well managed with good market positions very significantly outperformed the market in the next couple of years. We have reviewed all our holdings and made some significant changes. The holdings we currently have are well positioned both for the current (challenging) and later recovering economy. In retrospect, it was close to impossible to predict that there would be an armed conflict between Russia and the Ukraine, and the sanctions that followed. The second leg down caused by the weaker oil price was also difficult to predict. In short, it was the perfect storm for the Russian market and many of our holdings. We have adjusted to the new market situation and been in touch with key decision makers throughout this period.

The Fund’s development Many of our key holdings record losses of 60-80% in 2014, this despite close to all of them showing increasing sales and earnings. Weaker rouble, a dramatic decrease in investor confidence and in many cases a worsening outlook led to this collapse. Shares of the airline Aeroflot decreased by 73% despite showing 11% passenger growth in 2014. The Russian holding company Sistema decreased 81% due an unfortunate power struggle that led to the company losing Bashneft which represented 40% of its NAV. On the positive side shares of the Russian steel maker Evraz jumped 50% due to a large part of the cost base denominated in roubles and sales in US dollars. Changes during the period It has been a year of many different periods, from sharp corrections to rallying stocks. If we look at the whole year we have done a lot of changes within the consumer exposed sectors. Most notably we have reduced almost completely Russian IT names Yandex and Mail due to a worsening outlook. We have increased real estate developers, which might seem counterintuitive but they are less exposed to the downturn than the market is pricing. We have significantly added non-energy exporters like Alrosa (diamonds), Evraz (steel) and Rusal (aluminium). Fund’s risk exposures

In 2014 the Fund was primarily exposed to the following

risks: market risk, currency risk, liquidity risk, political

risk and legal risk. The Fund’s standard deviation

increased compared to 2013 and is somewhat higher

compared with the benchmark index.

The Fund consists primarily of securities listed in other

currencies than the Fund’s base currency SEK and is thus

exposed to currency risk. Most of the Fund’s securities are

traded and priced in USD and RUB.

The liquidity risk in the Fund is higher than a fund that

invests in large companies at developed markets. This

means that it can be difficult to sell holdings in the market

without negative effects on the price. The risk is managed

by monitoring subscriptions, redemptions and holding

sizes in comparison with the turnover in the market.

The Fund has primarily been invested in Russia. The risks

that this country exposure entails have been analyzed

using research by internal specialists on Russia and

publicly available macroeconomic and business indicators.

Risks related to Russia increased significantly during the

year as the conflict with Ukraine caused investor sell-offs

on the back of sanctions against Russia. A falling oil price

and weakening rouble lead to very large volatility towards

the end of the year. The risk related to corruption, cost of

doing business and economic freedom is assessed to be

higher in Russia than most other countries based on the

Index of Economic Freedom.



Objective The East Capital Russian Fund is a feeder Fund that invests at least 85% of the Fund’s value in the Master UCITS East Capital (Lux) - Russian Fund. The Fund may also invest in any liquid assets required for the management of the Fund, as well as in derivative instruments, including OTC derivatives. The objective is that 100% of the Fund’s assets will be invested in units of the Master Fund, and that derivative instruments will only be used in exceptional cases. The Master Fund is a UCITS registered in Luxembourg. The objective of the Fund is to generate long-term capital growth by investing in companies domiciled in Russia through the Master Fund. Long-term perspective, fundamental analysis and active selection of equities are three main pillars of our investment philosophy.

Investment Policy of the Master Fund At least 75% of the assets of the Master Fund will consist of shares and equity-related instruments. The Master Fund will invest at least 50% of its assets in companies domiciled in Russia. The Master Fund may also invest in companies domiciled outside of Russia if they exercise a significant part of their economic activity there. The Master Fund may also invest up to a third of its assets in companies domiciled in Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. East Capital Asset Management S.A. has outsourced the portfolio management of the Fund and the Master Fund to East Capital AB.

Note: All performance figures in the management report are in EUR unless otherwise stated.


Key figures 2


Total return 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

East Capital Russian Fund -45% 3% 8% -26% 25% 122% -69% 23% 42% 118%

Benchmark 1 -31% -1% 8% -18% 16% 109% -67% 12% 47% 121%

Net asset value (in '000s SEK) 2 914 888 3 7 444 145 3 9 940 939 3 9 690 380 3 17 152 555 3 11 406 686 3 959 674 15 259 408 14 236 810 8 670 235

Number of units (without decimal) 4 330 573 6 144 511 8 451 171 8 860 190 11 592 188 9 604 149 7 393 638 8 740 365 10 063 960 8 675 944

Unit value (in SEK) 673.10 3 1 211.51 3 1 176.28 3 1 091.93 3 1 479.84 3 1 187.77 535.59 1 745.94 1 414.82 999.41

Dividend per unit (in SEK) - - 1.76 - - - - - - -

Investment expenses

(Subscription fee not included)

Management

fee

Management cost for lump sum deposit of SEK 10 000 (in SEK) 4 164.28

Management cost for regular savings of SEK 100 (in SEK) 4 12.39

Total risk 2014

East Capital Russian Fund 24.42%

Benchmark 1 20.43%

Active risk 8.88%

Turnover rate 5 41.97%

Ongoing charges 4 2.54%

Turnover with closely related funds 5 0.00%

Turnover with closely related investment firms 5 0.83%

Average annual yield for the past 24 months -24.87%

Average annual yield for the past 5 years -10.96%

Transaction costs as % of traded securities 4 0.10%

Transaction costs (in '000s SEK) 4 6 046

Management fee as % of average net asset value 4 2.01%

Balance sheet (in ‘000s SEK)

2014 2013

Assets Fund units 2 914 886

7 444 145

Total financial instruments with positive market value (Note 1)

2 914 886 7 444 145

Bank deposits and other cash equivalents 101

242

Other assets 20 836

29 992

Total assets 2 935 823 7 474 379

Liabilities Other liabilities -20 935

-30 234

Total liabilities -20 935

-30 234

Net asset value (Note 2) 2 914 888 3 7 444 145 3

Profit and loss (in ‘000s SEK)

2014 2013

Income and change in value Change in value of financial instruments (Note 3) -2 664 007

90 516

Interest income 0

421

Dividends 0

221 793

Exchange rate profit and loss, net 0

-4 460

Other income 0 1 395

Total income and change in values -2 664 007

309 665

Expenses Management fees 0 -157 701

Interest expenses 0 -19

Other financial expenses 0

-35

Other expenses 0

-662

Transaction fees 0

-6 528

Total expenses 0

-164 945

Result for the year -2 664 007

144 720

Fund facts

Management company East Capital Asset Management S.A.

Launch date 18 May, 1998

Quotation/trade Daily

Benchmark MSCI Russia Index Total Return (net)

Dividend No

Management fee 0%

Subscription fee 0%

Redemption fee 0%

Master Fund Company fee 2.45%

Domicile Sweden

Minimum investment 200 SEK

NAV currency SEK

ISIN SE0000777708

Note 1: Financial instruments

Market value

(in ‘000s SEK)

% of total net assets

East Capital (Lux) - Russian Fund - Class A (SEK) 2 914 886 100.00

Note 2: Change in the net asset value

(in ’000s SEK)

2014 2013

Net asset value at the beginning of the year 7 444 145

9 940 939

Units issuance 1 084 984

1 467 928

Units redemption -2 950 234 -4 109 442

Result for the year -2 664 007 144 720

Net asset value at the end of the year 2 914 888

7 444 145

Note 3: Change in value of financial instruments (in ‘000s SEK)

2014 2013

Realised profit 14 612

1 236 207

Realised losses -427 765

-2 825 161

Unrealised profit and losses -2 250 854 1 679 470

Change in value of financial instruments -2 664 007

90 516

Note 4: Costs of the Class A (SEK) of the Master Fund (in EUR)

2014

Management fees 10 587 694.32

Flat administration fees 2 419 237.81

Other administration fees 460 748.34

Subscription duty ("Taxe d’abonnement") 237 800.59

Transaction and transaction related fees 982 102.97

Notes: Past performance cannot be used as an indicator for current or future performance. The performance data do not take into account the commission and fees generated each time fund units are issued and purchased. The reporting principles are available at the end of this report. 1 RTS Index until 30.06.2010, MSCI Russia Index Total Return (net) from 01.07.2010. 2 Based on intraday prices. 3 Based on end of day prices. 4 The figure shown is calculated with the data of the Class A (SEK) of the Master Fund. 5 The figure shown is calculated with the data of the Master Fund.



East Capital Baltic Fund 7

Important Note From 1 October 2013 the East Capital Baltic Fund (the "Fund") is a feeder Fund that invests in the Master UCITS East Capital (Lux) - Baltic Fund (the "Master Fund"). For full details of the Master Fund portfolio constituents and related charges please refer to the financial report of the Master Fund which can be found online at www.eastcapital.com. * Pursuant to the Swedish Investment Fund Act (2004:46), East Capital Asset Management S.A. has been appointed to act as Management Company of the Fund.

Management report The Fund and its benchmark index both declined 2% during the year in SEK terms. The net asset value was 581m SEK as of 31 December 2014, to be compared to 734m SEK as of 31 December 2013. Net outflows during the year amounted to 172m SEK. Market update The Baltic market volatility during the year was mostly influenced by the negative events in the Ukraine and increasing turbulence in the Russian market. Baltic equities have been trading up on positive domestic factors, such as solid GDP growth and Euro introduction in Lithuania, and then losing all gains in March, August and December, when the neighboring markets were hit by geopolitical tensions and the ruble crisis. The uncertainty from the east was primarily stemming from a potential negative impact on the GDP growth as a result of the Russian food embargo as well as general slowdown in the Russian economy affecting Baltic exports, tourism and general sentiment. In fact, the GDP growth of the Baltic markets is being revised down for 2015 by 0.5-1.0% during the year, however it is still expected to stay at relatively attractive levels of around 2-3%. Lithuania was among the five best performing markets in Eastern Europe last year advancing 7% on the back of the good economic growth and ahead of the Euro adoption in January 2015. It is an important milestone for the Baltics completing the European integration mission. The Fund’s development The largest holding of the fund Linas Agro outperformed the market, up 2.6%, as the company is vertically expanding to the larger margin segments. Indirect exposure stocks such as Swedish Swedbank and Finish retailer Kesko together added 0.8% in attribution. Polish insurer PZU performed well, they notably acquired the largest and best insurance company in Lithuania helping them end the year up 10.6%, adding 0.6% in attribution during the year. PZU is also one of the best dividend paying stocks in the portfolio, yielding up to 8%. Some of the index constituents such as TEO, Tallina Vesi and Valmieras SS have showed strong gains in 2014; however, we do not own these stocks due the low liquidity and stock specific risks. One stock in the portfolio that has suffered from the Russia related sell-off was electricity trader Inter Rao Lietuva, down 20.6%. However, it continues to show solid results and is expected to yield up to 10%. The largest dairy in the portfolio Pieno Zvaigzdes and Rokiskio Suris were down 14.5% and 11.4% respectively on the back of the Russian food embargo, which is expected to end in August 2015.

Changes during the period The main trading in the Fund was an increase in the large caps outside the local Baltic market such as Swedbank and Polish blue chips PZU and PKO reducing the large cash position of the Fund at the beginning of the year. We also sold off Latvian pharma company Grindex at a 30% premium to the market in the beginning of the year as we saw risks increasing. Moreover, we also sold our entire position in Klaipedos Nafta ahead of the increased involvement in the public goods LNG projects. Fund’s risk exposures


risks: market risk, currency risk and liquidity risk. The

Fund’s standard deviation is in line with the previous year

and is lower than the standard deviation of the benchmark

index.



exposed to currency risk. The Fund’s securities are

primarily traded in EUR.

The liquidity risk in the Fund is higher than a fund that





sizes in comparison with the turnover in the market. The

market turnover in the Baltic countries decreased during

2014 compared with the previous year. Turnover in the

Baltic market is at low levels compared with other markets.

The Fund has primarily been invested in Lithuania and

Estonia. The risks that these country exposures entail have

been analyzed using research by internal specialists on the

region and publicly available macroeconomic and business

indicators. The risk related to corruption, cost of doing

business and economic freedom is assessed to be low for

both Lithuania and Estonia based on the Index of

Economic Freedom.

Objective The East Capital Baltic Fund is a feeder Fund that invests at least 85% of the Fund’s value in the Master UCITS East Capital (Lux) - Baltic Fund. The Fund may also invest in any liquid assets required for the management of the Fund, as well as in derivative instruments, including OTC derivatives. The objective is that 100% of the Fund’s assets will be invested in units of the Master Fund, and that derivative instruments will only be used in exceptional cases. The Master Fund is a UCITS registered in Luxembourg. The objective of the Fund is to generate long-term capital growth by investing in companies in the Baltics through the Master Fund. Long-term perspective, fundamental analysis and active selection of equities are three main pillars of our investment philosophy.



Investment Policy of the Master Fund At least 75% of the assets of the Master Fund will consist of shares and equity-related instruments. The Master Fund will invest at least 50% of its assets in companies domiciled in Estonia, Latvia and Lithuania. The Master Fund may also invest in companies domiciled outside Estonia, Latvia and Lithuania if they exercise a significant part of their economic activity there. The Master Fund may also invest up to a third of its assets in companies domiciled in Belarus, Denmark, Finland, Poland, Russia and Sweden. East Capital Asset Management S.A. has outsourced the portfolio management of the Fund and the Master Fund to East Capital AB.



Key figures 2


Total return 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

East Capital Baltic Fund 2% 12% 15% -23% 38% 21% -57% 1% 12% 48%

Benchmark 1 2% 17% 18% -19% 43% 10% -53% -6% 4% 52%

Net asset value (in '000s SEK) 580 549 3 733 707 3 774 049 3 827 074 3 1 549 906 3 493 571 414 202 1 252 318 1 909 260 3 386 679


Unit value (in SEK) 50.92 3 49.52 3 44.19 3 39.11 3 50.58 3 37.34 32.01 74.26 73.72 65.97

Dividend per unit (in SEK) - - 0.78 - 0.71 1.13 0.53 0.41 - -

Investment expenses


Management

fee



Total risk 2014

East Capital Baltic Fund 7.03%

Benchmark 1 8.86%

Active risk 3.41%





Average annual yield for the past 24 months 8.07%

Average annual yield for the past 5 years 7.06%


Transaction costs (in '000s SEK) 4 442



2014 2013

Assets Fund units 580 549

733 707


580 549 733 707


3

Other assets 2 626 8 395

Total assets 583 175

742 105

Liabilities Other liabilities -2 626 -8 398


-8 398

Net asset value (Note 2) 580 549 3 733 707 3


2014 2013

Income and change in value Change in value of financial instruments (Note 3) 19 077

78 544

Interest income 0

274

Dividends 0 26 960

Exchange rate profit and loss, net 0 -519

Other income 0

238

Total income and change in values 19 077

105 497

Expenses

Management fees 0 -14 863

Interest expenses 0

-22

Other expenses 0

-71

Transaction fees 0

-192

Total expenses 0 -15 148

Result for the year 19 077

90 349

Fund facts


Launch date 30 June, 1998


Benchmark OMX Baltic Benchmark Capped Index Total return (gross)

Dividend No

Management fee 0%

Subscription fee 0%

Redemption fee 0%


Domicile Sweden


NAV currency SEK

ISIN SE0000777724


Market value

(in ‘000s SEK)


East Capital (Lux) - Baltic Fund - Class A (SEK) 580 549 100.00


(in ’000s SEK)

2014 2013

Net asset value at the beginning of the year 733 707

774 049

Units issuance 66 917

262 768

Units redemption -239 152

-393 459

Result for the year 19 077 90 349

Net asset value at the end of the year 580 549

733 707


2014 2013


139 187

Realised losses -301

-157 479

Unrealised profit and losses 14 687

96 836

Change in value of financial instruments 19 077

78 544


2014


Flat administration fees 318 258.18

Other administration fees 559.90



Notes: Past performance cannot be used as an indicator for current or future performance. The performance data do not take into account the commission and fees generated each time fund units are issued and purchased.

The reporting principles are available at the end of this report. 1 Baltic 30 Index until 30.06.2010, OMX Baltic Benchmark Capped Index Total Return (gross) from 01.07.2010. 2 Based on intraday prices. 3 Based on end of day prices. 4 The figure shown is calculated with the data of the Class A (SEK) of the Master Fund. 5 The figure shown is calculated with the data of the Master Fund.



East Capital Eastern European Fund 10

Important Note From 1 October 2013 the East Capital Eastern European Fund (the "Fund") is a feeder Fund that invests in the Master UCITS East Capital (Lux) - Eastern European Fund (the "Master Fund"). For full details of the Master Fund portfolio constituents and related charges please refer to the financial report of the Master Fund which can be found online at www.eastcapital.com. * Pursuant to the Swedish Investment Fund Act (2004:46), East Capital Asset Management S.A. has been appointed to act as Management Company of the Fund.

Management report The Fund declined 23% during the year, while the benchmark index lost 13% (both in SEK). The net asset value was 1 920m SEK as of 31 December 2014, to be compared to 3 440m SEK as of 31 December 2013. Net outflows during the year amounted to 887m SEK. Market update During 2014 there was a very large performance discrepancy between Eastern European markets. Among the large countries the star was Turkey recording a 30.8% gain and the worst hit Russia losing 35.1%. Among the smaller countries our holdings in Serbia gained 40.7% and Slovenia 33.3% on renewed investors interest for the frontier markets. With the oil price falling 48% it is no surprise that oil importers like Turkey did well, but the country also implemented a number of long-term structural reforms. For Russia the situation was unfortunately the opposite. The country was initially hit by a wave of sanctions from the EU, US and other countries on the back of the Ukrainian conflict. During late spring the market recovered but was later again hit by more sanctions and a sharply falling oil price. The rouble weakening accelerated in December with very large volatility. One could argue why, but in short the central bank did too little too late. The government stepped in and propped up the rouble, and since then we have seen a stabilization. In Greece the market turned sour by the end of the year due to the risk of a leftist government coming to power. We have stayed away from Greek banks which we believed had understated non-performing loans, and hence were overvalued. This turned out to be a successful move. The market lost 28.9% during the year. The Fund’s development Turkish holdings recorded some of the largest gains, especially Turkish Airlines which gained 55.4%. The Turkish carrier has successfully expanded over the past couple of years, but also got an extra boost from lower oil price. Within Turkey our largest weighting is to the banking sector, with many of the banks recording gains 30-50%. In Russia we had the opposite developments; many key bets lost 60-80% and thereby contributed most to the funds underperformance. Most of these companies still showed growing sales and earnings in rouble terms. Aeroflot, the Russian carrier, lost 73.4% despite recording 11% passenger growth. Non-oil exporters did well in Russia e.g. steel maker Evraz gaining 50.6%. The Balkan markets

performed well during the year. In Slovenia one of our key holdings, insurance company Triglav gained 32.5% on strong results and a potential privatization. Changes during the period The largest regional change has been to significantly increase the weighting in Turkey. This was financed by decreasing Russia and Poland. We have made changes in Russia and in Turkey in line with changes reflected in the East Capital Russian and Turkish Funds. In Central Europe we have increased the exposure to some interesting smaller Polish companies like the shoe retailer CCC and Jeronimo Martins, the Portuguese retailer that runs one of Poland’s most successful grocery chains Biedronka. Fund’s risk exposures



risk and legal risk. The Fund’s standard deviation is in line

with the previous year and similar to the benchmark index.




traded and priced in USD, RUB, TRY, EUR and PLN.

The liquidity risk in the Fund is higher than a Fund that





sizes in comparison with the turnover in the market. The Fund has primarily been invested in Russia, Turkey and Poland. The risks that these country exposures entail have been analyzed using research by internal specialists on the region and publicly available macroeconomic and business indicators. The risk related to corruption, cost of doing business and economic freedom is assessed to be high in Russia and medium in Turkey and Poland based on the Index of Economic Freedom. Risks related to Russia increased significantly during the year as the conflict with Ukraine caused investor sell-offs on the back of sanctions against Russia. A falling oil price and weakening rouble lead to very large volatility for Russian equities towards the end of the year.

Objective The East Capital Eastern European Fund is a feeder Fund that invests at least 85% of the Fund’s value in the Master UCITS East Capital (Lux) - Eastern European Fund. The Fund may also invest in any liquid assets required for the management of the Fund, as well as in derivative instruments, including OTC derivatives. The objective is that 100% of the Fund’s assets will be invested in units of the Master Fund, and that derivative instruments will only be used in exceptional cases. The Master Fund is a UCITS registered in Luxembourg. The objective of the Fund is to generate long-term capital growth on your investment by investing in companies in Eastern Europe through the Master Fund. Long-term perspective, fundamental analysis and active selection of equities are three main pillars of our investment philosophy.



Investment Policy of the Master Fund At least 75% of the assets of the Master Fund will consist of shares and equity-related instruments. The Master Fund will invest at least 50% of its assets in companies domiciled in Albania, Armenia, Austria, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Estonia, Georgia, Greece, Hungary, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Macedonia, Moldavia, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Tajikistan, the Czech Republic, Turkey, Turkmenistan, Ukraine and Uzbekistan. The Master Fund may also invest in companies located outside the above mentioned countries if they exercise a significant part of their economic activity there. East Capital Asset Management S.A. has outsourced the portfolio management of the Fund and the Master Fund to East Capital AB.



Key figures 2


Total return 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

East Capital Eastern European Fund -23% 0% 14% -29% 18% 86% -64% 24% 24% 88%

Benchmark 1 -13% -5% 18% -22% 9% 65% -62% 20% 15% 77%

Net asset value (in '000s SEK) 1 919 858 3 3 439 944 3 4 675 281 3 4 071 113 3 7 664 207 3 5 598 508 3 261 503 12 205 326 7 784 780 5 509 890


Unit value (in SEK) 26.88 3 34.43 3 34.38 3 30.65 3 43.37 3 36.67 19.75 54.78 44.27 35.74

Dividend per unit (in SEK) - 0.51 - - - - - - -

Investment expenses


Management

fee



Total risk 2014

East Capital Eastern European Fund 15.67%

Benchmark 1 14.94%

Active risk 6.53%






Average annual yield for the past 5 years -5.93%





2014 2013


3 439 944


1 919 858 3 439 944


37


Total assets 1 925 023

3 450 143



-10 199



2014 2013

Income and change in value Change in value of financial instruments (Note 3) -633 462

-86 986

Interest income 0

237

Dividends 0 134 548

Exchange rate profit and loss, net 0 -3 257

Other income 0

685

Total income and change in values 0

2 337

-633 462 47 564

Expenses

Management fees

Interest expenses 0

-78 699

Other financial income 0 -59

Other expenses 0

-154

Transaction fees 0

-560


Result for the year -633 462

-36 400

Fund facts


Launch date 18 March, 2002


Benchmark MSCI EM Europe Index Total Return (net)

Dividend No

Management fee 0%

Subscription fee 0%

Redemption fee 0%


Domicile Sweden


NAV currency SEK

ISIN SE0000888208


Market value

(in ‘000s SEK)


East Capital (Lux) - Eastern European Fund - Class A (SEK)

1 919 858 100.00


(in ’000s SEK)

2014 2013


4 675 281


886 177

Units redemption -1 135 248

-2 085 114

Result for the year -633 462

-36 400


3 439 944


2014 2013


564 639


-1 110 443

Unrealised profit and losses -541 107

458 818

Change in value of financial instruments -633 462

-86 986


2014


Flat administration fees 1 280 782.44




Notes: Past performance cannot be used as an indicator for current or future performance. The performance data do not take into account the commission and fees generated each time fund units are issued and purchased. The reporting principles are available at the end of this report.

1 MSCI EM Europe Index until 30.06.2010, MSCI EM Europe Index Total Return (net) from 01.07.2010. 2 Based on intraday prices. 3 Based on end of day prices. 4 The figure shown is calculated with the data of the Class A (SEK) of the Master Fund. 5 The figure shown is calculated with the data of the Master Fund.



East Capital Balkan Fund 13

Important Note From 1 October 2013 the East Capital Balkan Fund (the "Fund") is a feeder fund that invests in the Master UCITS East Capital (Lux) - Balkan Fund (the "Master Fund"). For full details of the Master Fund portfolio constituents and related charges please refer to the financial report of the Master Fund which can be found online at www.eastcapital.com. * Pursuant to the Swedish Investment Fund Act (2004:46), East Capital Asset Management S.A. has been appointed to act as Management Company of the Fund.

Management report The East Capital Balkan Fund gained 22% while its benchmark index went up by 16% in 2014 (both in SEK). The net asset value stood at 711m SEK as of 31 December 2014, compared to 757m SEK a year ago. Most of the increase was due to good performance. We have seen flows going both ways which resulted in a net outflow of 200m SEK. Market update Balkan equity markets showed very diverse performance in 2014. Turkey started slowly, but built up momentum throughout the year and performed particularly well in the last quarter amid declining oil prices which resulted overall in a 30.8% gain for the year. Core Balkan markets had a decent year as well. Slovenia did particularly well with a 19.6% rise as the economic recovery was faster than initially expected and the long awaited privatization process finally kicked off. Serbia, for some time one of the cheapest markets globally at 3x P/E, advanced by 12.7% as investors gradually returned to the Balkan frontier. Romania gained 9%, extending the strong 40% rise in the previous year. By far the most volatile market in the region was Greece. It got off to a flying start as international investors recognized the economic recovery is on track, something we were well positioned for already from late 2012. Positive sentiment helped the Greek banks to raise north of EUR 8b in fresh capital over the first and second quarter of last year. Unfortunately, political turmoil that started looming in autumn changed the investors’ perception completely and caused the market to sharply reverse the gains to end the year with a 28.9% decline. The Fund’s development The positive absolute and relative performance of the Fund was by and large driven by successful stock picking with many of our key bets doing substantially better than their respective indexes. Another large source of relative outperformance was our systematic underweight in Greek banks. Based on extensive time spent on the sector, we concluded early in the year that the risk-reward ratio was not compelling as the banks still held significant amounts of Non Performing Loans on their balance sheets, something we thought would make their earnings recovery much slower than market expectations. This proved to be the case later in the year, while political uncertainty forced investors to unwind a crowded trade and banks declined between 30% and 70%. Sava Re, a Slovenian insurance company and third largest holding of the Fund, doubled over the year as the good technical profitability and successful integration of a recently acquired competitor were underpinned by strong investment income due to declining bond yields in

Slovenia. Zavarovalnica Triglav, another Slovenian insurer with strong market position in the wider Balkan region, also performed well with a 32.5% gain. We were again actively involved in shaping up board composition and pushing for dividends/buybacks in both names over 2014. A wide array of smaller bets, particularly in Serbia and Romania, such as Aerodrom Nikola Tesla, Belgrade airport, also contributed positively – the latter was up 88.2%. Among the negatives, Austrian banks Erste bank and Raiffeisen Bank International lost 46.5% and 24.2% as restructuring took longer than expected. Fourlis, an IKEA franchise in Greece, fell victim of a weak stock market and lost 25.2%. Changes during the period The most important changes in the Fund were done on a stock specific level. We participated in several share placements which helped us build nice positions in Petrol, a Slovenian oil retailer, Atlantic Grupa, a Croatian consumer company, Transelectrica, a Romanian utility, and Aegean, the Greek flagship air carrier. A common denominator of all placements was that they were offered at a discount to the market and we made solid gains on all of them. We also reacted quickly to declining oil price and reduced our exposure to the oil sector significantly (from 9.3% to 2.7% of the Fund), predominantly by selling out of one of the key positions, OMV Petrom in Romania. Fund’s risk exposures



risk and legal risk. The Fund’s standard deviation

decreased compared with the previous year and is lower

than the standard deviation of the benchmark index.




listed in EUR, RSD, TRY and RON.

The liquidity risk in the Fund is higher than a Fund that





sizes in comparison with the turnover in the market. The Fund has primarily been invested in Slovenia, Serbia, Turkey and Romania. The risks that these country exposures entail have been analyzed using research by internal specialists on the region and publicly available macroeconomic and business indicators. The risk related to corruption, cost of doing business and economic freedom is assessed to be high in Serbia and medium in Slovenia, Turkey and Romania based on the Index of Economic Freedom.



Objective The East Capital Balkan Fund is a feeder Fund that invests at least 85% of the Fund’s value in the Master UCITS East Capital (Lux) - Balkan Fund. The Fund may also invest in any liquid assets required for the management of the Fund, as well as in derivative instruments, including OTC derivatives. The objective is that 100% of the Fund’s assets will be invested in units of the Master Fund, and that derivative instruments will only be used in exceptional cases. The Master Fund is a UCITS registered in Luxembourg. The objective of the Fund is to generate long-term capital growt, by investing in companies in the Balkan region through the Master Fund. Long-term perspective, fundamental analysis and active selection of equities are three main pillars of our investment philosophy.

Investment Policy of the Master Fund At least 75% of the assets of the Master Fund will consist of shares and equity-related instruments. The Master Fund will invest at least 50% of its assets in companies domiciled in Albania, Austria, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Greece, Hungary, Macedonia, Montenegro, Romania, Serbia, Slovakia, Slovenia, the Czech Republic and Turkey. The Master Fund may also invest in companies located outside the abovementioned countries if they exercise a significant part of their economic activity there. East Capital Asset Management S.A. has outsourced the portfolio management of the Fund and the Master Fund to East Capital AB.



Key figures 2


Total return 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

East Capital Balkan Fund 22% 5% 25% -35% -4% 29% -66% 41% 22% 70%

Benchmark 1 16% -14% 42% -37% -1% 66% -62% 20% 15% 77%

Net asset value (in '000s SEK) 711 194 3 756 582 3 977 840 3 663 574 3 1 095 472 3 1 212 782 1 163 313 6 872 989 2 992 202 2 887 004


Unit value (in SEK) 14.32 3 11.55 3 11.01 3 8.94 3 13.76 3 14.41 11.37 33.33 23.57 19.32

Dividend per unit (in SEK) - - 0.12 0.04 0.06 0.27 - - - -

Investment expenses


Management

fee



Total risk 2014

East Capital Balkan Fund 11.18%

Benchmark 1 22.34%

Active risk 14.58%





Average annual yield for the past 24 months 14.06%






2014 2013

Assets Fund units 711 194

756 582


711 194 756 582


163


Total assets 716 190

763 603



-7 021

Net asset value (Note 2) 711 194 3 756 582 3


2014 2013


4 312

Interest income 0

119

Dividends 0 33 190


Other income 0

15


186

155 025 36 193

Expenses

Management fees

Interest expenses 0

-18 089


Other expenses 0

-3 260

Transaction fees 0

-369



13 321

Fund facts


Launch date 1 October, 2004


Benchmark STOXX Balkan Total Market Index Total Return (net)

Dividend No

Management fee 0%

Subscription fee 0%

Redemption fee 0%


Domicile Sweden


NAV currency SEK

ISIN SE0001244328


Market value

(in ‘000s SEK)


East Capital (Lux) - Balkan Fund - Class A (SEK) 711 194 100.00


(in ’000s SEK)

2014 2013

Net asset value at the beginning of the year 756 582

977 840


776 435

Units redemption -371 873

-1 011 014

Result for the year 155 025 13 321

Net asset value at the end of the year 711 194

756 582


2014 2013


132 304

Realised losses 0

-345 184


217 192


4 312


2014







The reporting principles are available at the end of this report. 1 MSCI EM Europe Index until 30.06.2010, STOXX Balkan Total Market Index Total Return (net) from 01.07.2010. 2 Based on intraday prices. 3 Based on end of day prices. 4 The figure shown is calculated with the data of the Class A (SEK) of the Master Fund. 5 The figure shown is calculated with the data of the Master Fund.



East Capital Turkish Fund 16

Important Note From 1 October 2013 the East Capital Turkish Fund (the "Fund") is a feeder Fund that invests in the Master UCITS East Capital (Lux) - Turkish Fund (the "Master Fund"). For full details of the Master Fund portfolio constituents and related charges please refer to the financial report of the Master Fund which can be found online at www.eastcapital.com. * Pursuant to the Swedish Investment Fund Act (2004:46), East Capital Asset Management S.A. has been appointed to act as Management Company of the Fund.

Management report The East Capital Turkish Fund gained 40% while its benchmark index went up by 39% in 2014 (both in SEK). The net asset value was 1 374m SEK as of 31 December 2014, compared to 1 120m SEK a year ago. In spite of good performance, the Fund witnessed outflows amounting to 175m SEK in 2014. Market update Turkish stock market experienced a volatile yet strong year in 2014. The year started on a negative note with a corruption and bribery investigation on then Prime Minister Erdogan’s AK Party (AKP). Along with political uncertainties, FED’s tapering and global emerging market currency sell-off made Turkish Lira see its all-time-lows vs. US Dollar in January. However, Central Bank’s decisive policy rate hike of 550 basis points which was followed by market friendly AKP’s victory in local elections and improvement in global investment sentiment helped Turkish market rebound strongly from March onwards. Summer months passed without any clear direction for the market as regional tensions and intensifying news flow on a possible US rate hike led to a range-bound trading in the market. In the meantime, presidential election proved to be a non-event for the market as Erdogan was elected as the president, as expected. Last quarter has been outstanding for Turkish equities as political stability was restored, economic growth appeared to be stronger than initially expected and, above all, oil price started coming down significantly. As a major beneficiary of lower oil price, Turkey saw its benchmark bond yields coming down and stock market going up to join the league of best performing markets in 2014. The Fund’s development The East Capital Turkish Fund performed better than its benchmark index by 95 basis points. The outperformance was primarily as a result of off-index small and mid-cap holdings, but our strategic positioning in the financial sector and consumer stocks also had a positive contribution. First and last quarters were particularly strong for the Fund vs. its benchmark index. Our favorite mid-cap Do&Co, the entertainment and airline catering company, had a particularly strong year with a 74.7% gain as it continued to growth its revenues by 15% and to re-rate due to increasing investor awareness. Steel producers Kardemir and Erdemir also enjoyed a good year with around 100% gain along with strong domestic demand and good margins. We took profits out of the latter during the 2Q2014. Turkish Airlines was also among the stars of the year, thanks to its ongoing passenger growth and declining oil price. Financials ended the year broadly in line with the index but offered good entry points

especially during the first quarter when we increased their weight. Enka Insaat, on the other hand, lagged the market significantly due to its exposure to Russian and Iraqi markets which experienced an eventful year. AvivaSA Emeklilik, Sabanci Holding’s pension business, also contributed negatively as it lost 6.2% during the few weeks following its initial public offering in November. Changes during the period The most important change in the Fund came towards the end of the first quarter as we increased the weight of the financial sector due to our expectation of increased political stability post elections and better earnings outlook for the banks. Otherwise, we have been relatively active in small and mid-cap space as we sold out of some of the longer term holdings especially in the energy sector, such as Aygaz and Turcas, while increasing holdings in the consumer-related stocks such as Dogus Oto, the auto retailer, Bimeks, the consumer electronics retailer and Do&Co, the entertainment and airline catering company. Fund’s risk exposures



risk and legal risk. The Fund’s standard deviation is in line

with the previous year and with the benchmark index.



exposed to currency risk. The majority of the Fund’s

securities are listed in TRY.

Liquidity in Turkey is generally good but liquidity risk in

the Fund is somewhat higher than a fund that invests in

large companies at developed markets. This means that it

can be slightly more difficult to sell some of the Fund’s

holdings in the market without negative effects on the

price. The risk is managed by monitoring subscriptions,

redemptions and holding sizes in comparison with the

turnover in the market. The Fund has primarily been invested in Turkey. The risks that this country exposure entails have been analyzed using research by internal specialists on Turkey and publicly available macroeconomic and business indicators. The risk related to corruption, cost of doing business and economic freedom in Turkey is assessed to be medium based on the Index of Economic Freedom.

Objective The East Capital Turkish Fund is a feeder Fund that invests at least 85% of the Fund’s value in the Master UCITS East Capital (Lux) - Turkish Fund. The Fund may also invest in any liquid assets required for the management of the Fund, as well as in derivative instruments, including OTC derivatives. The objective is that 100% of the Fund’s assets will be invested in units of the Master Fund, and that derivative instruments will only be used in exceptional cases. The Master Fund is a UCITS registered in Luxembourg. The objective of the Fund is to generate long-term capital growth on your investment by investing in companies domiciled in Turkey through the Master Fund. Long-term perspective, fundamental analysis and active selection of equities are three main pillars of our investment philosophy.



Investment Policy of the Master Fund At least 75% of the assets of the Master Fund will consist of shares and equity-related instruments. The Master Fund will invest at least 50% of its assets in companies domiciled in Turkey. The Master Fund may also invest in companies domiciled outside of Turkey if they exercise a significant part of their economic activity there. The Master Fund may also invest up to a third of its assets in companies domiciled in Armenia, Azerbaijan, Bahrain, Bulgaria, Cyprus, Egypt, Georgia, Iraq, Kuwait, Lebanon, Oman, Russia, Saudi Arabia, Syria and the United Arab Emirates. East Capital Asset Management S.A. has outsourced the portfolio management of the Fund and the Master Fund to East Capital AB.



Key figures 2


Total return 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

East Capital Turkish Fund 40% -27% 54% -35% 17% 90% -59% 52% -25% -

Benchmark 1 39% -27% 57% -35% 19% 79% -55% 61% -23% -

Net asset value (in '000s SEK) 1 373 673 3 1 119 724 3 2 757 463 3 1 092 668 3 2 672 548 3 1 681 448 844 394 2 207 337 1 031 398 -

Number of units (without units) 130 982 194 153 587 631 275 470 725 164 756 014 259 878 440 190 051 345 178 598 920 192 454 571 136 568 462 -

Unit value (in SEK) 10.49 3 7.29 3 10.01 3 6.71 3 10.29 3 8.85 4.73 11.47 7.55 -

Dividend per unit (in SEK) - - 0.22 - 0.02 0.10 - - - -

Investment expenses


Management

fee



Total risk 2014

East Capital Turkish Fund 29.41%

Benchmark 1 30.58%

Active risk 5.33%











2014 2013


1 119 724


1 373 673 1 119 724


17


Total assets 1 385 209

1 144 367



-24 643



2014 2013


-642 883

Interest income 0

420

Dividends 0 43 270


Other income 0

393


530

428 798 -600 472

Expenses

Management fees

Interest expenses 0

-45 563


Other expenses 0

-161

Transaction fees 0

-371



-648 591

Fund facts


Launch date 29 March, 2006


Benchmark ISE 100 Index Total Return (net)

Dividend No

Management fee 0%

Subscription fee 0%

Redemption fee 0%


Domicile Sweden


NAV currency SEK

ISIN SE0001621327


Market value

(in ‘000s SEK)


East Capital (Lux) - Turkish Fund - Class A (SEK) 1 373 673 100.00


(in ’000s SEK)

2014 2013


2 757 464

Units issuance 1 114 732

2 457 181

Units redemption -1 289 581

-3 446 330

Result for the year 428 798 -648 591


1 119 724


2014 2013


314 587


-436 054


-521 416


-642 883


2014







The reporting principles are available at the end of this report. 1 ISE 100 Index until 30.06.2010, ISE 100 Index Total Return (net) from 01.07.2010. 2 Based on intraday prices. 3 Based on end of day prices. 4 The figure shown is calculated with the data of the Class A (SEK) of the Master Fund. 5 The figure shown is calculated with the data of the Master Fund.

East Capital

Auditor’s report – translated from Swedish original

19

To the unit holders in

East Capital Russian Fund (id. no. 504400-4223), East Capital Baltic Fund (id. no. 504400-4280), East Capital eastern European Fund (id. no. 504400-8554), East Capital Balkan Fund (id. no. 504400-4561), East Capital Turkish Fund (id. no. 515602-0561). We have audited the accompanying financial statements of the East Capital funds stated above as at 31 December 2014.

Responsibility of the Board of Directors of the Management Company's responsibility for the Annual Report The Board of Directors of the Management Company responsible for the preparation and fair presentation of these financial statements in accordance with the Law on Investment Funds and the Financial Supervisory Authority's regulations on investment funds, and for such internal control as the Board of Directors of the Management Company determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (ISA). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the judgement of auditor including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Management Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Management Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors of the Management Company, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Additional information According to ISA 720, we also read the supplementary information contained in the Annual Report to determine whether this information is consistent with the audited financial statements. Stockholm, 30 April 2015 KPMG AB Mårten Asplund Authorized Public Accountant

Management Company East Capital Asset Management S.A., a wholly-owned subsidiary of East Capital Holding AB Corporate identity number: B 136364, incorporated 29 January 2008 Share capital: EUR 200,000 Address: 11, rue Sainte-Zithe, L-2763 Luxembourg Phone: +352 27 860 701 Fax: +352 26684717 E-mail: [email protected] Internet: www.eastcapital.com

Board of the Management Company Peter Elam Håkansson, Chairman of the Board Albin Rosengren, Board Member Johan Wigh, Board Member Mathias Pedersen, Board Member

Senior management of the Management Company Paul Carr, CEO Management Committee: Paul Carr, CEO and Conducting Officer Yves Wagner, Conducting Officer Magnus Lekander, Non-resident Conducting Officer

Depositary Skandinaviska Enskilda Banken (publ)

Supervisory authority The Funds are authorised in Sweden and regulated by the Swedish Financial Supervisory Authority, Finansinspektionen. East Capital Asset Management S.A. is authorised in Luxembourg and regulated by the Luxembourg supervisory authority, Commission de Surveillance du Secteur Financier (CSSF).

Legal Status of the Funds The Funds are mutual funds pursuant to the Mutual Funds Act (Swedish Code of Statutes 2004:46). The Funds cannot acquire rights or assume obligations, but are represented by the Management Company.

Auditor Mårten Asplund, Authorised public accountant KPMG AB. An agreement concerning the exchange of information and coordination has been entered into between the Funds' auditor and the Master Fund Company's auditor.

Reporting principles This Annual Report has been prepared in accordance with the Investment Funds Act (SFS 2004:46), the Swedish Financial Supervisory Authority’s regulations on investment funds (FFFS 2013:9) and the Swedish Investment Fund Association’s recommendations for the reporting of key performance indicators pertaining to investment funds.* The value of any cash in hand or on deposit, bills and demand notes and accounts receivable, prepaid expenses, cash dividends and interest declared or accrued as aforesaid and not yet received are deemed to be the full amount thereof, unless in any case the same is unlikely to be paid or received in full, in which case the value thereof is arrived at after making such discount as the Fund may consider appropriate in such case to reflect the true value thereof. Securities admitted to official listing on an official stock exchange or traded on any other organised market are valued at the last available reliable price on such stock exchange or market, unless such a price is not deemed to be representative of their fair market value. The financial derivative instruments which are not listed on any official stock exchange or traded on any other organised market are valued in accordance with market practice. Fund Shares/Units in undertakings for collective investment in transferable securities ("UCITS") are valued at the latest price determined and and obtained from the Master Fund. Both unrealised and realised profits and losses are reported in the accounts. The funds’ holdings in shares and other financial instruments have been valued with prices taken at 22.00 CET as per 31 December 2014. * Assets and liabilities are reported at their fair value.

Tax rules at a glance For the fund New tax rules for investment funds were put into place on 1 January 2012. The amended tax rules result in investment funds no longer being liable to pay taxes on income from assets that are part of the fund. Instead, physical unit-holders are taxed for their holdings via an imputed income (schablonintäkt) that is recognised as unearned income. The imputed income is calculated as 0.4 percent of the value of the units as at 1 January each calendar year. The imputed income is taxed at 30 percent, which results in an actual tax of 0.12 percent of the fund value. The new rules do not entail any changes to the current rules for taxing capital gains and any distributions with regard to units. Gains and distributions continue to be taxed at 30 percent. For unit-holders Special rules apply for legal entities and unit-holders domiciled outside of Sweden. We recommend that investors consult a tax adviser to get a complete explanation of how investments will be taxed.

Term definitions Active risk (tracking error), as reported in this annual report, describes how much the total return of the fund deviates from the return of its benchmark index. It is an indication of how active the manager has been, where a high value is an indication of active management and a low value is an indication of passive management. The turnover rate is a measurement of the proportion of the fund which is traded over a period of time. It indicates how short or long-term the management perspective is by reflecting the length of time that a security remains part of the fund. It is calculated by adding all purchases and sales respectively for a given period and then dividing the lowest total by the average of the fund’s assets under management. Ongoing charges is total costs excluding transaction costs, expressed as a percentage of the average of the Fund’s assets under management. Total risk (standard deviation) is a measure of the fluctuations in the fund’s total return over a set period of time. The higher the value, the higher the risk.

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