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Yearbook 2011Sustainability

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Printed on CyclusPrint Recycled

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Northern StarNorthern Star is a global multi-boutique asset manager specializing in active investment management and strategic partnerships with clients. Established in Helsinki by a senior team of financial industry professionals, Northern Star is striving to become a leading international investment management business with scale and institutional credibility. Leveraging its partnership with Limestone, Northern Star is pioneering in introducing responsible investing in worldwide emerging and frontier 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 first New Europe based investment managers that integrates the concepts of socially responsible investment and sustainable development into fundamental research process as essential factors for long term performance and risk management.

The European SRI Transparency logo signifies that the Limestone commits to provide accurate, adequate and timely information to enable stakeholders, in particular consumers, to understand the Sustainable Responsible Investment (SRI) policies and practices relating to the fund. Detailed information about the European SRI Transparency Code can be found on www.eurosif.org, and information of the SRI policies and practices of the Limestone SRI Fund can be found at Limestone website. The Transparency Code are managed by Eurosif, an independent organisation. The European SRI Transparency Logo reflects the fund manager’s commitment as detailed above and should not be taken as an endorsement of any particular company, organisation or individual

Limestone is a signatory to the United Nations Principles forResponsible Investment (UN PRI) and European SRI Transparency Code

InteractionTransparency

KnowledgeValue

4

If there is one clear message to learn from the financial crisis that has rocked the world for the better part of last four years, it is that change is needed. From the sudden understanding that borrowed welfare is not an asset but liability, to the realisation that the sacred ratings that the entire financial system relies upon are nothing more than more or less educated guesses, there are signs everywhere that the current Western financial model is not entirely 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 distributing the gains. We believe it is time to return to the very basics of investing, to do it in a way it was meant to be.

Limestone took up the task of introducing sustainable investing practices 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 multi boutique investment house with common sustainable investment framework. Northern Star Group brings together Limestone’s team with experience from emerging Europe and ambitious international 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, often considered by institutional 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 collection of investment themes driven by long term demographic and social shifts, as opposed to a political map of separate countries, is the underlying idea of Globetrotter Fund. Northern Star Russia was created to answer to the demand for a more sophisticated view on Russia than presented by the usual index driven mega funds playing the ever more virtual commodities-game.

While GDP in most rich economies is still below its level at the end of 2007, emerging economies’ output has jumped by almost one fifth over the same period. The rich world’s woes have clearly hastened the shift in global economic power towards the emerging markets. The long-term outlook for emerging economies remains bright, with less debt, more growth and huge potential to lift productivity. Investment flows will follow. Northern Star was created to accommodate that shift in a pioneering way. Building on long experience from global capital markets and grass root level ground work practice, Northern Star and Limestone team has something novel to offer.

We sincerely hope that this book will achieve its primary goal and convince you that it is not only possible to do things differently but it is also necessary in order to survive and prosper in these turbulent times. The world is full of opportunities.

Alvar RoosimaaCIO, Limestone

Tomi LångströmCEO, Northern Star

Dear Reader

5

Northern Star Group: Nourishing the Best of Boutique Culture

Responsible Investing Makes Sense From Day One

Nothing Sacrificed and Whole Lot Gained

Leveraging Limestone’s Three Year Success Track

Best Risk Management Tool for Emerging Markets

Integrated Research as Yin and Yang of Successful Investing

Limestone New Europe Fund

Update And Outlook

Globetrotter – Unlocking the Undiscovered World

What Are Frontier Markets?

Clear Investing 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 Frontier

Development and Challenges

Capital Markets and Corporate Governance

Companies in Focus

Why Governance Matters: From Investing To Litigation in A&D Pharma

Northern Star Group Responsible Investment Principles

Framework for ESG Evaluation

Evaluating Corporate Governance

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Contents

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The post crisis investment community is looking for new solutions with better alignment of motivation between investors and managers and more straightforward value and risk proposition. In the boom days when funds could pick and choose investors and assets piled up without too much effort, these were easily overlooked – unless things went horribly wrong.

Recent investment innovation has focused on themes like new asset classes and allocation techniques, new risk and return enhancing tools, theme investing, and new business models. Institutions that have gained the most from that innovation had strong investment beliefs which they were able to implement in a disciplined way, often benefiting from early mover advantage.

Institutions that lost the most were victims of their herd instinct 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 recognition is universal that even when it is obvious that small management controlled investment teams have higher motivation and potential to outperform, business risks often outweigh that prospect. People who are good at trading or investing 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 creating a multi-boutique asset management house: a base where talented fund managers could operate and share resources. A flight to quality and size often means a flight to “boring”, or benchmark-hugging strategies – entrepreneurs supported by institutional infrastructure are the solution. By partnering up with Limestone,

Northern Star Group:Nourishing the Best of Boutique Culture

7

Northern Star got to an instant start with licensed Luxembourg based infrastructure, and a talented team that had been building institutional quality service for the last three years.

Creating something new is an opportunity to combine all the newest and best innovations into one. In addition to modern business concept, Northern Star is focusing on the integration of two other areas of investing that promise to be market share winners in the coming years: responsible investing and emerging markets.

Non-financial 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 often leaves everything else unchanged within the investment process. Responsible investing is not so recent innovation, but is undergoing a transformation to adapt to real needs by real investors. There is still a rather small group of asset managers and institutional investors who take it seriously. Ahead of the crowd, Northern Star is being ESG implementation pioneer in new geographical areas and in new ways to integrate ESG into traditional valuation 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 potential to lift productivity. Investing in developing markets is traditionally considered to carry a higher degree of risk, and the main reason is the information problem: company specific data is not readily available. The pricing inefficiencies created by

that are an opportunity for investment managers with analytical resources and investment infrastructure capable to collect and process non-standardized data, including non-financial information.

Asset managers with success have often 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 multi-boutique 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 experimentation and learning from others.

We may not be able to change the world, but we will seek to be better by putting into action 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 often classified as high alpha seeking against indices. We believe that by being benchmark agnostic against traditional indices can actually lead into less risky portfolios when ESG is fully integrated into investment process.

Creating something new is an opportunity to combine all the newest and best innovations into one.

8

Northern Star has taken on a unique challenge to build up an emerging markets multi-boutique platform with a dedicated focus on sustainability and responsible investing. There are no readymade solutions towards

that goal and, as with every new thing in an established environment with sticky traditions, more threats and immediate problems are on the visible surface than quick wins.

Nothing Sacrificed andWhole Lot GainedMainstream investment community still 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 effort to demystify the concept of ESG research and social responsibility in investing. 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 investing is that it requires for immediate sacrifices in the performance and selection of opportunities, for the sake of doubtful benefits in the unclear future. This should not be the case. Our minimum exclusion and integrated research approach adds value from day one without any sacrifices. We hope that by increasing the size of our business we reach more investors and help turn socially responsible investing concept from „frown upon“ into „smiled upon“.

Leveraging Limestone’s 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 active investing in Emerging Europe with integrated environmental,

social and governance analysis before. The first three years have proven highly successful: fund’s 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 effective ways of assessing the extra-financial 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 portfolios would benefit from managing ESG risks, but it is in emerging markets where the degree is most acute. Gathering and assessing environmental, social and governance information, and limiting exposure to risks associated with extra financial factors significantly reduces „tail risk“ – the risk of unlikely events causing catastrophic damage. The real challenge hereby is the significant information problem. This can only be tackled by building up an inhouse research process that is capable of gathering the necessary information from outside the public data vendors’ services, and to integrate it into company valuation methodology.

Responsible Investing Makes Sense From Day One

9

The Yin and Yang ofInvestment Analysis

A 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 Invisible

Soft Facts

Financial strength

Financial results

Corporate governanceEnvironmental and social sustainability

Managerial strength

YIN

YANG

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Limestone New Europe SRI Fund celebrated its third anniversary in August 2010. Launched in the wake of the worst financial crisis in modern history – a few weeks before Lehman Brothers’ bankruptcy filing – the fund was the first 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 straightforward purpose: to find 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 ultimate goal is to outperform any competitive peer and investable market proxy in any three year time period. To achieve that goal the management team employs rigorous bottom up investment process, which is based on an in-house developed research framework and tools, including unique ESG factor integration serving primarily as a risk management tool.

Limestone New Europe Fund

20

40

60

80

100

120

140

July

08

Oct

08

Jan

09

Apr

il 09

July

09

Oct

09

Jan

10

Apr

il 10

July

10

Oct

10

jan

11

Apr

il 11

Limestone New Europe Fund

STOXX EU Enlarged Total Return

Source: Bloomberg

11

Looking back to last year, and reviewing year-old forecasts, it feels like deja vu. The final run-up to Limestone New Europe Fund’s three year milestone was again characterized by uncertainty about the sustainability of global recovery. Plenty of one off threats and hurdles kept popping up, like US debt ceiling debate, earthquake in Japan and of course the Greeks keeping the financial 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 setting the sentiment for Central and Eastern European markets.

Looking beyond the generic risk-on and risk-off market view that dominated investment flows, New Europe has shown surprisingly strong recovery from the crisis. From economic to political 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 positive.

The European Council concluded that Croatia is ready to become the 28th member of the European Union and accession treaty should be signed during 2011, which will enable the country to become a full member state in 2013. Moody’s raised the credit rating of Bulgaria

from Baa3 to Baa2 with a stable outlook. The increase is a consequence of the continuing fiscal discipline, the improved institutional stability as well as the relative flexibility of the financial system, the report reads. Bulgaria is effectively running a balanced budget and has very low levels of the public debt, something that is quite rare these days. In addition, Moody’s assessed

the public finance and the Bulgarian banking system to remain out of the influence of the Greek debt crisis owing to the considerable liquidity and capital buffers. EBRD revised upward its forecast for Romanian economic growth, saying it expects harsh austerity measures implemented under a multilateral financial program will pay off. And again, EBRD also assessed Greek influence and concluded that Greece’s 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 when it 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 and US debt, news from New Europe grew constantly more positive.

12

The above selecti on of news delibaretly focuses to the Southern part of New Europe, the least liked by investors in the crisis aft ermath and therefore the most neglected. Most markets in that region trade not much higher than at the bott om 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 portf olio has throughout 2011 shift ed more weight to the newest members of EU and the next two hopefuls, together oft en characterized as the „periphery“ of Eastern Europe. This is where we fi nd the cheapest companies with the most to benefi t from both the short term recovery and the longer term convergence. With careful liquidity management and rigorous bott om up research we are certain that for our portf olio the fundamental risk is not signifi cantly higher in the Balkans than it is in Warsaw or Prague. But the

room for future growth defi nitely is.The importance of Eurozone stability for New Europe is hard to overesti mate. At the same ti me it is important to understand the diff erence between the direct impact on domesti c economy of CEE countries and the potenti al damage that would come from another wave of risk aversion and renewed general percepti on downgrade, would Greek crisis escalate further. The former is relati vely moderate and the eff ects have already run their course. The latt er, however, is what moves fi nancial markets and short term asset prices; the “risk off ” trade that pushed prices lower in CEE is the direct consequence of that.

Naturally, all depends on the scale of crisis escalati on. 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 additi on, investments into the CEE region largely come from the Eurozone, and would therefore be negati vely aff ected in such a case, too. Even though there are indicati ons of a recovery that should shift in the coming months and years from export-driven growth to more balanced growth, the economic recovery will conti nue to rely on external factors from the Eurozone. While CEE countries with a larger domesti c demand base may be able to counter some negati ve external eff ects more effi ciently than

Recent fi nancial crisis and subsequent reforms have turned New Europe into a fi nancially sound and very competi ti ve region within the borderless European Union.

In the „periphery“ of Eastern Europe we find the cheapest companies 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)PER CAPITA

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%

PUBLIC DEBT

%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%

BUDGET DEFICIT

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%

MARKET CAP

€MN

WIG20

PX

BET

SOFIX

BUX

CROBEX

BELEX15

OMXT

SBITOP

OMXV

DJ STOXX

STOXX 600

MAIN INDEX

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%

RETURN FROM

‘07 HIGH

Source: GDP: World Bank , GDP Forecast: IMF World Economic Outlook April 2011, Budget Defi cit: Eurostat

13

smaller and less diversified economies in the future, the overall region will continue to depend on economic trends in the Eurozone, and especially Germany. CEE will

not only mirror the chances stemming from continued convergence but also the risks of a slowdown in growth.

Considering that New Europe is a relatively small investment region with open economies and strong ties to Western Europe, it is unlikely to decouple from general trends in global markets. What it offers, 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 continue to do what we know best: finding the most attractive companies in the region and constructing a unique portfolio to deliver the outperformance.

Working in equity markets from 1996 as equities trader and portfolio manager, Alvar joined Suprema Fund Management in 2000 as a fund manager. In 2003 Alvar started in Hansa Investment Funds where he initiated the set up of CEE investment management team and a portfolio of funds including the Morningstar 5* rated Hansa Eastern Europe Equity Fund. In 2007, Alvar co-initiated 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 in Estonia in 2005 and 2006. Alvar has a MSc in Finance degree from London Business School.

For the first time ever, risk of CEEMEA, as measured by CDS spreads, has dropped below Western European level. This would suggest that convergence of asset valuation levels should converge, too.

Source: Bloomberg

Alva

r Roo

simaa

Head

of E

aste

rn E

urop

ean

Equi

ties

50

100

150

200

250

300

350

Jan

10

Feb

10

Mar

ch 1

0

Apr

il 10

May

10

June

10

July

10

Aug

10

Sept

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

ch 1

1

Api

rl 1

1

May

11

June

11

July

11

Itraxx CEEMEA

Itraxx Western Europe

14

For those with the skill and patience to choose carefully and a strong view on how the world will look like in the coming years, global frontier markets provide excellent opportunities. There are many unexplored markets with exceptional value and growth opportunities 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 Globetrotter fund was created to do.

What Are Frontier Markets?Northern Star defines frontier markets as the most inefficient emerging markets with historically low correlation 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 systematically creates asset mispricing and that gives remarkable opportunities for investors who are capable of conducting a deeper research on the grass-root level

as well as assessing the soft values and company’s interaction with the environment around it.

There are many, both objective and subjective, reasons for the inefficiencies 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 haven’t noticed them yet. Some markets are restricted from foreign investors, which provide opportunities for

those who have the capability to dodge the restrictions. Good examples of these are Chinese and Saudi Arabian local markets that Globetrotter has access to, thanks to the local network created over many years of activity in the region. Then there are markets like Russia, and

Globetrotter – Unlocking the Undiscovered World

The lack of investor base overlap with global markets systematically creates asset mispricing in frontier markets.

15

Central Asian and Eastern European smaller countries that suffer from reputational downgrades that have little to do with real developments, thus offering extraordinary opportunities for investors with deeper local knowledge. Selected countries in Globetrotter frontier market universe Quite often, frontier markets funds base their portfolio construction on indexes and geographical borders. This usually means that large countries and regions have large weights and small ones have small weights, no matter what the outlook. Stock-wise, biggest companies in the market that are added to indexes usually get more attention. In the end of the day, everybody is doing pretty 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 potential in frontier markets. Some large countries are way too expensive during some periods while small markets could have tremendous potential. But higher risk profile that comes with big potential makes it seem to be safer to keep away while it really only requires more homework. Moreover, the companies operating in

these high-potential 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 after such prosperous gains.

Racing the index does not necessarily make anybody rich either. A fund can outperform a benchmark index but still give a negative return. Who would win in this case? Working on one’s own speed, having only the target performance in sight will create value for investors and increase their wealth.

Parts of the world considered frontier 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-investing comes in.

Companies operating in the high-potential markets are in the beginning of their fast growth phases where the highest returns come from.

CambodiaChinaCongo, Dem RepEgypt, Arab RepGhanaIndiaIndonesiaIran, Islamic RepIraqKazakhstanKenyaKuwaitLiberiaMalaysiaMongoliaMozambiqueNigeriaQatarSaudi ArabiaUnited Arab EmiratesVietnam

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 km²Population, mln, 2010

GDP 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

The idea of investing thematically 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 identify those themes that benefit first 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 diversification benefits in the fund.

While different parts of the frontier markets are in a different phase of development, the themes to benefit are also different. As changes take place, the winning themes change, so modifications should also be done in the portfolio in order to stay ahead of the market.

The benefitting themes are usually quite well protected during the times of market turbulence, because the big money has not reached them yet or does not care about them. Only smaller number of focused investors is involved in the beginning.

Clear Investing Principles:Key to SuccessFalling in love with companies is quite easy when doing as much work with them as frontier markets require. Knowing them so well and seeing the opportunities they offer could lead to buying assets that are relatively fairly priced. To prevent that, quite straightforward investing principles have to be set in place.

The whole investment process of Globetrotter is based on fundamental and geopolitical analysis as well as grass root level research while also adding soft values like environmental, social and governance factors. All the markets in frontiers’ universe are very different, there are no homogenous areas. All markets have different political regimes and cultural characteristics. They all have different risks involved. Before investing, all these aspects must be considered and measured accordingly. This is the one place where geographical borders actually do matter and are reckoned with.

In Globetrotter, the most important principle while building the portfolio 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 inefficient 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 SERVICES AND EXPLORATION

AFRICAN CONSUMER

MIDDLE EAST RECOVERY

SAUDI ARABIA OPENING GATES

Investing thematically captures the maximum growth in the selected areas of economy while not dragging the lagging parts of it along.

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protection during difficult times while providing an excellent upside.

Clearly, nobody has a crystal ball in the office. Even if all the fundamentals support the upside principle and inefficient markets approach, the performance can turn out to be less than expected. But it can also turn out to be much better. 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 considerations. Discussions of sustainability issues form an integral part of management and analyst meetings and play important role in assessing the long term business prospects of most companies. In choosing its investment themes, Globetrotter prefers developments that support local societies and improve people’s living conditions. ESG factors are integrated to financial models in the calculation of the target price. There is no

intention to punish companies that do not disclose their ESG practices but rather engage with them, explain the mutual benefits, and encourage them to open up. In frontier markets, the challenge is big – most companies do not have a habit of disclosing their ESG information, the reasons can be anything from cultural to the fear of competition or clients’ reaction. Among many good causes the ESG integration serves, it is also a vital risk management tool against damaging event risks in an environment where public information availability is underdeveloped.

Investment Themes in FocusTo give example of some out of more than ten investment themes in the portfolio, food and cement, as basic crucial necessities in frontier markets, make good cases. Food, one of the latest additions to Globetrotter, is a crucial issue everywhere, but especially so in the

According to Risklab research, “tail risk”, the risk of unlikely events causing catastrophic damage, can be reduced nearly 40 percent in an emerging markets portfolio that has limited its exposure to ESG risks.

The most important principle is to have at least 50 percent upside for each theme and company over the next 6 to 18 months.

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Ari-Pekka is one of the most experienced frontier market investors in the Nordic investment industry. With over 23 years of total experience in equity markets and portfolio management, he first started investing in emerging markets in early 1990’s. A-P has managed funds of various size and style, including 1.5 billion euro emerging/frontier market equity portfolio in Finnish Varma. Prior to Varma, from where he left to co-found Northern Star, A-P worked as the Head of Equities for institutions like LGPI and SEB Private Bank Luxembourg.AP has acted as a seed and anchor investor for numerous emerging market funds, including the first China A share Fund, and funds in Iraq, Iran, Vietnam and Cambodia.

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developing world, where population growth is strong and urbanization pace rapid.

There are 925 million undernourished people in the world, according to Food and Agriculture Organization of the United Nations (FAO) estimate for this year, with most of them, 62 percent, living Asia and Pacific, followed by Sub-Saharan Africa with 26 percent of world’s hungry people. Along with the very poor, very hungry people, come the “newly rich people” or those who have the benefit of increasing personal income together with the development of the broad economy. Higher disposable income reflects on the kitchen-table quite fast – products with higher quality or even more shiny labels have high attraction factor. These people live, additionally to the regions mentioned above, also in Middle East and Eastern Europe with the last one having recorded the most rapid growth in per capita consumption of basic foods in recent years.

Approaching the companies through the eyes of responsible investing, we look for evidence that the production is clean, traceable and sustainable, that the companies create new jobs and give their share in improving living conditions of local people or customers. They also have to preserve local environment and take steps to reduce their negative influence.

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 construction plan foresees building 36 million housing units in the next five 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 deficit of 17 million homes and poor state of infrastructure, both which the country’s Vision 2020 plan intends to relief. Currently, Nigeria has one of the lowest annual cement consumptions per capita in Africa of 57 kg. That compares to South-Africa’s 210 kg and Gabon’s 330 kg consumption per capita. The country is currently in cement deficit that is expected to end by 2013 when only local production will be sold. That also means better 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 effects. They are big employers and take initiative in the local social projects.

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Russia, always the land of plenty and full of promise, has yet never really fully delivered. Blame it on difficult history or bad luck, the Russian market has retained its reputation of being risky and opaque. And yet, for skilful investors, there have been periods over the last decade when substantial outperformance could have been extracted. Northern Star, in the search for the right model in Russia, has turned its main attention to corporate governance of Russian companies, as a natural source of much needed portfolio risk reduction.

It is generally accepted that governance issues are one of the most important factors differentiating 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 relationship 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 capitalization, the top ten companies delivered a growth of over 2,700 percent starting from 2002 up to 2Q 2011, and over 400 percent since 2009. Conversely,

the bottom ten companies increased shareholder value by mere 583 percent and 145 percent, respectively. The RTS index rose 613 and 190 percent during these periods. Statistics prove clearly that selection from corporate governance viewpoint makes a large difference 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 times to comply even with the very minimum legal requirements enforced by the exchange. Good thing is that the regulations are improving, slowly but surely. For example, insider trading became criminal offence 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 solid corporate governance

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must be paid in 60 days instead of 6 months allowed earlier. It is unfortunate that often companies that underperform in terms of governance make public spotlights, and that creates a biased image of the whole market.

When investing in Russia, it is vital to know the controlling shareholders’ background and their ambition with regard to the company. Cases of speculators who wrap up poor businesses in attractive packages in order to make a quick sale are not uncommon. At the same time, there are plenty of new generation entrepreneurs truly interested in long-term value creation. Making a clear distinction is crucial but definitely not an easy task. The main obstacle to make things easier is the still poor information disclosure habit in Russia. Among the main reasons behind that is the Russian legal and financial infrastructure that is still underdeveloped. Also, tax legislation is deficient, which makes companies afraid of disclosing information as it is not clear what is allowed

and what is prohibited: anything can potentially used against you. And what is most important, the general understanding of the potential benefits 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 supportive.

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 relations. They have moved out of the “comfort” zone and working in the name of gaining foreign interest and having an international investor base. In many cases, they just do not know how to communicate their efforts to the public. This is where dedicated research and engagement based analysis can make a big difference. Management meetings and thorough homework will help to find the true gems in the market.

A veteran of the Russian financial markets, Maxim was advising Pohjola Asset Management’s OP 650m EUR OP Russia Fund prior to joining Northern Star in 2011. During his tenure with Pohjola from 2008, OP Fund was firmly at the top of peer group rankings. Previously, Maxim was Director of International Equity Sales at Deutsche Bank, Moscow. Having more than 20 years of experience in Russian and emerging market equities from New York, London, Moscow and Helsinki, Maxim deep knowledge of the Russian equity markets and boasts a unique network of connections in local business community.

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Research is the cornerstone of Limestone, and the whole Northern Star Group’s, investment process. While necessarily effective in its traditional fundamental focus, the true uniqueness in the approach lies in the continuing development of the integration of environmental, social and governance (ESG) research to fundamental valuation.

Since the last Yearbook, we have developed further the concept of including ESG assessment to company valuations and have been able to reach remarkable results. Our approach to responsible investing is obviously integration, defined as an inclusion of ESG considerations to traditional financial analysis. Theoretically, integration 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 thematic 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 traditional approach provides a starting point for ESG implementation to fundamental analysis, it did not offer any readymade solutions.

In previous Yearbooks we have described the grading mechanism that is implemented in calculation of cost of capital, which has been developed in order to provide distinct tools for our research analysts for uniform assessment of ESG factors. In addition to in-house work, we have been communicating our message and have become even more visible in the SRI community. Our presentations in several high profile responsible investment conferences and investor events have received a lot of positive feedback. It is understandable that our structured and scalable solution to integration 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 use in investment decisions that take into consideration ESG aspects.

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who have mostly seen and been sold traditional ratings-based qualitative assessment methodology that has little 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 rating 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 respectively 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 one to five. Screening of the investment universe and fund portfolio at one point indicated that the average score in the universe was 2.85 and that of the portfolio was 3.9. Therefore, although 3 different analysts were granting the grades independently, the average company in the

universe was graded slightly below average, and the fund portfolio constituents were doing significantly better. Altogether, the grades give a snapshot of the management quality and awareness of environmental and social issues, as there can’t be perfect environmental management and a total disregard of social issues within one company.

Having built that assessment mechanism, without additional tools, every individual result would depend only on single analyst’s subjective view, which would not ensure the comparability of results that is needed for portfolio construction purposes. Thus, although the analyst responsible for assessing companies knows more than anybody else on the subject and is most qualified for granting the grades, supporting tools for reaching a certain degree of uniformity in final grades are required.

For building the tools, the starting point would be the assessment of information, analytical 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 than banks, whereas social risk is higher in construction 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 construction of risk assessment tools.

There are better and worse companies in the investment universe and their respective risk levels are taken into account in assignment of target price through cost of equity calculation.

Tourism & Leisure

IT ServicesMedia

Telco Finance

Real Estate

Construction

Soci

al R

isk

LOW

HIGH LOWEnvironmental Risk

Automotive

Retail

Pharma

FoodUtilities

Oil & Gas

Metals & Mining

Source: Limestone

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The risk profile of different sectorsPosition of sectors in Environmental and Social scale is arbitrary and in real life the differences between risk levels are narrower than can be deducted from the graph above. Inherent company risk level provides only the first step for assigning ESG grades and adjustment to cost of equity. When the starting point, or base risk as we call it, is set, the risk evaluation will be adjusted. Information required for evaluation is gathered by sector analysts that have the widest set of

information available and are therefore most qualified for such task. Quality of governance and approach of executive management towards ESG issues are the prevailing criteria affecting all relevant metrics. In addition to implementation of relevant policies and availability of documentation on governance, social and environmental aspects are analysed. In addition, community support, stakeholder relations and charity work are also taken into consideration. Description 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 significant attention to it throughout the process. It is the dominant factor and in every step of evaluation governance is the silver lining that at the end will be decisive. The base risk can move to both positive and negative side, meaning that e.g. initially low risk profile of financial 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 additional information gathered and processed by analysts, we introduced a descriptive 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-HouseResearch

Environmental RiskHIGH LOW

HIGH LOW

HIGH LOW

GOVERNANCESocial Risk

Management Quality

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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 Baltic region, and managed Hansa Central Asia Equity Fund, the first dedicated UCITS fund investing in the region. Started as an equity analyst at Suprema Securities in 1997, Rein later held the positions of Senior Analyst, Associate Director and Director until 2006. He participated in a number of landmark M&A deals and IPO’s in the Baltic region with main responsibility areas of valuation and structuring. Rein is a CFA Charterholder and holds MSc in Economics and Business Administration degree from University of Tartu.Re

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Risk Adjustment LeversThe underlying principle in RAL is that every company is put on respective scale from environmental and social perspective, based on a pre-assessed sector risk. Separate issue is managment quality that is given its respective position on the weak-versus-strong scale. Unlike environmental and social evaluation, there is no pre-set base, and evaluation is already based on available detailed information, not just sector risk. So, the levers are moved towards positive or negative side of the axes according of the results of research. Final position of the company on these three measures will serve as the foundation in assigning of grades and adjustment to cost of equity. Accordingly, position 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 position. Practical application has proven that we have very few companies with grades in extreme positions like 1 or 5.

In essence, each company’s starting position is determined by the industry risk profile, and then the analyst starts to look for justifications for moving the levers in either way, preferrably towards lower risk. It is not uncommon that companies will be given the final grade that is less than their starting position.

This happens when we have proof of irresponsible development, e.g. there might be labour relations’ issues in certain telecom companies that usually should be of low risk, or predatory lending practices 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 adaptation of risk adjustment levers we have provided our investment team an additional tool to better grasp risk profiles of the companies and to further enhance the integration of ESG principles into financial modelling and investment decisionmaking. However, the road does not stop here and we expect the work on research process to continue. The goal is to get the environmental, social and governance research completely out from the „soft 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 confidence in the righteousness of our path.

There is no doubt in our minds that ESG integration is really the only way forward.

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Serbia

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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, Croatia 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 fertile 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 offers 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, respectively. Additionally, the surface holds coal, iron ore, copper, zinc, gold and silver reservoirs, to name a

few. Agricultural products such as wheat, maize, sugar beets, sunflower, raspberries, beef, pork and milk are produced.

The capital of Serbia, Belgrade, has a population of close to 1.5 million out of 7.3 million in the country. Serbian national identity began emerging in the 8th century, with the ruling of prince Višeslav. The country’s territories expanded until being defeated by the Turks in 1389. In the next century, Ottoman 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 after a number of political and military struggles. In 2009, Serbia submitted its application for European Union membership.

Country Focus: Serbia, the Last European Frontier

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Development and ChallengesFollowing the democratic changes in 2000, Serbian economy witnessed relatively 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 of foreign direct investment inflows in Serbia during that period. Due to severe impact of the financial crisis, the Serbian market has been largely abandoned by international investors in the past three years. Together with the positive signs of recovery, interest is, though, returning.

The biggest challenges for the Serbian transition 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 90’s, 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 efforts to shrug off the legacy of that unfortunate period, including the much publicized catching and extraditing alleged war criminals.

The business infrastructure modernization is still in early stages. Governance regulations and enterprise restructuring laws, and competition 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 positive effect on the private businesses operating 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 still ranked just 89th of 183 in the world (Poland at 70, Croatia at 84, Greece at 109, and Russia at 123) in 2010. Companies operating in the country have brought up issues of political instability, practices of informal sector and limited access to finance. Dedicated efforts to tackle the issues hindering a better ranking were started in 2009 and are at their final stages of implementation.

Another tool to strengthen and accelerate the transition is the EU integration process. It provides a unique incentive for political and economic reform and aims to bring the country up to European standards in all areas covered by EU treaties. Following free travel arrangements from 2010, accession talks have begun in 2011 and an official opinion regarding Serbia’s 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, Raiffeisen, IMF

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period to EU membership could be very rewarding for investors willing to take on some liquidity risk.

Capital Markets and Corporate 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 commodities. In the beginning of 20th century, the most wanted and stable securities listed on the exchange were government securities. 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 exchange’s 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 recommendations which should be implemented. The code was adopted in 2008. On stock market’s home page, there is Corporate Governance Scorecard introduced for companies to fill and evaluate their corporate governance practices on different aspects of the issue. That helps them improve their knowledge about corporate governance factors and also see where their efforts are still lacking.

Corporate social responsibility (CSR) approach is relatively new to Serbia. Although awareness of this exists, it is mostly on the level of concept-formation rather than on the level of locally realized practice. 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 Initiative was introduced and in 2008, Business Leaders Forum was established. While the first one was founded to inspire, institutionalize and put into practice the concept of corporate social responsibility, the forum actually gathers Serbia’s socially responsible companies to one network. These companies have a shared goal of promoting CSR and operating in a sustainable way to benefit 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 operations. On the other side, it also has a task of connecting business leaders to government representatives to identify social and economic problems and find appropriate solutions. It’s a start.

We have met many managers during our company meetings in Serbia who are very well aware 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 scale for financial investors to go through the accession process.

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Companies in Focus

Tigar A company established in 1935 in the southern Serbian town of Pirot, has transformed itself from the simple car tire manufacturer for the entire Yugoslavia into world class rubber footwear and technical rubber specialist. Being historically the largest producer of car tires, the management realised in the early stage that in highly competitive international environment with ever expanding R&D budgets of major competitors, there is no place for a small independent tire 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 financially supported by EBRD and IFC. By 2009 the Company exited the tire business and focused on production of rubber footwear and technical rubber products.

With an investment of over 23 million Euros in development, reengineering and upgrading of manufacturing facilities, the company has created a

compact and well-equipped industrial complex, Tigar 3, which enjoys a surface area of some 22 hectares, and encompasses cutting-edge industrial capacities in one of the region’s largest industrial zones. Tigar operates now in attractive sector, as market share of rubber boots on global scale is increasing, as leather boots are significantly more expensive. Also competitive situation is favourable, as there is only one competitor left in Europe and there is some competition 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 national chain of car service stations and distributes tires, batteries and motor oils in Serbia. This forms a unique asset with high potential for disposal to strategic investors that are expanding their operations in the CEE region, where

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Serbia is the natural next market to enter. In addition to excellent competitive position, the Serbian market will also witness high growth, as only from 2011 all cars are obliged to use winter tires.

Tigar has made good progress in the field of CSR. It has implemented ISO and OHSAS certificates, as well as established modern, highly efficient production facilities with low level of energy use and minimum waste. In 2010 the Company commissioned the plant for production of recycled-rubber products. Corporate Governance practices are of high standard, developed in cooperation with IFC, and they are exceeding the requirements of local stock exchange. Tigar is also considered to have one of the most professional investor relation services in Serbia, which Limestone team has experienced several times in company meetings during our trips to Serbia.

AIK Banka Founded 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 National 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, Greece’s 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 offers short term credit, credits for both export financing and development financing, as well as corporate depositing products. Great variety of payment cards, safe-depositing, money transfer, and electronic banking services are also on the offer. The bank has also built a reputation of a strong dealer-broker company on local capital markets. Among other Serbian banks, AIK Banka especially differentiates from the rest of the group by its exceptional capitalization level with CAR above 30%, together with excellent operational efficiency: cost to income ratio is well below 30%.

Such a strong market position combined with remarkable development potential 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 after meeting the newly appointed Chairman in Belgrade in spring 2011. Strength of the capital base, massive earnings potential and extremely low valuation make AIK an exellent case for any investor who is looking to get exposure to Serbian development.

EnergoprojektEnergoprojekt is the largest engineering and construction group in Serbia. Through its network of regional branches, subsidiaries, joint ventures and other corporate entities, Energoprojekt controls projects in 24 countries across four continents. From the Yugoslav days, Energoprojekt has retained its position as one of the major design, engineering and construction companies in the South-eastern Europe. With a solid reputation, and revenues of approximately €200 million per annum and annual contracts in excess of €400 million, Energoprojekt presents a very good platform 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 international leaders in the fields of engineering, construction, and project management, so that the investors, partners and clients will perceive them as an integral part of their own success, satisfied 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 reputation in this field, as knowledge and experience of employees are the factors that give

Energoprojekt decisive competitive edge. Operations in a number of countries on several continents require top scale quality control and adherence of strict environmental regulations. Therefore, the Company has adopted the ISO quality management system. Energoprojekt supports the objectives and the ten principles of the Global Compact and has formally joined The UN Global Compact Initiative. 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 pharmaceuticals distribution 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 offering, which brought in no new capital for ADPH. One GDR was priced and sold for 12 EUR.

The company, initially struggling with operational and management issues, went through a complete turnaround in 2007—2009 when new management was installed, costs structure and operations 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 listing and conducted several meetings with the management over the years. We always believed that the company should be able to capitalise on their unique market position, but were not convinced until managerial capacity was boosted. In 1H10 report, sales were up 30% over last year, and net profit was 17.5m EUR for the period, representing 80% of consensus full year 2010 estimates.

Minority SqueezeADPH was always considered as an obvious takeover target, and with financial success the potential to attract strategic interest obviously increased. The majority owners, allegedly approached by interested parties, 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 time 2010, and was carried through by February 2011.

Limestone was one of the initiators of minority shareholder revolt against the buyback and was among the applicants in legal proceedings against the majority shareholder in Dutch court.

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 protection usually enjoyed by the stockholders. Second, company’s board members, except for one, turned out to be not independent and in fact quite directly tied to majority shareholder.

Why Governance Matters:From Investing To Litigation in A&D Pharma

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December 17 2010Public announcement:

December 21 2010Email: Final Applicants:• Limestone• Kairos• BankInvest• Henderson• T.Rowe Price• East Capital• SEB• Lupus• et al

Legal Councel:• Baker & McKenzie

A&D Pharma Holdings N.VProposed Delisting of GDRs and Termination of Depositary Agreements

Proposed Purchase of GDRs and Reduction of Share Capital Announcemen of Board Changes

From owners of 65% of GDR’s / 24% of the Company:1. Letter to the Board of Directors of A&D Pharma Holdings N.V.2. Letter to the Citibank (holder and issuer of the GDR’s)3. Enquiries with Banks financing A&D Pharma, indirectly also the buyback4. Enquiries with global industry peers to search for alternative offer5. Enquiries with London stock Exchange6. Application to Dutch Court’s Commerce Chamber

Responses:1. Company claimed that liquidity on AIM is low, listing is costly and it is time consuming to market the company for public investors2. Citi referred to prospectus’ small print3. Banks were unwilling to take any stance without court decision4. Stock exchange: formal rules are not violated5. Court referred to prospectus’ small print where risk of delisting is always mentioned, and that no existing law is broken

Shareholder’s meeting on January 31, 2011 decided to delist the company, end the GDR agreement with Citi , 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 worth significantly more when sold to strategic investor.

Dear fellow investors,

Limestone is 100% commited to fight the delisting, even if for the principle; their actions is cynical, ugly and a grand violation of all the ethical standards we stand for.

As it is clear from ING’s preliminary study, straight forward legal means are scarce. We lack previous experience in such cases but the first option coming to mind is approaching the banks that, according to the announcement, have veto power. Could any of you who has better access to experienced legal counseling, come up with additional ideas?

Looking forward to fruitful discussion and productive action.

Kind regardsAlvar RoosimaaFund ManagerLimestone Investment Management

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As an integral part of its fi 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 capabiliti es.

Proxy voti ng 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 voti ng primarily together with engagement to support and sustain engagement results.

Framework for ESG Evaluati on Evaluati on 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 organizati on faces from environmental and social factors.

In order to examine ESG performance of companies, our analysts are evaluati ng all three factors separately using their professional skills and tools provided by the company, supported by internally created „cheat sheets“ for sectors and regions. The latt er should ensure that the evaluati on process is standardized enough to make the results comparable across companies, sectors and markets. Initi al informati on gathering for analysis is conducted using public sources, such as company websites, reports, media and info vendors. If public sources provide inadequate amount of informati on, the analysts are expected to engage the company directly for more informati on and address unanswered questi ons during company meeti ngs.

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 modelsTarget price assignment

Discussion at investment Committe

Engagement and Proxy Voting

Investment Desicion

No investment/Further analysis

Inclusion intoportfolio

All info publicly available

Investment Idea selection based oninvestment 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

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Corporate Governance PrinciplesThe Global Principles of Accountable Corporate Governance create a framework by which Northern Star (NS) executes its proxy voting. In addition, the Principles provide a foundation for supporting our corporate engagement and governance initiatives to achieve long-term sustainable risk adjusted returns.

Corporate objectiveThe overriding objective of the corporation should be to optimize the returns to its shareholders over time. Where other considerations affect this objective, they should be clearly stated and disclosed. To achieve this objective, the corporation should endeavour to ensure the long-term viability of its business, and to manage its relationships with stakeholders effectively.

Disclosure and transparencyCorporation should disclose accurate, adequate and timely information, in particular meeting market guidelines where they exist, so as to allow investors to make informed decisions about the acquisition, ownership obligations and rights, and sale of shares.

Voting rightsThe exercise of ownership rights by all shareowners should be facilitated, including giving shareowners reasonable notice of all matters in respect of which shareowners are required to or may take action in

the exercise of voting rights. Boards should treat all corporations’ shareowners equitably and should ensure that the rights of all investors, including minority and foreign shareowners, are protected. Corporations’ ordinary shares should feature one vote for each share. Corporations should act to ensure the owners’ rights to vote. Divergence from a ‘one-share, one- vote’ standard which gives certain shareowners power disproportionate to their equity ownership should be both disclosed and justified.

AuditAnnual audits of the financial statements carried out on behalf of shareowners should be required for all corporations. The audit should be carried out by independent, external auditors who should be proposed by or with the assistance of, the audit committee of the board (or its equivalent where applicable) for approval by shareowners. The corporation’s interaction with the external auditor should be overseen by the audit committee on behalf of the shareowners. To limit the risk of possible conflicts of interest, non-audit services and fees paid to auditors for non-audit services should be both approved in advance by the audit committee and disclosed in the annual report.

Corporate BoardsThe board of directors, or supervisory board, as an entity, and each of its members, as an individual, is a fiduciary

Good corporate governance is an integral element guaranteeing that companies are well managed, deliver long-term returns to their shareholders and take account of their responsibilities to society and the environment. Therefore, NS selects investments

based on investment potential and good corporate governance and engages on environmental and social issues with those companies that need guidance with material ESG factors.

EvaluatingCorporate Governance

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for all shareholders, and should be accountable to the shareholder body as a whole. Each member should stand for elections on a regular basis.

Corporation should disclose upon appointment to the board and thereafter in each annual report or proxy statement information on the identities, core competencies, professional or other backgrounds, factors affecting independence, and overall qualifications of board members and nominees so as to enable investors to weigh the value they add to the company. Information on the appointment procedure should also be disclosed annually.

Boards should include a sufficient number of independent non-executive members with appropriate competencies. Responsibilities should include monitoring and contributing effectively to the strategy and performance of management, staff key committees or the boards, and influence the conduct of the board as a whole. Accordingly, independent non-executives should comprise no fewer than three members and as much as substantial majority. Audit, remuneration and nomination board committees should be composed wholly or predominantly of independent non-executives.

Corporate Remuneration PoliciesRemuneration of corporate directors or supervisory board members and key executives should be aligned with the interests of shareholders. Corporations should disclose in each annual report or proxy statement the board’s policies on remuneration — and, preferably, the remuneration break up of individual board members and top executives — so that investors can judge whether corporate pay policies and practices meet that standard. Broad-based employee share ownership plans or other profit-sharing programs are effective market mechanisms that promote employee participation.

Strategic FocusMajor strategic modifications to the core business(es) of a corporation should not be made without prior shareholder approval of the proposed modification. Equally, major corporate changes that in substance or effect materially dilute the equity or erode the

economic interests or share ownership rights of existing shareholders should not be made without prior shareholder approval of the proposed change. Shareholders should be given sufficient information about any such proposal early enough, to allow them to make an informed judgement and exercise their voting rights.

Operating PerformanceCorporate governance practices should focus board attention on optimizing over time the company’s operating performance. In particular, the company should strive to excel in specific sector peer group comparisons.

Shareholder ReturnsCorporate governance practices should also focus board attention on optimizing the returns to shareholders over time. In particular, the company should strive to excel in comparison with the specific equity sector peer group benchmark.

Corporate Citizenship, Stakeholder Relations, and the Ethical Conduct of BusinessThe board is accountable to shareowners and responsible for managing successful and productive relationships with the corporation’s stakeholders. Corporations should adhere to all applicable laws of the jurisdictions in which they operate, and disclose their policies on issues involving stakeholders.

Corporations are encouraged to develop performance-enhancing mechanisms, which align employee interests with shareowner and other stakeholder interests. These include broad-based employee share ownership plans or other profit-sharing programs that are designed to enable employees to share in improved returns to shareowners.

Corporations should adopt and effectively implement a code of ethics and should conduct their activities in an economically, socially and environmentally responsible manner. The board is responsible for determining, implementing and maintaining a culture of integrity.

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Corporate Governance ImplementationCorporations should comply with a widely recognized national corporate governance code. Where such a code does not exist, investors and others should endeavour to develop a code. Each corporation should disclose the code that is applicable to it, whether it is complied with and, where not, the reasons for non- compliance. Institutional investors should give due and informed consideration given by corporation for such non-compliance.

Corporate governance issues between shareholders, the board and management should be pursued by dialogue and, where appropriate, with government and regulatory representatives as well as other concerned

bodies, so as to resolve disputes, if possible, through negotiation, mediation or arbitration. Where those means fail, more forceful actions should be possible. For instance, investors should have the right to sponsor resolutions or convene extraordinary meetings.

Evaluating Environmental andSocial FactorsNS has developed internal evaluation system based on sector and region specific material social and environmental factors. Our analysts use sector specific „cheat sheets“ to test whether the company has the understanding of the risks and challenges that it creates with its operations and how the company manages those risks.

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Yearbook 2011Sustainability