Risk Parameters

The Mutual Fund's risk profile is the quantity and type of risk Expat Asset Management takes investing the Fund's assets to the end of attaining the desired yields. The Fund's risk profile is different from security-specific risk factors, as well as from risk factors related to the Mutual Fund's activities.

Investment in the units of Expat New Europe Stocks involves taking medium-to-high risk.

In performing its functionsthe hund is exposed to various types of risks affecting its performance. The major risks to be taken into consideration by investors, when they invest in Expat New Europe Stocks units are as follows:


Market risk

The market price of the financial instruments in which the Fund invests may fluctuate as a result of changes in the economic and market environment, central banks' monetary policy, issuers' business activity, the sector in which the issuer operates and the demand and supply on the securities market. There are certain moments when stock prices on the market (stock exchange) may fluctuate significantly. This market risk affects the Fund's NAV, which will also fluctuate as a result of the changes in the market prices of stocks and other securities, the Fund has invested in. Not all stocks traded on a market (stock exchange), and not all stock markets change their prices in the same direction at a given moment and there a various factors influencing the market price of certain stock (for example, financial statements, stating that the issuing company's profits have decreased; loss of a major client; a lawsuit is filed against the company involving a claim for a large amount of money; change of the regulatory framework of an industry/sector). Not all factors of the kind can be predicted.

Expat Asset Management can reduce, yet it cannot completely eliminate, the effect of investment price fluctuations, through diversification of the Fund's portfolio. To diversify stock investments, Expat Asset Management plans to invest in stocks issued by companies belonging to various economic sectors, as well as to stick to the investment limits imposed on investment in stocks and other financial instruments of a single company.

Market risk may take the shape of interest, currency, price, liquidity and inflation risk.

Interest risk

Interest risk is the possibility of a decrease of security prices as a result of interest rate increase. In general, interest rate increase has an unfavourable effect on both fixed yield securities (bonds) and stocks. There are various methods of limiting interest risk through the use of derivative instruments such as futures, swaps and options.

Currency risk

Currenct risk is most of all related to investment instruments in the Fund's portfolio, denominated in foreign currency. These instruments's BGN value may fluctuate as a result of currency exchange rate fluctuations. Such fluctuations would affect Expat New Europe Stocks' NAV and its profits. As the lev is currently pegged to the euro, this risk is considered to be relatively low. The instruments denominated in BGN are not exposed to currency risk. The planned geographic positioning of the Fund's investments is aimed at currency risk differentiation. Expat Asset Management can conclude certain transactions to hedge the currency risk (for example, currency options, currency purchase and sale under spot and forward transactions), which transactions also carry certain risks.

Price risk

This is the risk of decrease in the value of the investment in a security in the event of unfavourable changes in market price levels as a result of unfavourable events related to the specific issuers' activity and performance, as well as to capital market trends (short-term or long-term market adjustments as a result of changes in valuation and investor expectations).

Liquidity risk

Liquidity risk is the Fund's inability to meet its short-term and long-term obligations. It is related to certain conditions making it hard or impossible for Expat Asset Management to sell securities owned by the Fund at a favourable price. The fund's liquidity risk will be managed through maintenance of active balance positions that will enable Expat Asset Management to meet all its obligations at any moment at a reasonable price taking a minimum risk, and will also prevent any hasty sale of assets, which would result in losses and/or missed benefits. Expat Asset Management is pursuing a strict policy as regards the maintenance of a minimum liquid amount in accordance with legal requirements and the Fund Rules.

Inflation risk

Inflation risk is the possiblity of general price increase in the economy resulting in decrease in the purchasing power of the local currency. Rising inflation can reduce significantly or completely the yields of Fund unitholders, as a result of which investors in Expat New Europe Stocks may not earn any real income or earn insignificant real income. Over the last years, as a result of the currency board and the implementation of restrictive fiscal policy, inflation in Bulgaria has been kept relatively low and it is expected to stay like that in the forthcoming years.


Risks related to the use of derivatives

Credit risk

This is the risk of the issuer (issuing company), respectively the collateral provider, being unable to meet their obligations, namely to pay the principal and/or interest due within the established time limit. In the case of securities redemption agreements, the Fund may incur losses, if the counterparty to the agreement with Expat New Europe Stocks is unable to honour its securities redemption obligation, as long as profits from the sale of the collateral are lower than the redemption price, where the said price is fixed. When specific securities have a credit rating, credit risk includes the possibility of lowering of the credit rating of the securities in which the Mutual Fund has invested. Standard and Poor's ratings and Moody's and Fitch ratings are an internationally recognized barometer for securities credit risk. Yet, even the said ratings are not flawless as they are minimum event-based and do not reflect all possibilities.

We expect that the major part of Expat New Europe Stocks investments will be in securities with no credit rating. Expat Asset Management will try its best to reduce the credit risk carried by investment in securities with no credit rating through credit analysis, investment diversification and observation of political and economic events and trends. There is no guarantee that the said measures will prevent losses.

Credit risk is also involved in the relations with counterparties to stock exchange transactions and over-the-counter market transactions, there being two types of this particular kind of credit risk, namely counterparty risk and settlement risk. With the former there is the possibility of the counterparty to over-the-counter market transactions not honouring his obligations. This risk is minnimized by the Fund, given the fact that it invests predominantly in financial instruments traded on regulated markets. Settlemet risk is the possiblity for the Fund not receiving money or financial instruments from the counterparty on the settlement date, after the Fund has honoured its obligations to the said counterparty under the transaction.

Operational risk

It is related to the possibility of incurring losses because of flaws and omissions in the organizational system, underqualified staff, unfavourable external non-financial events, including legal risk. Expat Asset Management defines a short-term and a long-term strategy for the management of operational risks occurring in the process of managing Expat New Europe Stocks activities and portfolio. The said strategies are described in the Fund's Valuation and Risk Management Rules.

Concentration risk

The possibility of loss triggered by wrong diversification of clients, namely exposure to groups of related clients, clients belonging to the same economic sector, performing the same activities or located in the same geographical area. Exposure to such risk may result in significant losses. Concentration risk can also involve large indirect credit exposures. This type of risk is managed through adherence to investment restrictions, described in detail in the Fund's Valuation and Risk Management Rules.


System risks

System risks depend on general economic and market fluctuations. The Fund cannot influence system risks, yet it takes them into consideration and acts accordingly. Examples of system risks are as follows:

Macroeconomic risk

This is the possibility of macroeconomic instability in the countries in which the Fund invests. Taking this possibility into consideration, Expat Asset Management focuses its attention on developing countries, whose markets are relatively stable as a result of EU accession, robust economic growth, foreign investment growth, and success in curbing inflation. Expat Asset Management observes on a regular basis the macroeconomic conditions in the regions where it invests and manages actively the Fund's protfolio, acting in accordance with occurring changes.

Interest risk

This is the possibility of interest rates rising to such levels that lead to decrease in economic growth through decrease in credit lending. All time low interest rates over the past years in the world economy, the Eurozone, and in Bulgaria in particular, have had a very favourable effect on the country's economic development. Monetary policy tightening in the Eurozone that started in 2004 will have an impact on economic growth and the Asset Management Vehicle observes closely developments pertinent to that risk.

Currency risk

This type of risk is related to possible devaluation of the lev and other currencies in which the Fund's investments are denominated. For example, the pegging of Bulgarian currency to the euro through the introduction of a currency board in 1997 means that lev fluctuations against foreign currencies depend on euro fluctuations against foreign currencies. As euro fluctuations are significantly smaller than lev fluctuations, the Bulgarian lev is currently stable as a result of the fixed exchange rate. Theoretically, this risk may increase when Bulgaria joins the European Exchange Rate Mechanism II (ERM II). This mechanism allows lev fluctuations of up to ±15% against the euro (i. e., maximum lev depreciation of up to BGN 2.2492 in exchange for 1 euro or maximum lev appreciation of up to BGN 1.66245 for 1 euro). Prcatically, all ERM members (Cyprus, Denmark, Estonia, Lithuania, Latvia, Malta) experience much smaller fluctuations, though the economic structure of some of those countries, as well as their macroeconomic indicators, are similar to those of Bulgaria.

And many others. In detail for each type of risk, which are set out investment in (shares) you can read in the Risk Management Rules and in the Prospectus of the MF Expat New Europe Stocks.