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Russian Retail Rising

Tim Steinle, co-manager of the Eastern European Fund (MUTF:EUROX), braved the frigid Moscow winter this week to attend a conference sponsored by the investment bank Troika Dialog. These are some of the observations he sent back to the U.S. Global investment team.

Many think of the Russian consumer sector as a defensive play, but it outperformed the MICEX stock market in 2009.

The transformation of the retail food industry has been one of the biggest drivers of this advance. What was once a state-owned enterprise with empty shelves and shriveled potatoes is now on par with what you would see in the United States.

A group of us from the conference visited stores and distribution centers of several chains in Moscow and in Podolsk, about 20 miles or so away.

One of the biggest and most successful of these chains is X5. You can see the strong corporate culture and pride employees have in their work by how spic and span their stores are. The company combines a clever store format with strong execution to move into more affluent areas.

Some new legislation will affect this space. As of February 1, market share per company is capped at 20 percent, and the maximum discount that retailers can receive from suppliers is 10 percent.

After many decades of state-run grocery chains, the intent of these laws is to encourage competition. In part because of these changes, we believe the consumer sector of Russia possesses good growth potential.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises the 30 most liquid stocks of Russia's largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, with a base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

Holdings in the Eastern European Fund as a percentage of net assets as of December 31, 2009: X5 1.68%, Troika Dialog 0.00% #10-92



Disclosure: X5