Nicholas Watson in Prague -

More than a year after being picked by the Romanian government, Franklin Templeton Investment Management on September 29 finally managed to issue the announcement it had taken over management of the multi-billion-euro fund that is being used to compensate Romanians who had property stolen by the Communists. Analysts believe a re-rating for the fund is now on the cards.

The €3.4bn Fondul Proprietatea, or Property Fund, has been dogged by Romania's turbulent and murky politics since it was first established in 2005 - a fact alluded to in Templeton's press release. "The process involved in securing this mandate has been a long and challenging one that took place amidst market volatility and parliamentary approval of Ordinance 81, all in the last 18 months," the US fund manager said in somewhat of an understatement.

The Fondul Proprietatea was based on a compensation plan by former prime minister Calin Tariceanu's government in 2005, in which minority stakes owned by the state in some of the country's biggest companies would form a fund that would be used to compensate citizens who hadn't received back property seized after the 1948 nationalisation. The thousands of former property owners or their inheritors expected this fund to be expeditiously listed on the stock exchange so they could cash in what they were entitled to. This never happened as numerous governments came and went.

Before Templeton was picked in an open tender in July 2009 to manage the fund, a breakthrough of some sort was achieved in 2007 when legislation was passed that allowed trading of the fund's titles, warrants basically, which allowed some people to cash out. Yet this wasn't done within an organized framework such as the stock exchange, but for example through newspaper ads, and some critics have claimed that a succession of governments deliberately sought to postpone the listing of the fund in order to allow well-connected Romanian businesspeople to accumulate fund titles at low prices. Indeed, the over-the-counter price in early September was RON0.54, whereas the shares will be listed at nominal RON1 per share, so the shares are trading at a 60% discount to the net asset value (NAV) of the fund of $5.6bn.

However, in September an emergency general meeting finally handed over the reins to Templeton and, among other things, agreed to a listing of the fund on the Bucharest Stock exchange within 90 working days ie. in January or February 2011 as the government sells down its 49% stake. A dual listing in London is also a possibility in 2011. "The EGM represents the most important event in the recent history of the fund," said the Czech brokerage Wood & Co. "After a year of uncertainty and debates, the vital issues have been clarified."

On the up

Mark Mobius, emerging market eminence grise at Templeton, says the listing of the fund should attract greater foreign investor interest, including that from sovereign funds, in the Romanian market, which his firm feels is undervalued at the moment. The fund also offers a good deal of diversification from the general Romanian market, where banking shares dominate, as its minority stakes have a heavy emphasis on energy and infrastructure.

Out of the more than 80 companies represented in the fund, three dominate: the OMV-owned refiner Petrom (20.1%), gas producer Romgaz (15%) and the gas distribution firm Transgaz (15%). There are also holdings in the two major power companies - the hydroelectric producer Hidroelectrica and the nuclear generator Nuclearelectrica.

Adrian Pop, portfolio manager of East Capital, which is one of only seven shareholders that hold more than 1% of the fund, believes that over the next year the fund is likely to see a re-rating that should bring it closer to its NAV.

What will be the drivers of that? As well as the listing and change from passive to active management of the fund, the EGM agreed to pay out the dividends for 2008 and 2009 worth RON1.1bn (€258m), as well as pledge a share buyback of some 1.37bn shares, or about 10% of the fund, over the next two years.

Pop also cites as another reason for the fund trading at a discount to its NAV is that many of the stakes it holds are in unlisted firms. However, this is set to change as the government has indicated it wants to sell further stakes of about 15% in Transgaz and Transelectrica as well as carry out an IPO of Romgaz, while an active manager such as Templeton will sell assets in order to monetise the unlisted positions. "A large portion of the fund is unlisted and whenever you have unlisted assets, it's harder to value and investors are more distrusting," says Pop.