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 Properties involves taking medium-to-high risk.

The Fund nvests in securities issued by companies whose activities are related to the real estate market and its specific risks, the so called sectoral risks. The latter may be summed up as follows:

Unfavourable market price changes

The dynamics of real estate market prices in general, including rent prices, construction prices and the prices of other relevant services (insurance, maintenance, etc.), will have a decisive effect on the profits of companies in which the Fund invests and the value of their capital.

Major risks are related to:

• Decrease in real estate market prices
• Decrease in rent prices
• Increase in construction prices
• Increase in insurance premiums

Liquidity risk

Real estate is harder, and sometimes impossible to sell quickly, at the current market price and at minimum transaction costs.

Risks related to real state users/or tenants

When companies sign a management contract or a lease contract, they become dependent on the counterparty's financial stability, which might in turn affect the said companies' liquidity and level of profits.

Risks related to real estate construction/renovation

Companies investing in real estate undergoing construction or renovation, take a risk related to the building contractor's ability to complete construction or renovation within the planned construction costs, in accordance with architectural and engineering plans and regulations, and most of all, within the set time limits. Failure to comply with the said obligations on the part of the building contractor may result in the taking of court action against the latter. Yet, the building contractor's failure to comply with his obligations may be due to factors beyond his control. Whether or not construction/renovation delays are the building contractor's fault, the said delays may result in the termination of preliminary real estate sale or lease contracts and/or in the payment of compensation. The occurrence of the abovementioned events would have a significant negative effect on the profitability of the companies in which the Fund invests, as well as on the market price of their stocks or bonds.

Other sectoral risks are: Competition for the limited real property to invest in, Losses not covered by insurance, Environmental pollution risks.

Besides the above sectoral risks, investors take a number of general risks associated with operations and mutual fund portfolio. Such, but not all are:


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, the Asset Management Vehicle 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

Currency 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 the Expat New Europe Properties' 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. The Asset Management Vehicle 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.

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. The Asset Management Vehicle 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 possibility 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 unit holders, as a result of which investors in Expat New Europe Properties 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.

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