GLOBAL FUND
MANAGERS DIFFER
ON RUSSIAN
OPPORTUNITIES.
Despite the country’s dire economic
situation, a crash in oil prices and
sanctions, the Russian stock market
outperformed many of its peers in
the early part of this year – albeit off
a relatively low base.
The MICEX Index has retreated
quite significantly from the highs
reached in February, but was still up
roughly 17% over one year towards
the end of June, notwithstanding
the turmoil.
But while some global fund
managers argue that the country
offers stock specific opportunities
that are too cheap to ignore, others
have given Russia the cold shoulder.
Glenn Silverman, chief investment
officer at Investment Solutions, says
some managers do not want to buy
Russian stocks at all, despite the
fact that prices may be attractive.
Others say they will only invest if
appealing opportunities arise. There
are also fund managers who have
made the leap.
"
“We have zero exposure to Taiwan,
for example, even though it is a
big part of the GEM universe. Our
argument is simply that there are
a few really decent businesses
in Russia that are so cheap they
compensate for the significant risks
involved with investing in Russia,”
he says.
The exposure to a particular
share is adjusted to reflect the
risks involved.
Assuming two companies were
identical in nature and the valuation
was similar, a 5% position in Russian
retailer Magnit could in theory be
equal to an 8% position in a less
risky country like India, he says.
The overriding motivation for
investing is its belief that a company
is worth significantly more than its
current share price would suggest,
using long-term assumptions on
what the company will earn in
five years (or longer) and taking
company-specific risks into account.
“Remember that risk is different in
different sectors – resources stocks
can be effectively nationalised
without recourse (this has
happened in Russia before). But
other sectors government has no
lower risk sector in part due to its
defensive nature and consolidation
opportunities for the large players.
It also has a small exposure to
technology (internet) and banking
stocks in Russia.
Suleman says aside from the fact
that their valuation models show
that the shares are cheap – each is
attractive for different reasons.
“One is the ‘Google’ of Russia.
We like search engines because
a dominant one tends to attract
a disproportionate share of
advertising, and advertising is
increasingly moving online in
Russia,” he says.
Another holding is a popular
internet portal, e-mail provider
and online games developer that
also owns Russia’s preferred social
networking sites.
It also has a small position in
Russia’s largest bank, which should
benefit from financial services
penetration over time (people
getting credit cards, mortgages etc.)
and its status as a safe haven in a
very fragmented domestic banking
system. Like most of the emerging
markets, individuals in Russia still
operate very much in cash-oriented
manner, he says.
there are a few really decent
businesses in Russia that are so cheap
they compensate for the significant
risks involved with investing in Russia,
Silverman says one of the managers
in their portfolios, Pzena, also has a
fairly sizeable exposure to Brazilian
energy group Petrobras and its
Russian equivalent Gazprom. The
latter is trading on a very appealing
price-earnings multiple and has
some of the most attractive
reserves in the world.
Suhail Suleman, Coronation
Another one of the managers in its
portfolio, Orbis, had bought some
stocks related to the oil sector.
These shares had a tough time due
to the Russian discount and the
lower oil price and while it was part
of the attraction the short-term
experience had been quite painful,
he says.
Fund Managers
Where managers do invest, it is
generally not because they argue
that Russia is appealing, but rather
because a specific stock or sector
offers long-term potential.
Suhail Suleman, portfolio manager
and analyst in Coronation Fund
Managers’ Global Emerging
Markets (GEM) team, says they are
bottom-up stock pickers and don’t
believe that investors have to have
exposure to a specific country.
44
ISSUE 4 – JULY 2015
real interest in nationalising – think
of the chaos that would ensue
if government took over food
distribution; a situation that could
likely result in food shortages.
Venezuela is trying this now, the
result is hyperinflation and empty
shelves in supermarkets,” he says.
The Global Emerging Markets
funds have an overall exposure of
10% to Russia, 85% of which is in
food retail, which they believe is a
Some of its other managers don’t
have any exposure at all.
Prudential M&G has taken a
position not to invest because of
the ability of the state to confiscate
assets and to change the rules for
political patronage,
Silverman says. ■