Adventurous Investor

July 22, 2011 3:07 pm

From Russia, with risk

Assuming that the equity market doesn’t collapse after a Greek/Italian/Portuguese/American bond default... I thought I’d suggest a few ideas for the more adventurous among you. All are decidedly contrarian in their rationale – so they require a big leap of faith – but they stand a chance of providing some long-term gains.

Most contrarian – because it goes directly against my own rule of ‘Don’t invest in Russia!’ – is buying into the shares of warehousing company Raven Russia. Now, you don’t need me to remind you of the risks of investing in this country. Just think of BP. Canny fund managers such as Robin Geffen at Neptune might argue that these issues can be mitigated by astute stockpicking and analysis of valuation metrics. However, I have to say that I’d beg to differ: political power trumps everything and value counts for nothing when at the wrong end of a Kalashnikov wielded by the revenue police.

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In fact, I’d normally say that private investors should be heavily underweight in Russian shares and ignore valuation arguments. Nevertheless, I can be persuaded where there’s a clear story, and no sign of political interference or nepotism. For this reason, I found the recent trading update from Raven Russia was very encouraging. Mood music from the Kremlin suggests it favours infrastructure investment and Raven seems to be experiencing strong trading at its logistics hubs. Experienced investors such as Invesco Perpetual and Schroders are already big shareholders (they hold 33 per cent between them) – no doubt tempted by the potential for dividend increases as the big sheds that Raven owns outside major Russian cities drive its rental income upwards. House broker Singer reckons that Raven’s dividend could hit 3p in the coming year, and there’s a chance that the net asset value of the logistics assets might be adjusted upwards as bigger funds sniff around the Russian consumer market. Raven reckons that, once all its projects are let, the implied yield will be 11.9 per cent.

Raven’s cumulative preference shares pay out 12p on £1 – and they’re currently valued at 135p, which implies a running yield of just under 9 per cent. There are also some warrants exercisable at 25p through to 2019. These warrants obviously don’t get the potential dividend flow – so they are more a play on the property assets being revalued, and the share price’s discount to net asset value (currently at around 71p) narrowing. But they look good value at 35p.

My second contrarian idea also goes against my instincts – it is a new exchange traded fund (ETF) from Deutsche Bank investing in the largest companies in emerging markets energy (London Stock Exchange ticker XMEY). As a commodities cynic, I can’t bring myself to say that I’d buy this ETF right now (my previous remarks about Russia also apply). Even so, I admit that there is a compelling – if slightly twisted – logic behind this ETF. It tracks the MSCI Emerging Market Energy sector, and has a total expense ratio (TER) of 0.65 per cent.

Top companies in this index include a grizzly shortlist of oil and gas majors, including Gazprom (13.4 per cent), its smaller rival Lukoil, the expensive Brazilian giant Petrobras (18 per cent), plus Chinese companies Cnooc and PetroChina. I say “grizzly” because nearly all these companies – with the honourable exception of perhaps Petrobras – miserably fail every corporate governance test I can imagine. Also, this ETF is synthetic – which means it does not actually hold the stocks in question, but uses an index swap contract. According to the Financial Services Authority, this type of ETF might not be appropriate for private investors, although I’d have to say that I disagree.

So there are several reasons not to buy this ETF. There is, however, one reason to ignore them: energy is the key to real power in emerging markets and these state-backed energy companies hold all the cards. If, like many analysts, you think oil is going to stay expensive, these companies will benefit massively – and this ETF offers simple, unmediated access to companies that could be even more valuable in ten years’ time. Meanwhile, I’ll hold my nose, and hope that the clean-energy brigade can save me from a world dominated by Gazprom!

adventurous@ft.com

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