MONEY Iquite like contrarian ideas. But even I struggle when it comes to Russia.
There are a great many thoughtful investors who think that Russia is worth a flutter – they maintain that it has been unfairly maligned by a western investor community applying double standards.
They quite rightly point out that many of the worst practices that Russia stands accused of are a great deal worse across the border in China – but everyone ignores the latter’s systemic issues because it is “the next big thing”. Russia is just regarded as a post-superpower.
I do know what they mean. In Russia, state interference in private property rights is not that frequent and tends to be focused on bringing oligarchs to heel. In China, all it takes is for the CCP to snap its fingers and decide that it doesn’t like the boss of Company Y and, hey presto, your equity is worth nothing!
Even so, Russia is still risky and its government’s love of geopolitical grandstanding and threat-based international diplomacy hardly inspires confidence.
So, when deciding whether to invest, there are arguments on either side: many cheap companies with phenomenal global market positions in resource sectors, and a growing consumer sector, versus regulatory risk and a lax attitude towards debt repayment.
I’ve stayed away from Russia until now – and arguably missed one of the biggest bull bounces in history. However, I am now tip-toeing into the market in a small, controlled manner. How, then, should adventurous types gain exposure? There are a number of choices.
First, you can buy simple beta via Russia exchange traded funds (ETFs) from Lyxor and Deutsche Bank, which have total expense ratios of between 50 and 70 basis points. These ETFs tend to track indices that follow the very largest of the Russian listed companies – and this focus on mega-caps and momentum can be a strength or a weakness. Large Russian companies are the ones that the Kremlin cares the most about and will probably interfere with.
Second, you can buy alpha via one of the small number of fund managers with Russian expertise. In my book, that equates either to a unit trust run by Neptune’s Robin Geffen or a listed fund from the team at JPMorgan . These buy into Russia using a concentrated and, dare I say, contrarian stockpicking approach. One problem with this quest for alpha (market-beating returns) is that you’re buying it at par – you’re paying £1 for every £1 of net asset value (NAV). Also, these fund managers still have to play by some of the rules and that means a focus on larger caps at the core of portfolio.
My view is that, in places such as Russia and China, you’re better off buying smaller cap companies flying below the government radar with genuine private sector expertise.
Third, you could focus on companies in the small-cap indices. In China, that means buying in via the Claymore Alphashares China Small Cap index ETF (New York Stock Exchange: TAO) or the closed-ended fund Vision Opportunity China (London Stock Exchange: VOC). In Russia, though, you’re effectively forced into buying small, listed closed-end funds on the London market. These specialist funds also tend to trade at a big (possibly justified!) discount to NAV.
My tentative step back into the markets has been via one such fund called Aurora Russia , although I am looking at another interesting idea based around property outfit Raven Russia – Nick Louth, my fellow FT Money columnist, is a big fan .
Aurora’s brief is simple: invest in small to medium-sized private companies that are focused on Russia’s growing middle-class consumer segment, then take the companies to the market (or flog them to a trade buyer). As far as I can tell, the underlying companies are trading well, building market position and avoiding too many run-ins with the authorities. But growth is likely to be determined by oil prices which have a huge effect on the Russian economy.
So, it is obviously at the very risky end of any spectrum of investments and any investor feeling hesitant should probably stick with Neptune or JPMorgan. But, for me, there’s potentially a double discount here: Russia is still relatively cheap as fast-growing emerging markets go, and Aurora’s shares trade at a discount to NAV, although the price has been steadily ticking up in recent weeks.
