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Financial Services
US funds to stand by Russia despite losses
From the Financial Times of Fri, 19 Dec 2014 13:49:11 GMT
A neon sign displays the latest Russian ruble euro dollar exchange rate outside a currency exchange bureau in Moscow©Bloomberg

und managers that are overweight on Russia are keeping assets in the country in spite of the rouble's gyrations and western sanctions

Some of the fund managers most heavily exposed to Russian stocks are promising to stick with the country, despite currency and equity market turmoil that has sent their fund values tumbling.

Lazard, GMO and Oppenheimer are among the large US mutual fund managers telling clients the Russian market is likely to stabilise, and one of their number says he has been putting more money into the country despite the rouble’s gyrations and Western sanctions.

Justin Leverenz, manager of the $38bn Oppenheimer Developing Markets fund had more than 7 per cent invested in Russia at the start of this month before the dollar value of the holdings began to tumble.

“Am I changing my mind? No. All year long, I have been buying more, because the prices are really extraordinary,” Mr Leverenz said.

The value of Oppenheimer’s fund is down 7.6 per cent in a month, ranking it 94th out of 100 in its category, having been one of the hardest hit by the Russian turmoil and by the falling oil price. Its Russian allocation is concentrated in three companies: Magnit, a food retailer, Novatek, a natural gas producer, and the search engine Yandex.

Lazard’s Emerging Markets Equity fund — another of the most popular funds investing in developing markets to have overweighted Russia — is down 7.2 per cent, ranking it 90th out of 100 in its category. It does not hedge currency risk, but instead tries to factor it in, along with political and economic risks, when determining whether to invest in a company.

James Donald, who manages the $13bn fund, called recent market movements in Russia “an extraordinary panic”.

He said: “Things like this have occurred before, and I have managed money when they have occurred before. These are situations when you have to be courageous.”

According to data from Morningstar, there are eight $1bn-plus US mutual funds that had allocated more than 6 per cent to Russian stocks at the date of their last portfolio update. This list is led by GMO’s Emerging Markets III fund, which had an 11.3 per cent allocation to Russia at the end of August and is down 5.0 per cent over the past month.

“Russian energy companies trade at valuations south of five times earnings and pay dividends north of 5 per cent,” Arjun Divecha, head of GMO’s emerging markets equity team, wrote in a note to clients. “Given that our main case is that there will not be comprehensive capital controls that limit our ability to take money out of the country, we remain comfortable holding these very cheap assets (and perhaps adding to them if they decline further).”

Morningstar’s list also includes funds from Brandes Investment Partners, USAA, Franklin Templeton, Macquarie and JPMorgan.

Mr Donald said Russia had so far met two of the three conditions needed to stabilise the rouble: interest rate rises, and central bank intervention in the currency markets. But he noted: “We have not yet seen the oil price show signs of stabilisation.”

Over the past month, the MSCI emerging markets index has fallen 7.3 per cent, and is down almost 8 per cent in the year to date.

Sentiment towards emerging markets has been volatile for two years, amid signs of slowing growth in China and other developing economies, concerns that an end to loose monetary policy in the US could hit investment in the region and, more recently, the effects of the falling oil price.

US mutual fund exposure to Russia
Fund name Fund size Exposure Portfolio date

GMO Emerging Markets III

$6.7bn 11.3% Aug 31

Brandes Emerging Markets

$1.2bn 9.8% Sep 30

Lazard Emerging Markets Equity

$13.4bn 8.4% Sep 30

Delaware Emerging Markets

$2.7bn 7.2% Oct 31

Oppenheimer Developing Markets

$37.9bn 7.1% Nov 30

USAA Emerging Markets

$1.1bn 6.8% Aug 31

Templeton Developing Markets

$1.8bn 6.7% Sep 30

JPMorgan Emerging Economies

$1.2bn 6.7% Oct 31
 Source: Morningstar

Additional reporting by Vivianne Rodrigues

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