| NEW YORK
NEW YORK May 6 Some big global investors are
riding out the stomach-churning drops seen in Russian assets
this year, refusing to join a stampede to the exits on the
belief that any retaliation against Moscow for its role in
Ukraine will fade and prices will rebound.
A Reuters analysis of Lipper mutual fund data shows more
than three-quarters of asset managers cut their Russian
allocations in the first quarter of 2014. The few holding to
their positions acknowledge that the choice has hit performance
but argue that the price declines are so extreme as to be
"Investor response over Russia is emotional rather than
rational," said Julie Dickson, equity product manager for
London-based emerging market fund manager Ashmore.
Russian stocks, in particular, have been pummeled, including
a one-day market plunge of more than 10 percent in early March.
Year-to-date, the rouble-denominated MICEX stock index is
down 13 percent, while the dollar-denominated RTS is off
The rouble has slid 8.5 percent against the dollar.
Dickson said Ashmore does not believe the unrest in Ukraine,
which western powers contend is being fomented by Russia, will
result in an all-out military conflict.
The stand-off with Moscow "will be resolved diplomatically.
Valuations in Russian equities are extremely cheap and they have
overshot on the downside," she said.
But for now, Ashmore's overweight position in Russia has
hurt results. Its emerging market small-cap equity fund
year-to-date is down 3.30 percent versus a 4.82
percent gain for the benchmark MSCI emerging market small cap
index, according to Reuters data.
Russian equities are trading at five times trailing
earnings. That's less than half the multiple of 12.2 for their
peers in the MSCI Emerging Markets stock index and
compares with 18 for the U.S. benchmark S&P 500 index.
Unlike Ashmore, most investors have pulled back, with 86
percent of mutual funds reporting allocations in both the fourth
quarter of 2013 and the first quarter of this year having cut
their exposure to Russian equities, according to Lipper, a
Thomson Reuters company.
JPMorgan, for one, is recommending underweight positions
across Russian equities, fixed income and local currency markets
as the conflict between Moscow and Kiev deepens.
Norway, with the world's largest sovereign wealth fund at
$860 billion, is holding off making new investments in Russia.
Normally taking advantage of market stresses, the fund's
chief executive, Yngve Slyngstad, told Reuters: "Countercyclical
does not really work well when the risk factors are of a
Dollar-denominated Russian sovereign bonds and
quasi-sovereign bonds are down 4.93 percent year-to-date, second
only to Ukraine's 9.47 percent loss. Every other component, save
for Ghana which is down a third of 1 percent, on the JPMorgan
EMBI Global benchmark index is up this year. The index itself is
up 5.45 percent in 2014.
Investment-grade Russian debt trades at 360 basis points
over comparable U.S. Treasuries on the index. That is worse than
lower-rated credits like Indonesia and Croatia.
"Russia is trading like a weak double-B, high single-B
credit," Los Angeles-based TCW portfolio manager Dave Robbins
said in a conference call.
Among hard-currency debt funds, 75 percent cut their Russia
allocations, according to Lipper, while 78 percent of local
currency debt funds made similar cuts.
TCW maintains an overweight Russia position between 10 to 11
percent versus an 8.9 percent weight within the index.
"We certainly have been hurt by our exposure to Russia,"
Robbins said. "Obviously, with the political situation in
Ukraine it has cost us a little over 50 basis points of
performance, but we think Russia has gotten to the level where
it really is extremely cheap relative to many other credits
within the markets."
(Reporting by Daniel Bases; Editing by Dan Burns and Leslie