| LONDON, April 24
LONDON, April 24 Russia-themed equity funds have
sunk to the bottom of performance league tables as international
tensions over Ukraine and fear of tougher Western sanctions hurt
the value of Russian assets.
Mutual funds specialising in Russia and Eastern Europe were
the 30 worst performers out of all the 3,489 equity funds
available for sale in Britain in the three months to the end of
March, according to data from Lipper, a Thomson Reuters company
that tracks the asset management industry.
The hardest hit funds were the Neptune Investment
Management's Russia Special Situations, which lost more than 24
percent of its value over the period, and its Russia and Greater
Russia fund which was off 21 percent.
The funds' manager was unavailable to comment.
Next was the JP Morgan Russia fund, which was down 21
percent over the three month period, according to Lipper.
"A defining characteristic of the Ukraine crisis has been
uncertainty. We don't know whether sanctions against Russia will
become more or less severe," said Richard Titherington, Chief
Investment Officer for emerging market equities at JP Morgan
Asset Management in an emailed statement.
However, he said that the group has not adjusted its
regional emerging Europe portfolios in response to the crisis
"as we do not want to react speculatively to short-term news
The United States and the European Union have imposed visa
bans and asset freezes on a few Russian individuals in protest
at Russia's annexation last month of Ukraine's Crimea peninsula.
However, they have warned that harsher sanctions, affecting
key sectors of the Russian economy could be imposed in days
unless Russia implements the terms of an international agreement
signed last week intended to defuse the Ukraine crisis.
These tensions have helped Russia to become the worst
performing big emerging equity market so far this year. The
Moscow's rouble-denominated MICEX index down more than 10
percent since the start of 2014. The dollar-denominated RTS
has fallen more than 17 percent.
Boston-based fund tracker EPFR Global also said that Russia
dedicated equity funds were by far the worst performer among all
the emerging market country and regional fund groups, down some
20 percent for the year to date. The second worst performing
category is Emerging Europe Regional Funds in which Russia tends
to have a big weight.
In terms of flows, EPFR says $345 million fled
Russia-dedicated equity funds in the first quarter of 2014,
though there were inflows from mid-March as the Ukraine crisis
seemed to abate. Emerging Europe funds lost over $1.2 billion.
However, overall capital outflows from the country have
surged as international tensions have worsened and investors
have moved their money out of Russia.
Central bank data released earlier this month showed an
estimated $63.7 billion in net capital outflows from Russia in
the first three months of the year, the same as for the whole of
2013. The World Bank has said this year's total could reach $150
The heightened sense of political risk has added to an
existing discount for Russian assets, said Peter Taylor, senior
investment manager at Aberdeen Asset Management.
Aberdeen's Russian Equity fund slipped around 20 percent in
the first quarter of 2014, according to Lipper.
Some of the assets hardest hit in recent selloffs were
companies with links to individuals targeted by international
sanctions, Taylor said.
One example was a 16 percent drop in the shares of gas
producer Novatek since the beginning of March, which
counts billionaire Gennady Timchenko, who is included on a U.S.
list of people subject to asset freezes and visa bans, among its
Timchenko has said he considers the sanctions to be a badge
The dilemma facing fund managers is how to persuade
investors not to yank out cash from Russia funds.
Russia enthusiasts argue that in spite of heightened
political risk, the opportunities that led people to invest in
Russia in the first place - rising incomes and consumption, oil
and mineral wealth, a powerful industrial base - still hold.
Add to this the valuations, with Russian shares trading at a
50-70 percent discount to Chinese and Indian markets on a
Angelika Millendorfer, Head of Emerging Market Equities at
Raiffeisen Capital Management advises investors to keep an eye
on the long term.
"The valuation argument has always been true for Russia and
it's now truer than ever. The vast majority of Russian companies
are very cheap," she said.
"History shows that usually when a crisis is over, markets
tend to forget relatively quickly so I wouldn't expect this to
last too long."
Greater clarity over the extent of future sanctions and a
calming of the political situation in Ukraine could cap asset
price volatility in Russia, Aberdeen's Taylor said, adding he
remains broadly optimistic about investing in the country.
Particularly encouraging is the emergence of a "new economy"
in Russia characterised by companies like food retailer Magnit
which have kept separate from the oligarchic "old
economy", Taylor said.
However, he said for the time being investors should
continue to treat Russia with caution.
"Is the Russian market now cheap? It has always been cheap
and has now got even cheaper. In terms of whether now is the
time to jump in. The short answer is yes but the answer was yes
three months ago," he said.
(Additional reporting by Sujata Rao; editing by Anna Willard)