NEW YORK The crisis in Ukraine sent the Russian stock market tumbling on Monday, delivering a blow to already-punished portfolio managers who took outsized bets on eastern Europe this year, but generously rewarding those who had shorted the country.
Investors of the Direxion Daily Russia Bear 3x Shares exchange-traded fund, which tracks three times the inverse of the performance of the DAX Global Russia Index, saw their fund up as much as 28.3 percent at its high on Monday. It has roughly doubled year-to-date.
Russia's benchmark stock index dropped 12 percent after the country's central bank on Monday raised interest rates to prop up its currency. The stock market ended 47.5 percent below the peak it reached in 2011 after the recent financial crisis, according to research firm Bespoke Investments.
Popular funds issued by T. Rowe Price and others with large positions in Russia saw some of their largest holdings tumble by 15 percent or more in one day.
A few bright spots poked through, but analysts said more declines may be ahead and some portfolio managers were planning to further trim their holdings.
"It did not feel very good knowing that this is one of our bigger positions," said David Garff, head of Walnut Creek, California-based Accuvest Global Advisors, which builds portfolios based on proprietary country rankings adjusted each month.
Garff holds long positions in the iShares MSCI Russia Capped ETF, an exchange-traded fund (ETF) focused on Russian stocks, and his most aggressive model portfolio has as much as 13 percent in the country. He expects to dial back on Russia when he does his next monthly adjustment.
"If you're a value buyer than you have to be looking at Russia strongly, and if you're a momentum buyer, you have to be running from it like the plague," he said.
WHEAT IS A BRIGHT SPOT
Commodity investors who had been betting on higher prices for wheat worldwide were rewarded on Monday since Ukraine is a big exporter. Its troubles point to a potential disruption in its supply, which could raise prices.
The $10.5 million Teucrium Wheat ETF, which tracks wheat futures contracts, was up as much as 8.5 percent on Monday. The fund has benefited from expectations that it may be difficult to obtain the commodity in the future.
Of course, investors who bet against Russia were also doing nicely while that market was selling off. The Direxion RUSS fund, which has roughly between $7 and $8 million in assets, usually trades about 50,000 shares a day, but was trading as many as 500,000 shares by early Monday, said Matt Hougan, president of analytics and publications at ETF.com.
BLACK EYE FOR EMERGING MARKETS
With Russia threatening to launch an assault on Ukraine unless Ukrainian forces leave the Crimea region, analysts said that the losses may deepen. That could discourage investments in broader emerging markets, a once-hot investment that has soured, in part because of steep currency declines in Latin America and concerns about the pace of growth in China. (Emerging market stocks fell 6.5 in 2013 and another 3.6 percent lower in 2014, according to the MSCI Index.)
Nine mutual funds and exchange traded funds have more than 50 percent of their assets invested in Russia, totaling $2.4 billion, according to Lipper, a Thomson Reuters company.
For instance, T. Rowe Price Emerging Europe fund has shed $306.6 million, or 12.4 percent for the year through Friday, in large part due to its bet on Russia that constitutes 54.8 percent of its assets.
Its top holdings, including Sberbank Russia OAO, Gazprom OAO, and Navatek OAO, dropped 14 percent or more on Monday.
Even actively managed funds with smaller allocations to Russia have been hit hard.
The $8.2 billion GMO Emerging Markets fund has nearly 14 percent of its assets invested in Russia, more than double the size of the 6 percent stake in the benchmark MSCI Emerging Markets index. That outsized bet has helped push the fund down 5.8 percent for the year to date, putting its performance in the bottom 96th percentile of emerging markets funds tracked by Morningstar.
Russian equities typically account for the fifth-largest country weighting among actively managed emerging markets funds and exchange-traded funds, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
Diversified emerging markets funds would take a larger tumble if stocks in China or Korea fall sharply, yet signs that a bigger pullback from emerging markets could be coming, he said.
"What's going on so far is isolated to emerging Europe and not all of emerging markets, but we are already starting to see a flight to quality," he said.
(Editing by Linda Stern and Amanda Kwan)