Russian Funds Sizzle on Economy


Mutual funds that invest in Russia are reaping the benefits as the nation’s economy begins to broaden beyond commodities.

Often lumped in with Brazil, India and China, Russia is now garnering attention all on its own. Funds that invest specifically in Russia have posted sizzling returns in the past 12 months, and some managers now find the nation more attractive than its BRIC counterparts.

In the 12 months through May 28, JPMorgan Russia Fund’s A shares have gained nearly 43%, ING Russia’s A shares are up 43% and Third Millennium Russia has gained 40%, according to Chicago investment-research firm The dollar-denominated RTS Index has climbed 35% in that time, while the Standard & Poor’s 500 Index has lost nearly 6.4% on a total-return basis.

So far this year, Brazil’s Bovespa has outperformed the RTS index, while India’s Sensex is in the red. Hong Kong’s stock market also has fallen so far this year.

Over the past year, and particularly since the end of March, Russia has benefited from positive sentiment toward the oil sector, said Antoine van Agtmael, chief investment officer of Emerging Markets Management, which oversees more than $19 billion of investments in developing countries.

But the country is more than just an oil, gas and mineral-based play, he said. ‘It is becoming a much more broadly based consumer society; so you find interesting stocks not just in the oil-and-gas sector, but in telecommunications, in real estate, in banking and in other areas.’

He is currently overweighting Russia against his benchmark and underweighting Brazil, India and China.

Investors are taking note of the Russian market’s performance. Last year, Russia-focused funds, including exchange-traded funds, experienced more than $69 million in net outflows from the week ended Jan. 10 through the week ended May 23, according to AMG Data Services.

Over a similar period this year, more than $852 million have flowed into such funds on a net basis. Much of the new money has gone into the Market Vectors-Russia ETF, which AMG says has had net inflows of nearly $833 million.

Gus Robertson, senior portfolio manager of emerging-markets equities at ING Investment Management, notes that the energy sector still makes up more than 50% of Russia’s benchmark RTS Index. But he expects continued diversification in the next few years.

Mr. Robertson, who co-manages the $998 million ING Russia Fund, said Russia currently stands out from its BRIC counterparts for a variety of reasons.

‘If you look at the performance of the BRIC market from the middle of 2006, you’ve seen considerable strength in Brazil, India and China; whereas Russia was very much the laggard in the 18-month period running up to the end of last year,’ he said. That left Russia with relatively attractive valuations at the beginning of this year.

But Christopher Davis, a fund analyst with Morningstar, calls Russia ‘a speculative bet’ that still rises and falls on commodity prices. In addition, Russia still entails quite a bit of political risk, he said, and investors who enter the market now are taking a risk.

Copyright (c) 2008 Dow Jones & Company, Inc.