Another of my top projects this year was to evaluate Russian fund investment opportunities. There are a couple of obvious candidates, but I wanted to thoroughly work my way through all (related) funds. This approach might seem exhaustive, but as I’ve discussed before any effort I’ve devoted to this type of analysis has always paid off in spades. This includes reading each fund’s last few annual reports, and evaluating returns (over 1, 3, 5 & 10 years, if available), the fund’s geographic focus, any particular company/sector concentration, and the percentage of the fund’s portfolio invested in unlisted stocks.
You might wonder why I’d spend the time looking at some of the funds below… Especially if it appears to be a poor match for what I’m actually looking for. But sometimes a fund portfolio and performance don’t exactly match what it says on the tin, and it takes some digging to identify this. For instance, Aurora Russia may soon be better classified as an interesting event driven opportunity rather than as a Russian fund investment.
It’s also surprising how quickly factors change: Relative discounts and/or upside price target potential, the risk/reward profile of slightly different investment objectives, your own investment thesis, even the appearance of an activist shareholder on a fund register. While I’m all in favour of sticking with a successful investment (over-trading’s definitely your enemy), ranking and tracking your (related) investment alternatives offers you the chance to switch horses at short notice if it becomes attractive enough. Also, you’d be surprised how much this type of peer analysis improves your knowledge and insight when it comes to buying/selling/evaluating your preferred investment.
You’ll notice I ignore ETFs here. First, there’s too many of them out there these days, and they don’t really lend themselves too well to comparative analysis..! More seriously, I’m not opposed to them, but I’m wary of their specific disadvantages. As long as I find an interesting/appropriate closed-end fund or two, I’ll generally prefer them to an ETF. I also notice when I become interested in a sector or country that warrants a fund investment, it’s sometimes cheap and neglected enough to deserve a decent discount to NAV – an extra bonus! Right, let’s walk through the funds I’ve identified:
First, there are 3 ex-Soviet satellite countries worth considering as an alternative: Ukraine‘s often lumped in with Russia but, despite having important agribusiness and steelworks sectors, it doesn’t really have comparable natural resources sector. Two other markets in the region that better mirror Russia’s cheap valuation and heavy concentration in natural resource stocks are Kazakhstan & Mongolia:
Ukraine Opportunity Trust (UKRO:LN): UKRO’s a UK listed closed-end fund which invests in Ukrainian companies. 81% of the portfolio’s in unlisted stocks. Current discount and returns** look like:
Discount to NAV: 55%
1 Year Return: 0%
3 Year Cum. Return: 5%
5 Year Cum. Return: (47)%
2008 Return: (55)%
Origo Partners (OPP:LN): Origo’s a UK AIM listed closed-end fund. It’s focused on natural resources, with 57% in Metals & Mining and 23% in Agriculture. Unlisted stocks comprise 91% of its portfolio, and the major portion of the portfolio’s invested in China. However, at least 41% is now invested in Mongolia and this percentage is likely to grow, particularly if the fund’s largest holding (Gobi Coal) goes ahead with an IPO. However, I’d only consider Origo as a true Mongolia fund to invest in once this allocation exceeds 60-70%:
Discount to NAV: 34%
1 Year Return: 3%
3 Year Cum. Return: 19%
5 Year Cum. Return: 158%
2008 Return: 5%
Tau Capital (TAU:LN): Tau’s another UK AIM listed closed-end fund, investing primarily in Kazakhstan (66%), and also in Russia & Central Asia. Unlisted stocks comprise 37% of its portfolio:
Discount to NAV: 35%
1 Year Return: (18)%
3 Year Cum. Return: 12%
2008 Return: (43)%
Next, we’ll consider Russia & Eastern Europe funds. Personally, this fund sector never made any bloody sense to me. First, it’s not much of an economic ‘region‘, especially these days. Even as far back as Solidarity in Poland, and the fall of the Berlin wall, Eastern European nations have been literally tripping over themselves to escape their Russian bear-hug and to embrace Europe instead. Can you blame them..?!
Second, with usually 50-75% of these funds allocated to Russia, the name and investment objectives have always been a fund marketing construct (and joke). I recall when a lot of these funds were born, the average punter was terrified of investing in Russia, and the fund marketing bods clearly thought that throwing Eastern Europe (and Turkey..?!) into the mix would be a good way to allay investor anxiety and suck them in.
When Russia was flavour (and performance) of the month, they could boast about their Russian allocation – and when Russia was doing a Red October, they could just waffle on about Poland and Hungary instead… Either way, Eastern Europe was inevitably a bit of a sideshow, and Russia was always going to dictate whether you had a good year’s performance or not… But let us take a closer look at these funds, and see if anything interesting turns up:
East Capital Explorer (ECEX:SS): East Capital’s a Swedish listed closed-end fund which invests in Russia (45%), Eastern Europe & the Balkans. On a look-through basis, 15% of its portfolio’s in unlisted stocks:
Discount to NAV: 34%
1 Year Return: (30)%
3 Year Cum. Return: 19%
2008 Return: (33)%
Eastern European Trust (EST:LN): EST’s a UK listed closed-end fund which invests in Russia (54%), Eastern Europe, Turkey & Central Asia:
Discount to NAV: 9%
1 Year Return: (20)%
3 Year Cum. Return: 160%
5 Year Cum. Return: (35)%
10 Year Cum. Return: 204%
2008 Return: (77)%
Morgan Stanley Eastern Europe Fund (RNE:US): RNE’s a US listed closed-end fund which invests in Russia (57%) & Eastern Europe:
Discount to NAV: 11%
1 Year Return: (24)%
3 Year Cum. Return: 73%
5 Year Cum. Return: (13)%
10 Year Cum. Return: 250%
2008 Return: (64)%
Central Europe & Russia Fund (CEE:US): CEE’s another US listed closed-end fund which invests in Russia (72%), Eastern Europe & Turkey:
Discount to NAV: 9%
1 Year Return: (12)%
3 Year Cum. Return: 67%
5 Year Cum. Return: (1)%
10 Year Cum. Return: 323%
2008 Return: (53)%
Baring Emerging Europe (BEE:LN): BEE’s a UK listed closed-end fund which invests in Russia (63%), Eastern Europe & Turkey:
Discount to NAV: 7%
1 Year Return: (23)%
3 Year Cum. Return: (1)%
5 Year Cum. Return: 4%
10 Year Cum. Return: 319%
2008 Return: (23)%
Now, let’s turn to the dedicated Russia funds:
EOS Russia (EOS:SS): EOS is a Swedish listed closed-end fund which invests entirely in the Russian electricity industry. Virtually all of its assets are classified Level 2, so to be conservative it’s best to consider EOS’ entire portfolio as invested in unlisted stocks:
Discount to NAV: 36%
1 Year Return: (51)%
3 Year Cum. Return: 36%
2008 Return: (76)%
ENR Russia Invest (RUS:SW): ENR’s a Swiss listed closed-end fund, focused almost solely on Russia. Based on Level 2 & 3 assets, ENR has 34% of its portfolio in unlisted stocks:
Discount to NAV: 19%
1 Year Return: (7)%
3 Year Cum. Return: 2%
2008 Return: (20)%
Vostok Nafta Investment (VNIL:SS): Vostok’s a Swedish listed closed-end fund, focused solely on Russia. It’s a pretty concentrated fund, with over 50% in its top 3 holdings: TNK-BP Holding (TNBP:RU), Black Earth Farming (BEFSDB:SS) & Tinkoff Credit Systems. Approximately 10% of its portfolio’s in unlisted stocks. Vostok’s longer term shareholders have done much better than its poor investment record suggests, though – in a previous incarnation, it achieved v substantial returns as (primarily) a Gazprom investing vehicle. I recommend you read (all!) their annual reports – they really stand out among their peer group (in fact, against any peer group), and provide fascinating and v informative Russian commentary on both a macro and a micro basis:
Discount to NAV: 19%
1 Year Return: (19)%
3 Year Cum. Return: (70)%
2008 Return: (63)%
Aurora Russia (AURR:LN): Aurora’s a UK AIM listed closed-end fund with a portfolio of 4 Russian private equity investments. Management’s committed to realizing value for shareholders within the next 2 years:
Discount to NAV: 54%
1 Year Return: (5)%
3 Year Cum. Return: (27)%
2008 Return: (7)%
Prosperity Voskhod Fund (PVF:LN): PVF’s a UK AIM listed closed-end fund which pursues a restructuring and event-driven strategy, with a focus on Russian small- and mid-cap liquid stocks:
Discount to NAV: 11%
1 Year Return: (20)%
3 Year Cum. Return: 220%
5 Year Cum. Return: 11%
2008 Return: (73)%
Renaissance Russia Infrastructure Equities (RIEL:LN): RIEL’s a UK listed closed-end fund, focused on investing in Russian infrastructure companies. 25% of the fund’s portfolio is invested in unlisted stocks:
Discount to NAV: 27%
1 Year Return: (33)%
3 Year Cum. Return: 33%
2008 Return: (41)%
Templeton Russia & East European Fund (TRF:US): TRF’s a US listed closed-end fund which, despite the name, appears to be primarily a Russia-focused fund. It has 87% invested in Russia, with another 8% in Ukraine. It’s managed by Mark Mobius, who has a stellar long-term record with his Emerging markets fund:
Discount to NAV: 6%
1 Year Return: 18%
3 Year Cum. Return: (44)%
5 Year Cum. Return: (5)%
10 Year Cum. Return: 457%
2008 Return: (72)%
JPMorgan Russian Securities (JRS:LN): JRS is a UK listed closed-end fund focused solely on Russia:
Discount to NAV: 6%
1 Year Return: (17)%
3 Year Cum. Return: 121%
5 Year Cum. Return: 19%
9 Year Cum. Return: 459%
2008 Return: (65)%
To be continued…
** Call me distrustful, but the long-term fund returns one can find around the web often don’t appear the most reliable to me… As part of my normal research, I usually prefer to calculate returns myself directly from NAV histories, as above. Note all funds don’t report on a calendar year basis, so 2008/long-term returns aren’t completely apples-to-apples. Also, for US funds, I’ve included annual distributions in my return calculations, but haven’t assumed a dividend reinvestment effect. A tad unfair perhaps, but it reflects my general distaste for the analytic, administrative and tax headaches these distributions present. Overall, I think these are relatively minor points, and the data is sufficiently accurate, and comparable, to support useful analysis.
Wexboy 
Anyone wishing to invest in JRS I have opened 3 threads on the ADVFN.com ticker JRS and keep the main thread continually updated when it comes to JRS 10 Largest Investments.
When it comes to investing in JP morgan Russian Securities you forgot to put in several important points.
1). Able to invest as little as £50 on a monthly basis and therefore can be used more like investing in a pension plan. Better as at the end of the day one doesn’t have to buy an annuity and the entire investment still belongs to the investor.
2). As from the beginning of the next financial year JRS have dropped their management fee from the standard 1.5% to 1.2%.
3). The only cost in buying is the standard 0.5% stamp duty.
4). It is a FTSE 250 stock.
Also when it comes to Russia in general, over the next 15 years are going to spend $1 trillion on infrastructure of which $450bln is going to be spent on transport infrastructure.
Also this years predicted budget deficit of 1.6% of GDP has been worked out on an average oil price of $100.50. The average oil price so far this year has been well above this price and is likely to remain so, therefore there is a good liklihood that for 2012 Russia’s budget will come in balanced. The price of Russian oil is usually only around $1.50 below that for the price of Brent crude.
I notice reading (part II) you mention about investing in Vietnam. I lived for two years in Vietnam and still wouldn’t touch an investment in the counrty with a barge pole, even Nigeria is a better bet.
Why?
1). To show you how the average Vietnamese thinks – I was shopping at my local super market in Ho Chi Minh. Just gone through the till waiting for my taxi to turn up. Local women were going up to my trolley taking things out that I’ve just paid for.
I complained they were stealing form me, they replied it’s not stealing if they’re taking things from foreigners Bascially the average Vietnamese thinks the only purpose of foreigners is to take and steal from.
In other words the way a Vietnamese thinks is that foreigners are there to be ripped-off.
2). A governemt minster used £250k of minstry money betting on a football match.
I found the Vietnamese people to be rotten right through to the core, from the very top to the very bottom of society.
You have pointed out some interesting investing opportunities I never even heard of before. The only thing that is also relevant to performance is bid-offer spreads. Some of these smaller ones sound like there could be a hefty hidden charge on investing in the first place?
I am dubious about Russia, but would love a way to invest in the agricultural promise of eastern europe, along with the young workforce and relatively underrated country of Turkey, which I feel could be a superpower again within the next 100 years or so.
When you consider size/volume for respective stocks, I haven’t noticed anything extraordinary about spreads. Of course, smaller stocks are a little harder to deal in and % spread’s a little wider – I’ve never seen this as a real problem, as I demand a much higher potential upside for smaller/more specialized stocks/funds, so this tends to compensate.
Perhaps you’ve seen them, but I’ve written a couple of ‘Black Earth’ articles you should like – here’s the latest:
These stocks are mostly facing cash-burn/raising issues, so care should be exercised, but long-term they’re highly attractive. Cresud might be a better bet in teh short run:
I’m a big Turkey fan also. They’re getting killed by the European ‘recession’ right now, so no credit’s being given for the export advantage/economy boost from a significantly cheaper TRY…
Look at some of the economic stats I provide above for Russia, and think of the same stats for the US. Now imagine this scenario – it’s 20 years ago, and I give you these 2 sets of economic stats. Are you sure you would have correctly predicted which set belonged to which country?
Corruption’s just as bad in the developed world – it’s just gussied up in the form of political contributions and lobbying… And we hardly need to mention volatility – after 2007/08, I wonder if people have finally realized that developed markets are just as volatile as emerging markets?!
As regards the future for Russia: I’d observe that countries with a steadily increasing GDP per capita, and a burgeoning middle class, generally achieve increasing levels of democracy, so let’s hope they continue in the right direction!
After all that lovely analysis, do you think a fund heavily into Russia has much future? Russia has lots of resources that europe especially needs, but it also has Putin and has, of late, done a splendid job of frightening off western capital. What do think will happen in the next few years? I still hold some RNE, so the question is more than moot.
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