Recently I’ve argued that the Russian stock market is the cheapest in the world. And that’s why I want to show you how to get involved. I want to show you why the JP Morgan Russia investment trust (LON: JRS) could be a particularly interesting play.
The fund tends to do well in a rising market, and last year was no exception. Its net asset value (NAV) was up 9.3% against its benchmark's 3.7% rise. And seeing as I think the Russian stock market may well keep its upward momentum for some time, now could be a good time to check out this fund.
Sometimes we need a bit of shareholder activism
Active fund management has a bad reputation among investors. Many have taken to passive funds instead – that is, large funds that mirror movements in stock indices. And I get it. I mean, the active fund managers promise the world, and then largely end up disappointing, all the while raking in outsized fees.
But there are times when an active approach can pay off. Especially when you’re investing in emerging markets like Russia.
That’s because most of the capital pumped into these markets come from the West. And most of that money goes into passive trackers. These things are run by Western banks out of the world’s financial centres. They pump big bucks into the biggest, highly liquid emerging market stocks.
But the focus on the large caps leaves many interesting smaller stocks undervalued.
JRS’s fund manager, Oleg Biryolyov operates from downtown Moscow. He’s on the case! I like that approach – just like our man in Southeast Asia, Lars Henriksson, he’s close to the information needed for the chance to make outsized returns. Biryolyov has a three-pronged strategy to make the most of the opportunities as he sees them...
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What’s his active strategy?
The first part of his strategy is to focus on the domestic Russian market. Russia is riding the crest of a long bull market in commodities. Locals are getting richer, and the market for consumer staples and luxuries is growing.
Last year, shares in one of the fund’s core holdings (Magnit, a large Russian retail group) practically doubled. Media and mobile telephony are other great growth sectors in Russia’s domestic market. And in Russia, banking is still a profitable business. The fund is overweight Sberbank – indeed, Biryolyov argues that it’s probably the most profitable bank in the world!
Russian consumers still have quite a way to go before they reach what we’d consider Western standards… and JRS is positioned accordingly.
The second part of his strategy is to steer clear of heavily politicised industries. We all know that Russia’s elite rule with an iron fist. That’s why so many investors hate Russian stocks. But with an active manager, many of these industries can be avoided. For example, the Kremlin pressurises Russian utility providers to invest heavily in its infrastructure. That’s bad news for shareholders. So JRS avoids utilities. Simple!
The third part of the strategy is to actively hunt out great stocks. That’s what active fund management is all about. We’re after companies that have good products, ability to grow, long-term sustainability and quality management. And of course we want top corporate governance.
And on that score, something interesting is happening in Russia. As an emerging market, Russian companies haven’t been big dividend payers. But that’s changing. Last year, the yield on Russian stocks passed 3% - its highest ever. This year, we’re looking at 4% plus.
You see, the Kremlin holds large swathes of shares across the board. And it’s started to demand some payback on its holdings. That’s good news for all shareholders, it can pay to have a powerful shareholder on board!
I guess the situation just about sums up the mixed-up state of affairs in Russia’s stock market. Sometimes you want to avoid the heavy hand of the state… other times, it works in your favour.
An active fund manager can play both sides.
Don’t bet the farm
Although JRS is increasingly geared toward the domestic market, there’s no doubt that like anything to do with Russia, it is a play on the commodities markets. Specifically, a falling oil price will have ramifications for Russia’s real economy. And if history is any guide, it’ll be a big negative for this fund.
As always with overseas investment, bear in mind currency risk. And, of course fund managers aren't infallible, of course Biryolyov may yet drop the ball.
As one reader pointed out last week, though there are many cheap stocks on the Russian market, many also change hands at considerably higher multiples. Take Magnit, the retail stock I mentioned earlier. After its fantastic run, it’s now changing hands at over 25 times earnings – certainly not what I’d consider cheap!
You should also know that there are other investment funds available too. Some readers have left comments suggesting a couple of funds you may want to look into. And on that score, (despite what some posters have suggested), please be assured that I don’t receive any compensation from any of the funds I write about.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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