Russia is not an investment opportunity emerging market investors should immediately dismiss anymore, according to Genevra Banszky von Ambroz, co-manager of the Smith & Williamson MPS.
“Russia is generally not a well-owned asset class, yet the market has recently been one of the few delivering both strong returns and a good level of diversification” she says.
“The companies in this market are not typically well owned in Core GEM strategies given the composition of the benchmark, and this is despite many trading on attractive multiples whilst being hugely cashflow generative; with a large proportion of those cashflows being paid out as dividends to investors.
”What many investors don’t imagine when they think of allocating to Russian equities is that economic conditions are relatively good. The country has meaningful FX reserves, monetary and fiscal policy has been conservative under a sensible central bank, and corporate balance sheet leverage is low. Interestingly, despite the huge volatility in the oil price during 2020, the currency has also been relatively stable, in stark contrast to past experience.
As part of its exposure to the market, the Smith & Williamson MPS team holds Pictet Russian Equities.
“Pictet Russian Equities, run by Hugo Bain and Christopher Bannon, takes a value-biased, free-cashflow generation-focused approach to owning quality companies in the market, and it has had a good year so far, outperforming the MSCI Emerging Markets by over 30% year-to-date,” says Banszky von Ambroz. “The story around Russia remains positive, despite the ongoing challenges presented by geopolitics.”
To balance exposure to Emerging Markets more generally, the team holds a variety of strategies that are either less well known or contrarian.
“The funds we hold in the models tend to be slightly less well known by the market,” says Banszky von Ambroz. “This includes the likes of BlackRock Emerging Markets Equity Strategies (EMES), which we like for its truly contrarian approach.”
Managed by Samuel Vecht and Gordon Fraser, the BlackRock EMES fund has 6.88% of its portfolio invested in Russia.
“If there is a rotation towards value, or rising inflation becomes more structural in nature, and rates start to go up, the fund should provide exposure on the upside, diversification, and given its ability to short, some protection in a falling market, should equity markets endure a further period of meaningful volatility. Despite the fund having had a slightly more volatile few weeks, this year it has added value for the portfolios.
“Hermes Global Emerging Markets, which has had a more challenging year so far, given its quality growth bias, has 4.42% in Russia. It has been an excellent performer for us since we bought it in 2016, and we continue to believe that it deserves its place in client portfolios, having outperformed the MSCI Emerging Markets by 5%.
“Given our preference for running diversified, balanced portfolios for our investors, BlackRock EMES is included to provide a complement to the other strategies held within the Asia Pacific and Emerging Market allocations, which tend not to approach their investible universes in the same way.”