Investment platform AJ Bell has released a list of top performing funds over three years and it may come as a surprise that both Pictet Russian Equities and Neptune Russia & Greater Russia Funds are near the top, coming in at second and third respectively.
The Pictet fund has achieved a 30.57 percent three year annualised return whereas the Neptune fund has returned an equally impressive 30.44 percent.
The two Russian funds beat some well-known contenders, as they both outperformed funds from BlackRock, JP Morgan Asset Management (JPMAM) and Polar Capital with tech holdings, a sector that has seen explosive growth over the years.
Both funds have PJSC Lukoil, a Russian multinational energy corporation and Sberbank of Russia, a state owned Russian banking and financial services company.
They both carry a reasonable expensive ongoing charge figure (OCF), as the Pictet fund charges 1.86 percent and the Neptune fund 2.04 percent. The Neptune fund is managed by Robin Geffen.
Hugo Bain, fund manager of the Pictet Russian fund, explained why Russia equities beat Emerging Markets (EM) in 2018 and why it may do so again in 2019.
Mr Bain said regarding sanctions on the country that “although sanctions can have an impact on Russian asset prices this tends to hurt western investors more than it does Russians, who tend to have relatively little exposure to their domestic equity market.
“For sanctions to really have an effect on the Russian economy, the West would need to restrict the country’s hydrocarbon exports. This is highly unlikely given the degree to which Europe relies on Russian oil and gas.”
Mr Bain also describes the Russian finance minister and the central bank of the Russian federation as having “pursued sensible policies over the past few years. Russia’s debt to GDP ratio is low, and the government’s budget is in surplus.”
He went on to say “one would be very hard-pressed to find an economist in disaccord with Russian monetary and fiscal policy.”
Pictet has released information indicating the Russian equity market has paid an average of 7 percent in dividends compared to the 3 percent yield on offer from EMs more broadly.
Ryan Hughes, head of fund selection at AJ Bell said: “The Russian market has been one that has been totally out of favour for investors in recent years, particularly given the macro political issues that have been occurring and the sanctions placed on the country. However, with the stock market so heavily correlated on the oil price, it is no surprise to see that over the past three years, the MSCI Russia Index has outperformed even the S&P 500 Index, although admittedly it was coming from a much lower base.
“This has pushed the few Russian equity funds available in the UK to the top of the performance charts and the likes of Pictet have been beneficiaries of this. Looking at Pictet’s positioning, they have been significantly allocated to Lukoil which has doubled over the past 3 years and today represents 19% of the portfolio.”
He went on to say that investors looking at Russia market has clearly had a good run but remains at a discount to other EMs and additionally offers a much higher dividend yield. At the same time, Mr Hughes did issue a warning. “However, investors would be advised to treat these metrics with caution as the bigger issues of global politics can have far more influence on short term share prices than traditional financial metrics. The market may well be attractive but given the risks that remain, making a direct allocation remains the preserve of only the highest risk investors, otherwise accessing through a more diversified EMs fund may be more appropriate.”
Mr Bain thinks that fewer negative headlines about Russia should focus investors' minds on the fundamentals of this huge country's equity market for this year.
This in turn could lead to a re-rating for Russian businesses which will further boost returns.
