Despite the strife, investment trust managers still backing Russia as a long term play

7th March 2014

The ongoing issues in Ukraine and Russia are causing volatility for markets and investors are considering their next move. The Association of Investment Companies (AIC) has collated comments from fund managers with significant holdings in the region.

Dr. Slim Feriani, CIO of Advance Emerging Capital, managers of Advance Developing Markets says: “Investing in emerging and frontier markets requires investors to be patient and long-term. The current instability in the Ukraine and Russia is an example of the type of political risk that an investor has to consider when allocating capital to these markets.  We take a long-term view on a particular region’s attractiveness for investment based on a number of factors that include political risk. It is important that we do not take fright at short-term instability as often the economic fundamentals of a country’s investment potential will eventually play through.

“We have felt for some time that the political risk of the Ukraine outweighs the potential likely returns.  Russia, however, is a different story; the country holds strong current account and foreign exchange surpluses, as opposed to the Fragile Five, and we think that current valuations represent a decent entry point for patient long-term investors.  With regard to Russia’s involvement in the Ukraine, given how fast and how far events have escalated in the wrong direction, all sides now seem to be working hard to achieve a mutually beneficial resolution.”

Matthias Siller, Manager, Baring Emerging Europe says: “Ukraine’s economy remains weak with further help required for it to meet its external obligations. Looking ahead, presidential elections are scheduled in Ukraine for the 25th May. Additionally, Crimea’s parliament – it is an autonomous region within Ukraine – has called for a referendum on the region’s future. In our view, until the political direction of the country becomes clearer following the elections, the situation will remain in flux. This is likely to be a protracted situation, with so much now depending on the new government following the elections.

“As it stands, we believe there are three possible ways in which developments may unfold. In terms of regional stability, the best case scenario would include a post-election political outcome in which Ukraine is governed by a balanced, non-aligned government. The base case scenario would see Crimea remain effectively under Russian influence, while the worst case scenario would see an escalation in military mobilization with further separatism in the eastern part of Ukraine, where there is also a large ethnic Russian population, and sanctions being imposed on Russia.

“In the short-term, the heightened political uncertainty can cause volatility in markets with potential falls in all assets, equity, fixed income and FX as risk premia increases. Potential outflows from funds may put further pressure on Russian and Ukrainian assets.”

Ian Barrass, Fund Manager, Henderson Value Trust, says: “From time to time Emerging Markets can exhibit higher volatility than developed markets. A key success factor for a specialist fund of funds like Henderson Value Trust is to ensure that it selects Emerging Market fund managers who have experience of that volatility and have a proven ability to navigate through it efficiently for investors. With regard to Russia, Henderson Value Trust is invested with a handful of high-quality managers whose portfolios are mainly biased towards small and mid-cap companies which we believe have compelling long-term growth potential regardless of short-term uncertainties.”

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