Tubbs (pictured), manager of the Mirabaud Equities Global Emerging Markets fund, says buying into short and sharp falls in already out-of-favour markets has historically been a profitable exercise, and sees the recent sell-off in Russia as a result of the Ukraine crisis as a big opportunity.“It’s the old adage but it’s true – when there’s blood on the streets, it tends to be the best opportunity to invest. On a long-term basis, I think we will be rewarded handsomely,” he said.
“Russia is on a 12-month P/E ratio of 4.6 times, which is super cheap, and a forward yield of 5.5 per cent. In history it’s very rare that a market yields more than its P/E ratio, so straight away I’d say people should be looking at Russia.”
“It’s certainly the cheapest emerging market – the most hated market in a hated market. It’s as cheap as it was during the financial crisis, perhaps even cheaper, so there’s a real opportunity here. Looking back at my career, there’s only been three or four times when you’re faced with a market that is exceptionally cheap.”
Performance of indices over 1yr
Source: FE Analytics
“We’re 5 per cent overweight Russia, which makes our overall weighting 10 per cent. We didn’t add to our positions following the recent fall because it’s already our biggest overweight, but we remain fully committed to our position. If we weren’t already in Russia, we would be now – put it that way,” he added.
FE data shows that the MSCI Russia index has fallen by more than 18 per cent in a little over two weeks, taking total losses over a one-year period to 32.66 per cent.
This compares with losses of 17.48 per cent from the MSCI Emerging Markets index, and positive returns of 2.65 per cent from the MSCI AC World index.
Tubbs believes that worries over elections in Crimea are overstated, which has contributed to the current cheapness of the market.
“The sell-off has been quick and brutal and there could be some further problems in the next few days and weeks, but I think the political risk will decline,” he explained.
“If, as expected, Crimea does vote in favour of Russia, there will be some sanctions from the West, but nothing significant. Ultimately, the West knows it can’t function without Russian oil, and Russia can’t function without exporting it to them. The West has no hard assets in Crimea.”
“When this is realised, nervous investors with one eye on valuations in Europe and the US could look to a cheap area like Russia, which will give it a further boost,” he added.
Tubbs warns investors against buying Russian trackers or ETFs because they are so dependent on large cap companies such as Gazprom.
He owns three Russian companies: Sberbank, which has a 5 per cent yield and is trading on a P/E of 4.5 times; internet search engine Yandex, which beats even Google when it comes to market share in Russia; and finally food retailer Magnit, which is growing at an incredible rate, opening 78 stores in a single month in 2013.
“It’s been a painful time for the fund, but we’ve discussed it in detail and agree that the long-term case for these companies is now even more compelling. Operationally, the companies we are in are performing very strongly, and what’s going on in Ukraine has no bearing on them whatsoever.”
“In fact, if there are sanctions, it would play into the hands of something like Magnit because it has the economy of scale and pricing power to be cheaper than its competitors,” he added.
Tim Cockerill (pictured), investment director at Rowan Dartington, is a little more cautious, however.
He understands the investment case for Russia, but thinks only those with a huge appetite for risk should be investing directly into stocks and funds.“There’s a lot of tension in that part of the world at the moment. If you look at the action the Russian Federation has taken in the past, they ensure things work out for their interests,” he said.
“Russia is certainly cheap, but there have been lots of times over the last decade that Russia has looked cheap, and it’s just fallen even further.”
Performance of indices over 10yrs
Source: FE Analytics
“That said, there is certainly a case for it. President Putin is in a very strong position as Europe is so dependent on gas supplies, so I don’t think sanctions from the West are going to be as severe as some fear.”
“For ordinary investors, I think you’re much better off holding an emerging markets fund, with a manager with far more time and expertise in the area to determine whether there is indeed an opportunity.”
As well as Mirabaud, other emerging markets funds that are currently betting big on Russia include Templeton Global Emerging Markets, Schroder Global Emerging Markets and Neptune Emerging Markets.
Mobius’s Templeton fund has more than 20 per cent in the country, while the Schroders and Neptune funds have 8.71 and 15.19 per cent, respectively.
Investment director at Minerva Fund Managers Paul Warner has direct exposure to Russia personally, but says even medium-term investors should be very wary.
“It’s a very risky area, which is exactly why it’s so cheap,” he said.
“My clients have some exposure via emerging markets funds, and I personally have bigger exposure via the Jupiter Emerging European Opportunities fund, which has around 60 per cent in Russia.”
“This has done very well for me since I bought it overall, and I have no plans of selling because it’s a long-term holding. However, my clients tend to be a little older with a shorter time-horizon, so holding a Russia fund isn’t appropriate.”
Tubbs was previously head of emerging markets at BlackRock, joining Mirabaud in 2012.
As well as Mirabaud Equities Global Emerging Markets, he runs the FCA offshore-recognised Mirabaud Equities Asia ex Japan fund. Both were launched in July 2012.
Performance of funds and indices over 1yr
Source: FE Analytics
The Asia Pacific ex Japan fund has beaten its benchmark over the past 12 months, but Tubbs’ overweight in Russia has contributed to the slight underperformance of his emerging markets portfolio over the period.
Neither fund is currently available on Trustnet Direct, but the group confirmed it is in the process of making the Mirabaud range more accessible to retail investors.
