Willis has added the £228m JP Morgan Russian Securities investment trust to his most aggressive portfolio and says while the country’s equity market is very high risk it also very cheap.“The move was based purely on valuations. The market had fallen so much that in a very high risk portfolio we saw this as a good short-term opportunity. We are looking on a horizon of more than a month – it could be 12 months or slightly longer but hopefully it will be a quick snapback,” he said.
“It was just a case of looking at how the much the market has fallen and the ratio it was on compared to both other markets and its own history. There is complete repulsion to it [from investors] with no one really investing in it. So, we could have that re-rating if things improve. If that happens it may happen very quickly.”
“In a short period of time, you’d probably get a double-digit return. Your upside could be 20 per cent or more. If it was 10 per cent we might reassess and see if we can get a bit more.”
According to FE Analytics the MSCI Russia index is down 24 per cent year to date, compared to a 4.92 per cent uptick in the broader MSCI Emerging Markets index of which Russian makes up less than 10 per cent.
Performance of index in 2014
Source: FE Analytics
The profoundly bearish attitude to Russian stocks stems from the standoff between the west and Russia over its support of pro-separatist rebels in Ukraine and its involvement in the annexation of the Crimean peninsula in February.
The imposition of increasingly punitive sanctions, the shooting down of flight MH17 over Ukraine and the sliding of the rouble have added to its pariah status for investors.
“We are hoping all of that has been priced into the market. Nobody wants to hold it and if things are getting better from a geo-political point of view you’ll see a big rebound and if we make any significant returns in the short term we will close the position out. Job done,” Willis said.
“If investors become a bit more comfortable or if there is some resolution you will see a significant recovery, which is what we are playing on.”
“I’m hoping that the worst is behind us and it can recover quickly. I’m hoping to make it a short-term trade. Just look at India after its election this year. It has continued to go from strength to strength.”
Willis was thinking about using an exchange traded fund (ETF) to access the country but then decided to go for an investment trust due to its potential to maximise a change in sentiment. He chose the JP Morgan Russian Securities investment trust.
“It was on a discount and has some gearing so if we do see a snapback that will give you the accelerated uplift that you want. Not only will we benefit from the recovery of the market but also through the structure of investment trusts.”
Over the past three years the trust has lost 26.83 per cent, compared to a fall in the index of 24.33 per cent.
It has broadly moved in a correlated fashion with the index.
Performance of trust and index over 3yrs
Source: FE Analytics
The trust is currently on a discount of 14 per cent and has an ongoing charges figure of 1.44 and 2 per cent gearing.
Richard Titherington, JP Morgan Asset Management’s chief investment officer, is also bullish on Russian stocks.
He recently told FE Trustnet that despite the headwinds to the market, there is a historical record of strong bounce-backs in emerging markets over the short term when the average dividend yield of an index is larger than the price to earnings ratio.
“What happens in emerging markets when you get a P/E below the dividend yield? Historically it has happened about 30 times. It has happened in Hungary, Indonesia, Turkey, Brazil and Russia. Every single time except one on a 12-month view you have made somewhere between 50 and 150 per cent,” he said.
He says in these examples the outlook has been as bad or worse than Russia’s headwinds.
“Every single time it has looked really bad - coups in Thailand, presidents arrested, currency collapses - but there was only one occasion when you have lost money buying an emerging market when the dividend yield is higher than P/E and that is our dear old friend Argentina.”
