Last year Russia outperformed both the MSCI World and MSCI Emerging Markets indices but it was not down to increased foreign inflows, according to JP Morgan Asset Management’s Oleg Biryulyov.
In 2019, the MSCI Russia index made a total return of 45.53 per cent – in sterling terms – compared with a 22.74 per cent gain for the developed markets-focused MSCI World and a 13.86 per cent return for the MSCI Emerging Markets benchmark.
MSCI Russia versus MSCI Emerging Market and MSCI World in 2019
Source: FE Analytics
However, international investors have remained wary of the sanctions-hit country limiting foreign inflows.
As such, performance has been driven by better corporate governance and transparency and high dividend yields of at least 7 per cent, said Biryulyov, manager of the £400.8m JPMorgan Russian Securities investment trust. 
Biryulyov (pictured) said that since 2014 – when the EU and the US brought in sanctions following its annexation of Crimea from Ukraine – many have stayed away from Russia, but the market has rebounded and grown.
“Everyone thought that Russia was too risky as we faced political risk, but in the meantime our economy has been carrying on and recovering,” said the manager.
“The inflows were diminutive though so this all almost went unnoticed. So, Russia has done quite well.”
The trust manager said compared to other emerging markets Russia’s ‘unpopularity’ with foreign investors is apparent when you consider international inflows and the fact that the trust is trading at an 11.7 per cent discount to net asset value (NAV).
“Should I or the market rely on those foreign investors?” asked Biryulyov. “No, because they [will] just buy it by default and they will be the first out and the last in.”
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
A lack of flows hasn’t stopped the JPMorgan Russian Securities trust from outperforming over the past five years, making returns of 178.92 per cent over the past five years beating the RTS index – a market cap-weighted benchmark of the 50 biggest Russian stocks.
So, what are the opportunities that Biryulyov sees in this underappreciated emerging market?
The Russian market is dominated by the basic materials sector and Biryulyov’s trust invests more than 68 per cent of its portfolio there, with significant holdings in the oil & gas industry.
Indeed, one of his largest holdings is Gazprom which the manager said is not just the biggest company in Russia but is also the biggest gas company in the world.
Gazprom share price over 5yrs
Source: Google Finance
The country’s oil & gas industry was targeted by EU and US sanctions, with indirect bans on provision of technology for exploration and the provision of credit to these companies.
Nevertheless, the company has survived and thrived.
“If you survived then you clearly did a lot of things well,” he noted, highlighting the company’s drive towards transparency and double-digit dividend.
“If it was American it would have had at least 2x its market cap,” he said. “That’s just a reflection of reality. People don’t have the education [and] because it’s a Russian company it trades at a market discount.”
While fossil fuels remain a key component of the Russian economy, it is at risk of a global drive towards renewable energy alternatives.
This could be a challenge for Russia, said Biryulyov, but it would be more likely to use those natural resource to help its domestic economy.
“Obviously we would love to just have a Silicon Valley spread all over the world but that’s not possible,” he said. “Someone has to produce fuel and produce the electricity to make computers work.
“Russia is dominated by the energy sector we can’t just walk away from that.”
He added: “Yes, Russian businesses are fully aware of the environmental issues. And if anything, Russian companies are doing more than their global peers in terms of trying to reduce their environmental harm.
“They may have a worst starting point compared to the global peers as their industries are not very environmentally friendly.
“But let’s be realistic about the global situation, the way to reduce global air pollution globally is to force China, Europe, India and the US to stop using coal for generation and replace it with gas.
“That would have a massive impact in terms of the global energy pollution impact.”
Looking ahead for the rest of the year and Biryulyov quoted former Russian prime minister Pyotr Stolypin.
“‘In Russia nothing changes for 200 years and then everything changes in 10 years’,” he said “So, my expectation for this year will be very steady returns. If you think about this, we can’t predict price moves, but what we sort of can guestimate is what will happen with the economy.”
JPMorgan Russian Securities is 1 per cent geared, has a dividend yield of 4.7 per cent and ongoing charges of 1.17 per cent.