Update: Neptune Russia & Greater Russia Fund

e-fundresearch: "Which factors had the most impact on the Russian stock market in the last few months?"

Robin Geffen: "The Neptune Russia & Greater Russia Fund (ISIN: GB00B60T5R07) performed well over the last six months. Over the period, returns were driven by the materials sector which benefited from robust domestic industrial production and ongoing strong demand from China. Additionally, as we neared the end of 2010, the Russian market was further boosted by the higher oil price. This was beneficial not only for our energy holdings but also for our domestic consumer stocks due to the strong oil price’s broader wealth creation effect. As the Fund’s largest relative sector weighting, our position in consumer staples was a notable contributor to the Fund’s outperformance of the MSCI Russia Large-Cap Index, as was the long-held retailer Wimm-Bill-Dann, which was bid for at considerable premium by PepsiCo."

e-fundresearch: "Which factors will be important in the next 12 months?"

Robin Geffen: "Russia tends to benefit from global commodity price inflation, and a strong oil price this quarter and continued domestic growth momentum should see the Russian market’s outperformance continue. In 2011 as a whole, we expect to see Russia continue to bounce back strongly in economic terms. Whilst most global economies should register slower rates of growth this year in comparison to 2010, we expect Russia to increase in terms of output growth.

This acceleration in output growth will be led by a continuing resurgence in investment and consumption, supported by a more accommodative monetary policy when compared with most other emerging markets. In addition to an accelerating economic growth profile, the Russian equity market remains at a significant valuation discount to emerging market peers we think. We think this represents a great investment opportunity for the Neptune Russia & Greater Russia Fund to continue taking advantage of."

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e-fundresearch: "Which over- and underweights are currently held in the fund?"

Robin Geffen: "The Fund is fully invested and has retained its primary focus on stocks and sectors benefiting from the rise of the Russian consumer and the growth in disposable income. In addition to the consumer sectors, examples of such stocks are also found in the financials and telecommunications sectors. For example, our stock selection in financials has been positive as banks with strong franchises and solid balance sheets increase their penetration alongside the development of the consumer."

e-fundresearch: "Please comment on the performance and risk parameters of your fund in the past year as well as over the past 3 and 4 years."

Robin Geffen: "The Neptune Russia & Greater Russia Fund combines my extensive experience of investing in the Russian stockmarket with Neptune’s team-based process. Our top-down research analyses the macroeconomic forces and global industry trends influencing Russian companies, allowing me to position the Fund in the areas most likely to outperform.

This approach has seen the Neptune Russia & Greater Russia Fund generate a very strong performance track record. For each of the last five discrete years, the Neptune Russia & Greater Russia Fund has outperformed the MSCI Russia Large Cap Index, whilst since launch in December 2004, the Fund beaten the Index by over 110%.*

The Fund consists of a concentrated portfolio of c.30 – 40 holdings, diversified across the sectors. I favour large and liquid stocks that are well managed and transparent; at least 90% of the Fund’s holdings produce accounts under international accounting standards. Believing that absolute familiarity with holdings is vital, I meet every company at least twice a year, and have extensive “on-the-ground” experience of both visiting and investing in Russia.

The portfolio has had a long-held focus on the consumer and the opportunities that rise of a middle class presents. Indeed, whilst see Russia as benefiting from oil, gas and mineral wealth, consumer-facing stocks increasingly offer exciting opportunities. Wage settlements have ensured consumers receive higher wages year-on-year, which in turn has led to visible social change. This remains the predominant theme in the Fund."

e-fundresearch: "What are currently the most important opportunities and risks for investors in the Russian equity market?"

Robin Geffen: "While the UK and other “developed” economies are drowning in government and personal debt, the “emerging” economies – those countries that are still poor but are becoming less so very rapidly – will lead global economic growth over the next few years. This is because they have now reached a critical mass, both in global economic and political terms, at which they have become their own masters. We believe that Russia is one of the most important of these emerging economies, and perhaps represents the most exciting investment opportunity.  

There are two fundamental elements to Russia’s economic emergence today. First, like other successfully emerging economies, and in fact just like Western Europe in centuries past, Russia has cast aside a long standing “anti-growth” political regime – finally setting the upward grinding process of capitalism in motion. The precedents for this around the world are telling, such as China’s political reforms from 1978 onwards, following the death of Mao Zedong; India’s liberalisation of business and trade following the dismantling of the “licence raj” in the 1980s; or even the pro-merchant reforms following the Glorious Revolution in England in 1688. The lesson is straightforward: the replacement of anti-market regimes with pro-market regimes results in an economic growth revolution. And this is happening today in Russia, following the fall of the Soviet Union in 1991.  Russia’s “market moment” in the 1990s was marred by a rushed and hijacked transition from communism to capitalism, and the country suffered a decade of turmoil in which the standard of living for the majority of the country actually declined relative to life under communism. However, since the year 2000, under the leadership of Vladimir Putin and, since 2008 Dmitry Medvedev, the Russian economy has grown at an average annual  rate of over 5% and living standards have begun to rise very rapidly.  A large middle-class of Russian consumers is emerging, representing exciting investment opportunities. 

Second, in a world where around two fifths of global population are living in two countries that are growing in economic terms at close to 10% a year – India and China – Russia’s resource endowment is becoming more and more valuable. Russia’s strength in oil and gas is well known – it ranks above Saudi Arabia as the world’s biggest crude oil exporter, while supplying 27% of world’s gas reserves – but Russia’s resources are more than just oil & gas. It has world class reserves in iron ore, coal, nickel and chrome; a mineral reserve base second only to South Africa. It is also one of the world’s largest producers of platinum, palladium and diamonds and is the only country with the potential to grow its gold production. It is also home to 25% of the world’s forestry, with vast reserves of timber and water. And its share in the world grain market has grown from 1% to 14% in the past decade**. Trade turnover between Russia and China surged 1,200% between 1998 and 2008, and we expect similar growth over the next decade***. We also expect trade between Russian and India to take off over the next decade, as both countries climb the top-ten rankings of the world’s economies by size. The bottom line is that Russian exports are reflecting a broad trend in emerging economy growth.

The main concerns that investors have about investing in Russia are about corporate governance, property rights and corruption. These are legitimate concerns but Russia is not dissimilar to other emerging markets in this respect.  It simply means that it is vital for investors to look into the details of companies, including meeting the management, in addition to understanding the overarching economic themes.

The Russian stock market outperformed most other global markets strongly in the second half of 2010 as Russia’s economic growth rate rose above 5% again following the global recession, and as commodity prices rose on the back of global growth. We see this outperformance continuing during the next few months and see this as a good buying opportunity in Russia for the long-term investor."

e-fundresearch: "Thank you for the interview!"

*Lipper, A Accumulation share class performance, in euros with no initial charges, net income reinvested to 31.01.2011. Past performance is not a guide for future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the original amount invested. Investments in emerging markets are higher risk and potentially more volatile than those in established markets. References to specific securities are for illustrative purposes only and should not be regarded as recommendations to buy or sell these securities. These are the fund manager’s personal recommendations and we do not undertake to advise you as to any change of our views.

** Source: Renaissance Capital, December 2009

*** Source: VTB Capital, March 2010