The Russian share boom - which country is next?

Nearly five years ago, one of the City's new fund management stars told me this: 'Russia will be the one of the stock market winners over the next five years', or words to that effect.

That was the summer of 2002. Here are annual returns from the Russian stock market (in dollar terms)...
2002 - 38%
2003 - 58%
2004 - 4%
2005 - 83%
2006 - 71%

Tables for the top performing funds for British investors also reflect the boom - two of the top five unit trusts/Oeics over five years are those that invest in Russia and Eastern Europe - JP Morgan New Europe (+275%) and Credit Suisse European Frontiers (+ 271%). The top performer last year was Neptune Russia, returning 51.6% and Jupiter's Emerging European Opportunities fund, of which I am an investor, has had a terrfic run returning 189% in three years.

It's the same for investment trusts: JP Morgan Russian Securities (+459%) and the Eastern European Trust (+378%).

So who was this star manager?

John Chatfield-Roberts (pictured), who runs a handful of funds of funds for Jupiter. He doesn't need to worry about picking winning shares, but has to guess markets correctly and pick the right funds, reducing risk (and potential returns) by spreading investors' money around the world. His Jupiter Merlin fund has returned 82% over five years compared with an average 44% for the sector.

So where is he investing now?

Well, I get the feeling JCR is lacking confidence to make such a definitive call on the market again but these are his key thoughts on emerging markets...

>> 'There's been extreme growth in China - the three or four months have been phenomenal for the Chinese stock market. I think economic growth will continue but if I were committing new money, I would wait for a better entry point.' (His funds hold: First State Asia Pacific Leaders; Jupiter China)
>> 'Brazil is interesting. Some companies are growing at 15/20% a year but are generally cheaper than Russian shares. Interest rates are high - if they fall then it could help the economy and the stock market. I have 6% invested in Latin America at the moment - that's going up.' (His funds invest in Findlay Park Latin American fund)
>> 'We looked at India and thought it looked too expensive.'

As ever, remember that achieving high returns means taking high risks. Note that JCR only invested a proportion of his funds in Eastern Europe despite his bullish stance. Don't put all your eggs in one basket.

- Andrew Oxlade, Editor, This is Money

- Click on the graph right (from a report by Moscow's http://www.cefir.ru ) to see the ups and ups of Russian shares.

Useful links

>> Story reporting JCR's move into Eastern Europe (July 2002)

>> Special report: Risky Russia? (November 2006)

>> Neptune Russia is top fund of 2006 (December 2006)

>> Bank the emerging market gains (November 2006)

>> JCR's website and book - www.fundology.co.uk

Comments

[FR]

I looked at investing in Russia but decided they have an atrocious record in human rights, the government is run by the KGB and the mafia. An interesting comment caught my eye in the book 'How the west was lost' that i picked up at an airport bookshop last month, something along the lines of : Kleptocracies stand disadvantaged from the start regarding economic performance, which is why the Middle East and Russia are not going to keep up with the rest of the Emerging Markets. Russia has huge reserves of petro so it will do well when oil prices are high but soon as prices drop (and oil runs out half way into this century at the latest) then you don't want your money invested there.

[Karolus]

April 2007.

RUSSIAN INVESTMENTS:
RUSSIAN IPO INVESTOR ALERT

French holders of Russian government bonds remind all investors that the Russian Federation is still in default today (April 2007) on their estimate of some US$ 80 billion owed to them since the Bolshevik, then the Soviet, and now the Russian Federation governments have all unilaterally repudiated Tsarist debt and refused any form of contact or dialogue with their creditors.

They also remind investors that in its Sep. 15th 2006 report entitled "Governance matters: a decade of measuring the quality of governance", the WORLD BANK rated Russia's governance comparable to that of Swaziland, Zambia and Kazakhstan. Russia came 151st out of 208 countries in terms of (...) accountability, quality of regulatory bodies, rule of law, (...). In particular, rule of law (i.e. the courts and the quality of contract enforcement) was judged as effective in Russia as it is in Ecuador, Indonesia, and Bangladesh. Nicaragua, East Timor, and China's ability to control corruption was judged similar to Russia's.

On April 3rd 2007 Mr. John Thain, the New York Stock Exchange CEO, warned that he was "very concerned about the quality of corporate governance, the transparency of company financials and the protection of minority shareholders. A number of Russian companies raise serious questions around these issues."

Despite these findings, and despite the main rating agencies' knowledge that Russia is in default on US$ 80 billion of Tsarist debt, Russia is rated "INVESTMENT GRADE".

French bondholders intend to pursue their claim until full settlement at present value, by any legal means and in any jurisdiction they deem appropriate.

EVERY POTENTIAL INVESTOR IN RUSSIA MUST BE MADE AWARE OF THESE FACTS.

FRENCH CREDITORS OF THE RUSSIAN FEDERATION STRONGLY ADVISE AGAINST ANY FORM OF INVESTMENT IN A COUNTRY WHOSE SOLVENT GOVERNMENT HAS SYTEMATICALLY REFUSED TO FULFIL ITS NATIONAL AND INTERNATIONAL OBLIGATIONS, REFUSES ALL CONTACT AND DIALOGUE WITH ITS BONA FIDE CREDITORS, AND REFUSES TO DISCLOSE LIABILITIES WORTH US$ 80 BILLION.