Russian equities were by far the worst performing asset class last year due to the tensions with Ukraine and as the huge fall in the oil price – which plunged 40 per cent as a result of over supply issues and OPEC’s decision not to step in and manage the market – caused the rouble to halve in value and forced the Russian central bank to hike interest rates to 17 per cent.
According to FE Analytics, the MSCI Russia index fell a staggering 42.93 per cent in 2014. On top of that, our data shows the five Russia funds in the IA universe all lost more than 40 per cent.
Performance of funds vs indices in 2014
Source: FE Analytics
The Russian index has bounced back so far in 2015 but still has a long way to go to make up its losses.
Given that many expect the oil price to stay lower for longer – it is currently less than $50 a barrel – the large majority of experts haven’t viewed the recent falls in the Russian market as a buying opportunity as its fortunes are tightly correlated to the commodity.
However, Croft – manager of the £100m Jupiter Emerging European Opportunities fund – says that 2015 could well be a bumper year for Russia.
“The Russian market faced a perfect storm of falling oil prices and conflict in Ukraine. After suffering such a disastrous year, some people might conclude that it is the end of the world – they might feel an urge to simply throw in the towel, regardless of the cost,” Croft (pictured) said.
“But for those who have followed the Russian market for some time, this situation looks reassuringly familiar – and for us, the instinctive reaction is exactly the opposite of despair.”
Croft says investors need to look back to December 2008, which was the last time it was the “end of the world” for Russia funds as the oil price had fallen from its all-time high of $145 to just $34 a barrel, which brought the market to its knees.
“At the time, it felt like the worst possible moment to invest in Russian equities, and if anyone had advised you to do so, you would have thought them to be completely crazy,” Morton continued.
“Yet anyone ‘crazy’ enough to put their money to work in Russia that December would have doubled it in little more than a year, although there is no guarantee that this type of event will happen again.”
Following losses of 73 per cent between May and October 2008, the MSCI Russia rallied back strongly over the following 14 months, returning more than 130 per cent between its lows in October 2008 and the end of December 2009.
According to FE Analytics, Pictet Russian Equities, JPM Russia, Baring Russia and Neptune Russia & Greater Russia were all among the top 10 performing funds in 2009 as they all returned more than 115 per cent that year.
Performance of composite portfolio versus indices in 2009
Source: FE Analytics
Croft says the situation in 2008/2009 was “an echo” of what happened a decade earlier, when the Russian authorities were forced to devalue the rouble and defaulted on their sovereign debt as a result of the oil price falling to $9 a barrel.
“Much as it has today, consensus opinion very quickly began to assume that because the oil price had fallen, it would continue to fall and remain extremely low for a long time, if not indefinitely. Russian equities would once more have looked like toxic waste at the end of that year,” he said.
“Yet in less than 12 months, the price of oil doubled to over $20/bbl, and the ‘toxic waste’ that was the Russian market would have tripled the money of anyone ‘crazy’ enough to invest.”
According to FE Analytics, the MSCI Russia index returned a staggering 258 per cent in 2009 beating the MSCI AC World index by more than 220 percentage points in the process.
Performance of indices in 1999
Source: FE Analytics
Investors will no doubt think, however, that there is little use looking back at past performance when it comes to predicting future returns – we all know that past returns are no guide to future performance.
That is especially the case as it is unlikely that Russian funds rebound significantly from here without the oil price trending upwards and most industry commentators expect to stay near its current level for the foreseeable future.
Nevertheless, Croft is a firm believer that the price of oil will start to move higher.
“My view is that oil prices can’t remain at current levels for too long… eventually the invisible hand of the market is likely to work its magic. Already we are seeing high-cost producers cutting investment, and on the demand side we may well see consumers starting to use more fuel as it becomes less expensive for them to do so.”
Croft added: “It may take time for these forces to make themselves felt - but as the examples of 1998 and 2008 show, neither excessively high oil prices nor excessively low oil prices last indefinitely.
He also accepts that the important different between the current situation and previous Russian crises is the deterioration in relations between Russia and the West, which he expects to continue for some time.
However, Croft says the threat of more sanctions is now factored into Russia’s extremely low valuations, which haven’t been this low since 2008.
Croft has worked on the Jupiter Emerging European Opportunities fund since January 2008, over which time it has lost 50 per cent and underperformed against its MSCI EM Europe 10/40 benchmark in the process.
It is also down against the index over one, three and five years. Russia is the fund’s largest regional weighting, making up 43 per cent of the portfolio.
The fund has lost two of its co-managers in recent years. Elena Shaftan, who was a co-manager with Croft on the portfolio, retired from fund management in February 2014 and was replaced by Kathryn Langridge, who departed at the end of 2014.
Its ongoing charges figure (OCF) is 1.18 per cent.