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Rob Carrick

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Mother Russia’s becoming trendy

Rob Carrick


Quick, name a huge country with big oil reserves and a flashy stock market.

Canada certainly fits the bill, but Russia is the better answer. The world's biggest country and second-largest oil exporter is home to a stock market that hit record heights in mid-April and has almost tripled in value over the past couple of years. With oil trading around $60 (U.S.) a barrel, there's reason to believe the fun can continue.

Russia's not for everyone, mind you. We're talking here about a democracy with autocratic tendencies, a country where the government is determined to control its vital oil and natural gas resources, sometimes to the detriment of the private sector, and a country where journalists who ask tough questions have been murdered. No, it's not Switzerland or, for that matter, Canada.

Russia is also an emerging stock market, which means you can't go in without being comfortable at the prospect of more severe volatility than you'll see in developed markets. Back in 1997-98, aftershocks of the Asian financial crisis and other factors like falling oil prices drove the Russian market from a level of 500 points down to 38 points in just a few weeks. Since then, it's been pretty much onward and upward.

Emerging markets are somewhat difficult places to invest in, so there aren't a lot of vehicles for playing the Russian market. The biggest development yet in Russia investing could well be the impending introduction by a firm called Van Eck Global of an exchange-traded fund for the Russian stock market. The example of the iShares FTSE/Xinhua China 25 Index Fund shows that ETFs can be a very popular way to play a risky emerging stock market. For now, though, investors must choose between a pair of closed-end funds that invest in Russia and other Eastern European countries, or mutual funds and exchange-traded funds in the BRIC category, which stands for Brazil, Russia, Indian and China.

There are two closed-end funds are listed on the New York Stock Exchange, both of them managed by name-brand firms. One is the Templeton Russia and East European Fund, which is run by Franklin Templeton Investments and has a little over 91 per cent of its assets invested in Russia. The remainder is in Hungary and elsewhere. This fund is an ideal illustration of the benefits and dangers of investing in Russia - its 10-year compound average annual return to March 31 was 18.1 per cent, a period that included a 71-per-cent loss in 1998. The other closed-end fund choice is the Central Europe and Russia Fund, which is run by Deutsche Bank and has an asset mix of 56 per cent Russia and the rest in Eastern Europe and Turkey. This fund a 10-year compound average annual return of 13.4 per cent and its loss in 1998 was 25.2 per cent.

A growing number of BRIC funds offer the opportunity to diversify the risk of focusing heavily in the Russian market. Several mutual fund companies have BRIC funds - Franklin Templeton and HSBC are examples - and there's also an exchange-traded fund in this category listed on the Toronto Stock Exchange. The Claymore BRIC ETF was introduced last fall and has risen about 35 per cent since then. If you dig down into this fund, however, you'll come across one a potential pitfall in using a BRIC fund for exposure to Russia. As of the end of last year, the Claymore ETF had just 4.8 per cent of its assets in Russia.

This isn't surprising. Although Russia's stock market has been up and running for more than a decade, it has never been trendy like China and, to a lesser extent, India are today. If you judge by returns, though, Russia's market is undeniably hot.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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