Russia’s apparent immunity to 'hot money' outflows by foreign investors over the summer has led Swiss & Global AM’s new head of emerging markets equity to up exposure to the market.
Speaking to Citywire Global, Erdinç Benli, who replaced Andrzej Blachut as head of EM equity in July, has repositioned the Julius Baer EF Global Emerging Markets fund to have a greater focus on Russia.
Benli has upped exposure from 5.5% at the end of June, prior to his appointment, to 9.2% under the most recent available data. It is now the fourth biggest geographic exposure in the €31 million fund.
‘The reason for that is because we saw it was not as dependent on the macro as other emerging markets combined with the attractive valuations we were finding,’ said the Zurich-based manager.
‘As the country is strongly independent of oil and gas, it has allowed itself to create a sustainable balance sheet. Also, as investors turned away from it recently, we have been able to access an attractive market which is not very crowded.’
The main areas of investment have largely been in cyclical-focused sectors which can benefit from Russia’s improved economic strength and an improving consumer climate.
For example, Benli has focused mainly on the growth story of Russia’s mid-cap sector, while targeting companies in the consumer discretionary, telecoms and retail markets.
‘A large number of our competitors are avoiding this sector because of concerns over liquidity and corporate governance but it is growing and very attractive. So we are underweighting the larger part of the index and finding opportunities elsewhere,’ he said.
In addition to his penchant for smaller companies, Benli, who recently oversaw an overhaul of the firm’s equity funds range, is also looking for dividend-paying stocks in Russia.
‘These are relatively under-owned and you can get 6-8% dividends on some of these companies, which is not a bad bet. So if you combine that with the economy continuing to recover, then we will see an increase in disposable income. This, in turn, will feed more into these mid-cap, consumer-orientated stocks.’
Benli, who is attempted to reverse a period of underperformance for the GEM fund, said he made room to increase his Russia weighting by reducing exposure to countries such as Brazil, while completely exiting Turkey.
‘Turkey is now not represented in the global emerging markets fund at all. It had been an allocation of 6-7% but we saw how it was affected by tapering and foreign money flows and so withdrew.’
‘We did a similar thing with Brazil and South Africa, both of which were clearly affected by the tapering. Brazil went from a significant overweight in our fund to being an underweight today.’
Brazil has therefore dropped from representing 11.2% of the fund in June to 9% under the most recent data release.
The Julius Baer EF Global Emerging Markets fund has lost 9% in US dollar terms over the three years to the end of September 2013. This compares to a fall of 0.99% by its custom benchmark, the Cust Benchm JB Global Emerging Markets SF, over the same period.