Third Millennium Russia (TMRFX) fund and Vostok Nafta, two of the oldest equity funds investing in Russia, are exiting investments in Moscow as the European debt crisis causes investors to curtail risk.
Third Millennium Russia fund, which has invested in Russia since 1998, is shutting after posting losses and losing its founder and portfolio manager, John T. Connor, to retirement. Vostok Nafta, a Swedish fund manager focused on Russia since 1996, said on Aug. 15 it sold all of its Russia-listed shares, citing “a persistent low level of global risk appetite.”
“These funds getting out of Russian equities are a consequence of these types of funds being in a permanent crisis since 2008,” Chris Weafer, chief strategist at Troika Dialog in Moscow, said in an interview. “Clients are thinking there is enough risk in putting money with the bigger more stable funds without allocating money to more niche players with riskier strategies.”
Third Millennium and actively managed emerging-market funds have been losing clients to exchange-traded funds that track indexes. Russian ETSs attracted $743 million in the year to Aug. 22, or 86 percent of the $868 million inflow into Russia, according to Moscow-based Troika Dialog, which cited Massachusetts-based EPFR Global. For the latest week, Russia funds recorded a net outflow of $20 million while Russia ETFs had an inflow of $25 million, the data shows.
“All the inflows in the last few quarters into Russia have been for ETFs,” Maarten-Jan Bakkum, an emerging-markets strategist at ING Investment Management in The Hague, said by phone yesterday. “The option to invest in funds with lower fees is a powerful thing when risk appetite is under pressure.” ING’s $400 million U.S.-listed Russia fund hasn’t seen any recent inflows or outflows, Bakkum said.
Some investors are opting to put their money in developed markets rather than seek higher returns in emerging markets, according to EPFR Global, which tracks money flows. The dollar- denominated Russian RTS Index (RTSI$) returned 2 percent this year, lagging the Standard & Poor’s 500 Index’s 12 percent return.
Connor, whose Third Millennium fund has invested in Russian stocks since Boris Yeltsin was president, said U.S. investors have grown wary of emerging-market risk.
“Emerging-market funds have lost the trust of the investing public,” Connor, 72, said by phone from Tampa, Florida. “People are now afraid of putting their money to work overseas and prefer to be in cash or in U.S. investments.”
Emerging markets, including Russia’s, have struggled to match the performance of developed markets since 2008, when the global economic crisis triggered a flight to safety. BNP Paribas SA (BNP) estimated investors pulled at least $290 billion from Russia, the world’s biggest energy exporter, from August 2008 to February 2009 as the economy sank into its worst financial crisis since the government’s 1998 default on $40 billion of domestic debt.
The RTS Index tumbled 63 percent in 2008 and the ruble- based Micex Index tumbled 67 percent, the biggest decline among benchmark indexes in the 30 largest stock markets. Since 2008, the RTS fell 10 percent whereas the S&P 500 gained 11 percent. The RTS sank for the fourth day, losing 1.3 percent to 1,410.16 by the close in Moscow.
Third Millennium, which managed $190 million at its peak before the 2008 crisis, slid 35 percent in the year to June 30, outpacing the 29 percent decline for the RTS Index, according to the company’s website. Connor said the fund had gained 20 percent in the first two months of 2012 before slumping.
Vostok Nafta (VNIL) sold all of its Moscow-listed equities, according to its six-month report published on its website. The firm, which is listed in Stockholm, is returning $250 million to investors and has spent about $50 million buying back its own shares, said Robert Eriksson, the head of investor relations.
“Even though there remains potential upside in our portfolio of Russian listed holdings, the risk-reward ratio, after the strong start to the year and the persistent low level of global risk appetite, has deteriorated,” managing director Per Brilioth said in the report. Returns have been falling compared with the 1990s and 2000s because of the increased sources of capital, Brilioth said. Vostok Nafta said it retains four investments in two unlisted Russian companies and two listed in Sweden.
Swedish funds have been the biggest investors in Russian shares over the past two decades. Prosperity Capital, which manages about $4 billion, is the largest foreign portfolio investor. East Capital manages about $4.3 billion in Russia and central and eastern Europe.
“If we get through this fear of a European apocalypse, Russia may be rerated thanks to the series of financial reforms and it’s admission to the World Trade Organization,” Mattias Westman, chief executive officer of Prosperity, said by phone. “Until then, these smaller funds with up to $200 million will struggle due to risk perception and increased regulatory focus making it hard to turn a profit.”
Prosperity investors, which include the $620 billion Norwegian sovereign wealth fund, enjoy better returns and take a longer investment horizon than mutual funds and high-net worth individuals, according to Westman. Prosperity’s Quest fund was the best performer globally for the decade ending Dec. 31, 2009, with a 3,300 percent return, according to the firm, citing data from Morningstar Inc.
The Prosperity flagship Russia fund gained 6.5 percent during the first half of the year, compared with a RTS decline of 2 percent, according to the firm’s July 26 newsletter.
Wermuth Asset Management, a German investor focused on Russia, closed its $28 million Russian Deep Value fund and $55 million Deep Value 2 fund on July 31, according to an e-mailed statement. The firms said both had reached the end of their cycle and the closings weren’t related to performance.
Spectrum Partners, based in Moscow, may be “forced to restructure” its small-cap fund due to redemptions and a lack of investor interest for second-tier stocks, according to managing partner Michael Kart. The hedge fund has seen its assets under management shrink to $100 million from $150 million in six months due to clients taking money back and a decline in asset values, Kart said.
“People are facing a lot of difficulties, and it’s not viable if firms have shrunk to a few million dollars,” said Kart. “Clients are avoiding Russia and emerging markets because they see enough upside in the U.S. and Europe if things are turning around.”
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