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State Street Is ‘Re-Risking’ in Russia Equity, Lacaille Says

Feb. 3 (Bloomberg) -- Fund managers are abandoning their bearish outlook and “re-risking” capital in Russia and other emerging markets where stocks are cheaper than in developed nations, said Richard Lacaille, chief investment officer at State Street Global Advisors Inc.

“In terms of Russia, the valuations look cheap and we have been overweight in our exposure because of the cheapness,” Lacaille said in an interview at Troika Dialog’s annual investment conference in Moscow today. “We are very aware of the risks and the fact that the cheapness stems from a number of things.”

Lacaille said State Street Global Advisors, which oversees $2.1 trillion as a unit of Boston-based State Street Corp., has “several billion” dollars of client funds invested in Russian equities through “active and passive” investing strategies.

“Russia is not a specific unique story,” said Lacaille, who is making his first visit to Russia in five years. “It’s part of the overall re-risking coming back on.”

Russian stocks are the least expensive of the BRIC countries, with the 30 stocks in the benchmark Micex Index trading at 5.7 times earnings. That compares with a ratio of 16 for India, 12.2 for China and 10.6 for Brazil, data compiled by Bloomberg show. The Micex gained 0.2 percent to 1,544.68 by 4:44 p.m. in Moscow, its highest level since September. The Russian benchmark index has gained 10 percent this year compared with a 14 percent return for the MSCI Emerging Markets Index.

Fund Flows Increase

Russia-focused equity funds attracted $414 million in the week to Feb. 1, Troika Dialog said today, citing EPFR Global data.

“This is the biggest allocation since mid-April,” Chris Weafer, chief strategist at Troika Dialog, wrote in a e-mailed note today. “Investors have finally responded to the strong relative start for Russian equities and boosted investment into Russia-dedicated country funds.”

Russia can close the “cheapness” gap faster if it takes more aggressive measures to address investor complaints on issues such as corruption and excessive bureaucracy, Lacaille said. The government should overhaul the pension system, corporate governance rules and improve markets institutions “simultaneously” if it wants to transform Moscow into a financial center, he said.

Valuation Gap

Addressing the “perception and the reality of corruption,” as Prime Minister Vladimir Putin has been doing in his campaign to return to the presidency, are “very important” for closing the valuation gap between Russia and other emerging markets, Lacaille said. Putin is seeking to return to the Kremlin after four years as premier in elections March 4.

Putin’s comments yesterday that VTB Group should study buying back shares from investors who have lost money in the state bank’s initial public offering led the stock to surge as much as 4.3 percent.

The prime minister’s buyback plan could have “unintended consequences if that mindset began to take hold more widely” in Russia, according to Lacaille.

“I am more in favor of the private markets where the state doesn’t get too involved in terms of offering a safety net,” he said. “If you lose money from your investment, it’s part of a normal capitalist system and it’s a healthy one.”

State Street had a Russia joint venture with Pallada Asset Management from 1998 until its dissolution in 2005. Lacaille, who was previously involved in discussions on pension reform with Russian policy makers, said Russia would not be on “the top of the list” for State Street to build a local domestic capital business for domestic investors.

“There are a lot of steps to educate not just the public but those in policy making positions about the risks and benefits of pension reform,” he said. “The risks being that you have a longer-term time horizon but you will have periods where you might face large absolute losses.”

To contact the reporter on this story: Jason Corcoran in Moscow at jcorcoran13@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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