GMO has taken an unusual approach in its Emerging Markets fund by investing heavily in unloved country Russia.
In the firm’s Emerging Markets Trust fund, which was $78 million in size and nominated in the Global Emerging Market Equities category at this year’s Money Management Fund Manager of the Year awards, it had 17.1% allocated to Russia which was a significant overweight compared to the 3.2% held by its MSCI Emerging Markets benchmark.
Russian oil companies Lukoil and Surgutneftegas also sat in the fund’s top 10 holdings at 3.1% and 3% respectively.
Manager, Warren Chiang, said: “People laugh when I say we invest in Russia because of the news about Putin and about economic sanctions but it is very cheap. It is paying high dividend yields and the corruption is now lower. The financials are very robust, it could be a very developed market based on its finances and that’s what you want to see from an emerging market.
“The country also has a rainy day fund for when the oil price is low so we have felt comfortable that they would be able to withstand a low oil price for some time.”
Earlier this year, emerging markets managers said Russia was better prepared for a downturn in oil than other oil-producing nations such as Saudi Arabia as it was reliant on its exports. Oil turned negative in April with the price of WTI crude falling to -US$37 (-$51.2) but it had since recovered and was currently trading at $41 per barrel.
However, the performance of the MSCI Russia index has not been a strong performer within emerging markets with the index losing 23% since the start of the year and 13% over one year to 31 July. This compared to losses by the MSCI Emerging Markets of just 3.4% since the start of the year and positive returns of 3% over one year.
According to FE Analytics, within the Australian Core Strategies universe, the emerging markets sector lost 5.7% since the start of the year and 0.2% over one year.
The GMO Emerging Markets Trust lost 8.4% since the start of the year to 31 July, 2020 and lost 1.9% over one year to 31 July, 2020.
