Russia tempts advisers with equity choices

Russia's eight-plus-year economic expansion has spread into parts of the country's consumer and retail sectors, presenting a potentially new angle for participation among financial advisers and their clients. For some advisers, the lure of Russia's stock market performance still represents the double-edged sword of a recent stretch of big gains pitted against the dark uncertainty of a fledgling democracy. Even though "we're a little afraid of Russia, I think it's the place you want to be investing in," said Theodore Feight, owner of Creative Financial Design in Lansing, Mich. He is a veteran adviser who generally charges clients retainer and per-project fees. "I think Russia is still like the wild, wild West, where what happens sometimes depends on the government and sometimes depends on the Russian mob, and I'm not sure there's always a difference," Mr. Feight said. However, the temptations are becoming difficult to ignore, and as the consumer sector gains momentum, some analysts are making a case for playing the Russian economy through brand-name multinational companies such as Wal-Mart Inc., The Coca-Cola Co. and McDonald's Corp. While Russia's stock market is open to outside investors and the number of publicly traded companies is growing, most advisers are gaining exposure through emerging-markets exchange traded funds and some mutual funds that offer concentrated exposure.

STRONG RETURNS

The Market Vectors Russia ETF (RSX), a pure play on the Russian market from Van Eck Securities Corp. in New York, which was launched in April 2007, has gained 49.9% over the 12-month period through May 20, while the Standard & Poor's 500 stock index declined by 7.2%. According to Lipper Inc. in New York, there are more than 600 mutual funds that are investing directly in Russia to varying degrees. Among those, the Emerging Europe & Mediterranean Fund (TREMX), from Baltimore-based T. Rowe Price Group Inc., and the Forward Eastern Europe Equities Investment Fund (FEEEX), from Forward Management LLC of Denver, each have 60% allocations to Russia. The T. Rowe fund is 20% over the past 12 months, while the Forward fund, which was launched in December, is down 3% since inception. The Metzler/Payden European Emerging Markets Fund (MPYMX) has a 39% weighting in Russia and gained 20% over the past year, while the Templeton BRIC Fund (TABRX) has a 23% Russian weighting and gained 29% over the period. "We're seeing some funds invest primarily in Russia and other [funds investing] to a lesser degree, and the challenge is to use these funds at an appropriate level," said Jeff Tjornehoj, research manager at Lipper. "There's clearly evidence that the Russian economy is working for somebody. We're just waiting to see if it will work for everybody," Mr. Tjornehoj added. "Investors still need to be careful, because if oil prices decline substantially, these funds will take a double hit." This new interest in a country that didn't even have publicly traded stocks 15 years ago is shared by a lot of advisers and analysts who view Russia as a high-octane alternative to the struggling U.S. equity markets. "As the composition of this market changes, we think there will be more opportunities to invest, and a compelling longer-term story," said Vladimir Milev, an analyst with Los Angeles-based Metzler/Payden LLC. The story at this point, according to a recent Metzler/Payden research report, focuses on the fact that the price of Russian crude oil has increased by more than 300% since 2000. Add to that the idea that Russia's consumer/retail sector has outperformed the energy sector since 2005, and suddenly, the economic expansion gets even more interesting, according to Mr. Milev. "There is still a large population in Russia living around the poverty line, but there is also an emerging middle class," he said. "In Russia right now, there is a real high-end-luxury-goods market, and there is also a lower-end retail market where increased discretionary spending has people now replacing their TV and their old furniture." While Mr. Milev believes that Russian economic expansion could stay strong for the next three to five years, some advisers are less convinced, saying the country's best performance might be behind it and that risk should be carefully monitored. "The trend is strong, and you certainly don't short it, but it's all being driven by oil, and I think the consumer trend will die as soon as oil dies," said Sam Jones, president of All Season Financial Advisors Inc. in Denver. Mr. Jones, whose firm oversees $120 million for clients, is not anticipating a drastic drop in oil prices, but he doesn't anticipate another year in which the price jumps 80%. He is in the camp that believes that the safest way to gain exposure to Russia's bustling economy is through exchange traded funds such as Claymore/BNY BRIC (EEB), from Claymore Securities Inc. of Lisle, Ill., which invests in Brazil, Russia, India and China. More direct and concentrated exposure also is becoming available as the Russian government evolves toward a more democratic and capitalistic system. Moscow-based Gazprom (GAZ.F) is the country's largest company, which owns the world's largest natural-gas preserve. The stock, which can be purchased as an American depository receipt, gained 36.8% over the past 12 months.

RUSSIAN PURE PLAY

A good example of retail-sector expansion is Moscow-based Wimm-Bill-Dann Foods OJSC (WBD). The company produces a range of dairy products and is introducing Russian consumers to flavored yogurts and milk in a range of fat contents. "They used to have just whole milk, and they used to have to add their own flavor to yogurt," Mr. Milev said. The Winn-Bill-Dann stock price has gained 81.3% over the past 12 months. It too can be purchased as an American depository receipt. "As money continues to flow into the country, the consumers are going to want more goods and services," said Steven Rogé, president R.W. Rogé & Co. Inc., a Bohemia, N.Y.-based firm with $240 million under management. "There are ways to invest directly in that," he added. "But there are also funds available to investors who don't want to take such substantial risks." E-mail Jeff Benjamin at jbenjamin@investmentnews.com.