It’s fair to say the recent state of the UK’s relationship with Russia would fall into the ‘it’s complicated’ category. The Salisbury novichok poisonings, which the UK has firmly laid the blame on Russia for, have dragged what was already a strained political relationship into the gutter. However, it is also not so long ago that the UK, London particularly, was welcoming Russia’s financial elite with open arms, even if there was more than a hint of turning a blind eye to the often dubious source of that wealth.
A good chunk of London’s prime property market is under Russian ownership. The countries have also conducted a great deal of business between each other across different sectors, from inward investment to UK companies such as BP and Shell’s involvement in Russia’s oil and gas fields. Sooner or later, it is still more likely than not that relations will improve and the UK and Russia will again start doing business together. Both economies are too big for that not to happen unless Russian President Vladimir Putin takes his country on an extreme course towards international isolation. And despite his posturing, sowing of disruption online and willingness to pick his battles with the Western establishment, he seems too wily an old fox to take Russia too far down that route.
In the meanwhile, one renowned fund manager believes concerns around Russian corruption and the geo-political antagonism with the West means that there are bargains to be found in the country’s equities market. While investing in ‘emerging’ and ‘frontier’ equities markets is not for the conservative and requires a tolerance of volatility, the heightened risk can also lead to potentially attractive rewards.
One man who has built his considerable reputation on being able to sniff out the correct risk to reward ratio in volatile markets such as Russia is Richard Sneller, fund manager of the £701 million Baillie Gifford Emerging Markets Growth fund. His picks from these markets have been consistent enough to keep him in the top 25% of emerging markets fund managers for over 10 years now.
So what is Mr Sneller’s secret? In a recent interview with The Telegraph he says his fund takes a ‘three pronged’ approach to picking emerging market equities. The first is to identify companies with huge growth potential that will play out over 10 or 20 years and still being underestimated by the wider market. Taiwanese semi-conductor manufacturer TSMC is one such example, with South Korea’s Samsung a now well-known second. However, when Mr Sneller first invested in the company back in the 1990s, it was a long way from the leading international brand it is now.
The second prong of the approach is to look for companies with big shorter term growth potential that will outstrip the usual patterns of potential growth being limited by a ceiling of up to 30% a year. China’s Alibaba is a recent example of this kind of success story. The company has rocketed by 40% to 50% in value each year for the last half decade to become one of the biggest in the world.
Finally, the fund looks for sectors where others are overly conservative on the potential for growth. The current example of this is the favour that Mr Sneller’s fund is showing towards the oil and gas sector. He takes a contrarian view that growing demand from an increase in car ownership and affordable air travel in China will lead to big increases in demand and keep oil prices at around their current levels over the next few years.
Corruption is always a major risk when investing in promising companies from less politically and economically mature countries. The Baillie Gifford Emerging Markets Growth Fund tackles this in two ways. The first is to only invest in the minority of companies that demonstrate greater levels of transparency and corporate governance than the norm for their geography. The second is to invest in a company to a level that provides significant internal influence. This allows the fund to actively change the culture of a company from the inside out.
It is high risk for those investing online to take on the responsibility of making equities picks in volatile emerging markets themselves unless highly experienced. However, especially for those earlier in their investment cycle and with time on their side to ride out volatility, the kind of returns that these risks can deliver can really boost an investment portfolio’s returns. Identifying the best funds in the sector can reap rewards.