Why Russia can offer more than just its oil

WHEN investors think about money-making opportunities in Russia they usually think about oil and oil alone. So when the price of black gold is in the doldrums, as it has been for some time, they tend to steer clear of the country’s stock market.

However, investors who have behaved counter-intuitively will have cashed in – if Baring Emerging Europe investment trust is anything to go by.

Matthias Siller, co-manager of the 25-year-old trust, says Russia – which accounts for nearly 64 per cent of the fund’s holdings by region – is a more diversified market than you might think and providing plenty of attractive opportunities. In the past year alone, a £1,000 investment would have grown to £1,449 compared to £1,199 for the FTSE All-Share Index.

This is largely thanks to improvements in corporate governance, greater support for private enterprise and a culture now more focused on shareholders – including a commitment to paying rising dividends, Siller says. ‘Russia is more than an oil play,’ he adds.

But oil cannot be ignored. Russian giant Lukoil is one of the £114 million fund’s largest holdings. Siller says: ‘The management at Lukoil has been turned around in the last few years and the company is being run more efficiently.’

Financial companies are also a source of strong growth. The fund has a large holding in Sberbank, the country’s biggest bank. The fund’s co-manager, Maria Szczesna, says: ‘It is one of the best managed banks. It used to be pure banking but has diversified into areas as varied as property management to a service for booking doctors’ visits.’

The company has developed rapidly into digital banking. She says: ‘Sberbank has 93 million customers and 66 million use digital banking. The bank had the idea that digitalisation might allow it to close branches – but it has had a huge inflow of customers who want to use the branches as well.’

Just as Sberbank is diversifying into digital services, the investment trust is picking up the shares of strong players in the internet field. This includes a holding in Yandex – Russia’s equivalent of Google. Siller says: ‘I think Yandex can compete on the global stage. Part of its business is an Uber-like service called Yandex Taxi. It merged with Uber’s Russian business – with Uber taking a 36 per cent stake in return for not competing there.’

Although Russian companies dominate, other countries contribute to the fund’s success. While politically turbulent Turkey might put off many investors, there are some success stories that have added value. This includes Beko – one of Europe’s most prolific producers of washing machines and fridges, which is part of the KOC Group of Turkish companies. ‘Beko has been doing well in Poland,’ Siller says.

The Polish stock market may have gone nowhere in the past few years but the country’s economy has been a better performer, which is why stocks such as Santander’s Polish subsidiary features in the fund’s portfolio. Jason Hollands, of wealth manager Tilney, says emerging European markets are not for the faint-hearted. He says: ‘These markets are notoriously volatile. Russia has also become increasingly authoritarian under Putin.’

With just 47 stocks in Barings’ fund – and 40 per cent of the total in just four businesses – it is too concentrated for his taste.

Hollands adds: ‘I think a modest investment in a global emerging market fund is more appropriate.’