“I wouldn't start from here if I were you.”

It is interesting how many market commentators still cannot grasp the fact that it is possible to be active but use low-cost passive funds (ETFs) as these investment vehicles tend to deliver better investor outcomes due to their inherent advantages of liquidity, diversification, performance and low cost.

There is a myth that investing via ETFs is easy, even lazy, and all managers using ETFs are somehow not active managers but buy and hold merchants, not making investment decisions.  Since we started SCM 10 years ago, we have never employed a buy and hold (and forget) approach, nor employ a simple periodic review asset allocation strategy, once every quarter or once every six months or even just once a year.  In addition to being more active than many of our peers, we often hold different ETFs to our peers who tend to be obsessed with cost alone, without looking at potential returns or underlying valuations.

We have also invested a limited amount of a portfolio’s holdings in more volatile assets, from time to time; e.g. Russia.   When such assets are heavily out of favour and the valuation is compelling we seize the opportunity.  However, as with Russian equity funds, we are always completely alert to risks – even though some of these can be mitigated by investing via ETFs – due to the extra diversification and extra liquidity.

As the famous joke about the person being asked for directions to a place replies “I wouldn’t start from here if I were you.” The fact is that the Russian market can produce great returns but with greater volatility. The Russian stock market has been a good investment over the last 20 years, but had you invested during 2007,  prior to the last credit crunch, you would still have not recouped your investment:

Interesting that the current 20-day volatility is closest to the lowest its been in 10 years:

If you look at the recent ‘worry’ peaks when volatility was elevated – 18th April 2018, 4th Feb 2016, 8th Jan 2015, the subsequent 12m MSCI Russia Index (USD) returns were attractively positive – returning +17.4%, +62.3%, and +8.8% respectively.

With our contrarian mindset, we have invested in the Russian market when its valuation and popularity are excessively low, even by its own standards.  These are the periods during which we invested typically around 2% for several of our SCM Portfolios.  In this table we compared the returns of these asset allocation decisions with a traditional Emerging Market index:


*iShares MSCI Emerging Markets
** X-trackers MSCI Russia (2009-2010) iShares MSCI Russia (2014-2019)

Much of the recent performance in the Russian ETF we held, in GBP terms, had appreciated by 35% this year so far, which is down to the strengthening of the ruble against the £, which has accounted for 10.8% of the return.

Of course, part of this reflects the rise in the oil price, but the overall Russian market returns have been greater than the 20% increase in the oil price alone.  Furthermore, if you look back over the last five years, the return of the Russian market has far exceeded the oil price, so the fortunes of the Russian market (green line) is much less tied to the oil price (white line) over the medium term than you might first think:

We have decided to take advantage of the recent surge in the oil price, the Ruble and sentiment by selling our Russian ETF and re-deploying the proceeds into mainstream Emerging Market and Emerging Market small cap funds.

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