Index tracking funds in Russia bottom of investors’ shopping lists

Index tracking funds in Russia have continued to see outflows. Despite their relatively low risk profile compared to equities, they have failed to attract local investors.

In the last nine months, index trackers in Russia have seen outflows of nearly RUB1bn (€24.6m). September alone saw RUB232m leaving the asset class.

For a market segment that is just RUB4.85bn in size, this marks a significant loss. Assets under management have been decreasing steadily since the peak in 2007, when they stood at RUB7.14bn.

The number of index funds has also been decreasing from its peak in 2008. Back then, there were 44 such investment vehicles, but only 37 have survived to 2012.

Yet Russian index trackers have shown better performance
over the past 15 years than local equity funds. Market players attribute this to the volatility of the local equity market, which is difficult to play for many active managers.

Since the introduction of Russia’s RTS index back in 1995, its value has increased 15-fold from the base value of 100.Those people that had invested in the RTS index in the mid 90’s would have seen their money grow by an impressive 30% a year on average.

This would suggest that index tracking is a profitable strategy for investing in Russia. So why has interest in these products failed to flourish?

The main hurdle is investors’ mistrust, following the huge losses suffered by many local retail investors at the onset of the crisis.

Before 2008, local banks started creating so-called bank managed mutual fund, which were managed by the banks themselves and regulated by the Central Bank of Russia.

Unlike mutual funds, which were heavily regulated by depositories, these had much more freedom to invest in various instruments, including foreign equities.

Problems started happening in 2008, when investors in Uniastrum’s bank managed funds – the most popular on the market at the time – lost nearly all of their invested capital.

It turned out that instead of buying foreign equities, the bank used most of the client money to buy shares in Utrade, a company affiliated with one of the top managers at the bank.

The company’s stocks had devalued, which led to monumental losses. The bank, however, refused to reimburse investors, claiming they were warned of the potential risks.

Although the formation of new bank managed mutual funds is now banned and existing ones will close after the end of their investment cycles, it is hard to erase the memory of these events.

Mistrust for funds in Russia stretches across the whole mutual fund industry, which has been on the decline ever since the onset of the crisis.

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