JPM looks beyond index when investing in Russia

JPMorgan Asset Management does not rely on the country index when looking for compelling investment opportunities in Russia. So much so that over a third of the JPM Russia fund is held in off-index positions.

Claire Peck, client portfolio manager for emerging market equities, explained that in JPM’s view the index is a reflection of the past, not the future, but future opportunities lie in understanding how industries will develop. She said: “An investor could buy an ETF if he wants to gain exposure to the index. We must offer opportunities outside with returns above the index.”

The fund looks for companies that will “at least double their earnings” over the next five years, which leads to a natural orientation towards small and mid-caps. The fund allocates around 30% to small caps in the emerging markets sense of the world—anything smaller than $4bn; 10-15% is in mid-caps ($4bn-$10bn), with the remainder in larger companies. “Oil giants such as Gazprom don’t have the same growth potential—there is no way the oil price will double in the next five years,” Peck says.

One way to gain exposure to companies with such high growth potential is to focus on company specific return drivers, with sustainable returns throughout the market cycle. The preference in the fund is for strong players in secular domestic growth markets. Private companies are preferred to state-run ones, since there is a better alignment of interest with the manager, and therefore better shareholder protection.

The companies that are chosen tend to have minimal dependence on commodity cycles to avoid being affected by the ups and downs in the local economy. One sector which is particularly interesting in this respect is infrastructure.

Peck gave the example of Mostotrest, the largest Russian heavy construction company involved in building bridges, roads and other infrastructure project. The fund bought the company at the initial public offering (IPO) stage back in November 2010 and has enjoyed steady returns. Peck said: “Rising investment in infrastructure in Russia will act as a catalyst to domestic demand.”

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