Oil price slump hits Neptune Russia Fund

Managed (at a fairly steep annual rate of 1.75 per cent) by Neptune founder, Robin Geffen, the fund had outperformed MSCI emerging markets until the third quarter of last year when the global financial crisis and a sharp fall in the price of petroleum undermined confidence in the Russian and CIS economies. Russian GDP and industrial production had grown by 8.5 and 6.3 per cent, respectively, during the first quarter of 2008, but after oil commenced its precipitous decline from July onwards, the Russian RTS Index followed suit; the 70 per cent fall in the RTS all but mirrors the oil price over the same period.

The performance of the fund during the second half of 2008 highlights the vulnerability of economies within the region to falls in the price of energy and mining assets. The portfolio of the Russia & Greater Russia Fund will invariably be weighted towards energy leviathans such as Gazprom, Lukoil and Rosneft, so it is unsurprising that it has demonstrated such a strong correlation with the price of crude.

Conversely, the fund should benefit from any recovery in the oil price, but the short-term portents remain unfavourable. Deutsche Bank recently cut its Russian growth forecast to just 1 per cent for 2009, while the World Bank has also forecast a sharp contraction from what was an average expansion of 7 per cent a year since 1999. If that wasn't enough, ratings agency Fitch has just downgraded Russian debt to triple-B, just two rungs above 'junk' grade.

Robin Geffen doesn't underestimate the difficulties ahead for the Russian economy, but at an average of three times earnings, he maintains that Russian equities still offer ''outstanding value over the medium term''.

Source: Neptune & Morningstar

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