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Portfolio > Portfolio Construction

In Russia, Making Big Bets Where Few Investors Dare

By Gil Weinreich

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As the U.S. and its European allies finalize a package of economic sanctions on Russia that could take effect this week, at least one portfolio manager is eager to buy what the West wants to sell.

David Iben, portfolio manager of the Kopernik Global All-Cap Fund (KGGAX), an advisor-sold fund launched seven months ago, says “the opportunity [in Russia] is amongst the best I’ve encountered in the roughly one-third century that I’ve been fortunate enough to be in this business.”

The former hedge fund manager, and founder and chairman of Kopernik Global Investors, quotes in a letter to shareholders investing legend John Templeton’s famous dictum: “Invest at the point of maximum pessimism.”

Iben draws parallels between the attractiveness he sees in Russia today and the time in the mid-1960s when Templeton daringly put up to 60% of his portfolio in Japan.

At that time, the U.S. market enjoyed a “meaningful” run-up, leaving stocks “expensive and primed for underperformance,” Iben writes. At the same time, the Fed’s easy-money policy “made cash and bonds unattractive as investment alternatives.”

In that environment, the obvious solution — to Templeton — was to invest elsewhere, something that was not commonly done at that time.

The global investing pioneer and fund company founder estimated that Japanese stocks were trading at just 4 times earnings, compared with a U.S. P/E ratio of 19.5. 

While the case for investing in Japan might have seemed a no-brainer, Iben explains just how crazy it seemed at the time, just 20 years after the U.S. dropped two nuclear bombs on the country to end a bloody world war.

Not only did a sense of enmity toward Japan linger among Americans, but the country was seen as a high-risk climate for investment, with an economy marked by corrupt business culture and noted for its shoddy goods.

To Iben, Templeton’s willingness to breach an overpowering climate of opinion hostile to investing in Japan is similar to the fortitude needed to buy stocks in 1933, bonds in 1982 gold in 2001 or…Russia today.

“Having lost the Cold War two decades ago, still hated passionately by many, infamous for organized crime and corruption, powerful oligarchs worth billions, and an emerging market, its stock market is now selling at a mere 5 times earnings and 0.6 times book value!!” Iben writes of Russia.

But those figures are just market averages, which fail to reflect that market’s greatest bargains.

“Despite growth opportunities, a high ROE, and residing in a country whose debt, as a percentage of GDP, is roughly a tenth of comparable levels found in the U.S. and many European countries, Russia’s dominant bank sells at 83% of book value, 4.3 times earnings, and yields 4.9%,” he writes in an apparent reference to Sberbank of Russia (SBRCY).

Shares of the large bank franchise have fallen 18% since Russian pressure on Ukraine over a proposed trade deal with the EU sparked street protests in Kiev back in November. Sberbank represents 3% of KGGAX, according to a recent holdings report.

Iben adds that “one of the world’s dominant natural gas, oil and infrastructure companies sells at a third of book value, 2.6 times earnings, dividend yields 5.7%, and is capitalized at $1 per barrel of oil equivalent they own” — an apparent reference to Gazprom (OGZPY), which constitutes about 4% of KGGAX.

Gazprom’s stock price has recovered from a precipitous drop in late February, around the time that Russia facilitated a bloodless takeover of the Crimean peninsula previously under the rule of Ukraine.

Another bargain: “One of the world’s great franchises for generating cheap, clean, CO2-free hydroelectricity is trading a small fraction of replacement cost and just over a third of book value,” Iben writes, in an apparent reference to JSC RusHyddro (RSHYY), which accounts for over 3% of his KGGAX portfolio.

Iben cites another Templeton dictum — “where is the outlook most miserable?” — in support of his bet on Russia.

In that, Iben echoes another blood-on-the-streets manager who has recently expressed enthusiasm for investing in Russia:

Mebane Faber tilted to Russia in his Cambria Global Value ETF (GVAL), launched in March, telling ThinkAdvisor at the time that “Russia could very easily double or triple [in the next two or three years].”

“Buying the cheapest countries means buying … the worst of the worst geopolitical headlines,” Faber said at the time of Russia, which he characterized as one of the three cheapest countries of the 44 he tracks.

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Check out Bad Countries, Good Investments on ThinkAdvisor.

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