Today’s Best Emerging Market

What emerging market trades for less than six times earnings and pays 4%?

Here are a couple more clues about the country itself: Government debt is just 8% of the economy. (In the US, Japan and the EU, these percentages are over 100%.) And unemployment is only 6%.

The answer gets us to Rob Marstrand’s favourite idea…

I met Rob in Uruguay at an investment conference where we were both speaking. We also sat on the same ‘best ideas’ panel, in which Rob opened with his mystery favourite emerging market.

He is the chief investment strategist for the Bonner Family Office. Marstrand is English and reminds me of Roger Moore circa 1973, when he played James Bond. Before joining the Bonner Family Office, Rob worked for 15 years at the Swiss banking giant UBS. (As with your editor, he’s a former banker.)

The approach at the Family Office is pretty simple. It involves thinking ‘ultra-long term’ and applying a value approach. The office has an international focus, looks for big-picture trends and aims to keep costs low.

Rob favours emerging markets, but he likes one in particular. And it’s the answer to the question up top.


Now, there are a variety of ways to invest in Russia, and you probably know about a bunch already. There is the RSX, which is the Market Vector Russia ETF (exchange-traded fund). Back in February 2009, I wrote favourably about Russia and this ETF, which then traded for about $12 and was on its way to $40. Investing in Russia when it gets super-cheap can work out really well.

The other way is to buy the famous ‘Russian oils’ – Gazprom, Rosneft and Lukoil. Coincidentally, when I got home, the latest issue of Grant’s Interest Rate Observer was on my desk.

One of the stories was all about investing in the cheap oil sector of Russia. The aforementioned trio trade for price-earnings ratios of 2.5, 6.2 and 4, respectively. By whatever measure you choose to use, the Russian oil companies are super-cheap.

Everyone knows why they are cheap. Grant’s explains: ‘First and foremost, there is the trademark Russian deficit in the rule of law.‘ Enough said on that front.

Then there is the matter of corporate governance…or lack of it. Between the government thugs and the corporate pirates, it’s no mystery why so little of the value in Russian equities seems to accrue to the common shareholder.

Yet all these things were true when the RSX went from $12 to $40, too. These factors have not prevented some from making a lot of money investing in Russian stocks. Buying super-cheap stocks works – even in Russia.

Here we get to what I most liked about Rob’s bullish talk on Russia: his way in. He talked about Prosperity Capital Management, which runs a pair of funds.

The flagship fund is the Russian Prosperity Fund, which has ladled out a return of 21% annualised since inception in 1996, versus 10% for the MSCI Russia Index. As good as that is, the Prosperity Quest Fund has been ridiculously good: 37% annualised since inception in 1999.

Yes, 37% annualised for almost 15 years!

Prosperity has done this ‘without employing leverage and [by using] a bottom-up, long-only, active investor approach in Russia and the FSU.‘ (The FSU stands for ‘former Soviet states.’ Prosperity seems to have some exposure to Ukraine.)

The problem with these funds is the very high minimum investment required: $1 million. Nonetheless, any crew that puts up those kinds of numbers is worth paying attention to.

Otherwise, a toe dipped into the RSX could pay off handsomely down the road. Or you could buy the Russian oil companies. It’s not for everybody, as Rob admitted. You have to think… differently.

In Rob’s main talk, he began with a question: ‘Are you a dog or an alien?

Dogs are conditioned to react,‘ Rob said. ‘Aliens think differently.‘ Rob advised thinking like an alien. Ignore the chorus of negative talk on Russia, he said. Instead, ‘Go against the crowd and have patience.

Usually a good formula for exceptional returns. Investing in the cheapest of the big emerging markets doesn’t hurt either.


Chris Mayer
for Markets and Money

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Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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