Citywire AA-rated Nick Price has more than halved his overweight to Russia in the past few months but insists it has little to do with ongoing events in Ukraine.
Price has reduced the overweight from 7% to 3.2% in the year to date in the Fidelity Emerging Markets fund.
The remaining weighting in the fund, which is domiciled in the UK but registered for sale seven other European markets, is purely down to the strong bottom up fundamentals of his holdings, Price said.
He said: 'While I am overweight Russia, the positions I hold are supported by high dividend yields and very attractive valuations [and] have little or no exposure to the Ukraine crisis and I expect them to continue to perform for the portfolio going forward.'
The Russia exposure in the €700 million high conviction 76-stock fund is primarily made up of two positions - oil & gas firm Surgutneftegas and banking group Sberbank - which are both top 10 holdings.
Cheap for a reason
Price noted that many emerging market companies, not least in Russia, were trading on very cheap valuations relative to earnings, but he argued that many of them are cheap for good reason.
He cited Russian state-owned oil giant Gazprom as a key example.
'Gazprom is trading at around two and half times earnings, but given the company’s weak structure, constant governmental interference and the potential impact of ongoing troubles in Ukraine on Gazprom’s connection to the European market, I will not consider investing in the company.'
'I only want to hold quality names in the portfolio, characterised by a superior and sustainable return on assets, shareholder friendly attitudes and long term growth opportunities.'
Sticking with Surgutneftegas
By contrast Price does like oil & gas peer Surgutneftegas, which makes up 2.4% of his portfolio, around 2.1% more than the benchmark position.
'The main reason I hold it is its 10% yield. The remarkable fact about this stock is that the market cap is practically equal to the company’s net cash position (which is held in US dollars),' he said.
'This means that theoretically anybody acquiring this company would instantly have their purchase covered by the cash position. In practice this would never happen due to the vagaries of Russia.'
'The way we benefit from the cash position is through the consistent and highly attractive dividend yield.'
Price added that, because gas is priced in dollars, the company’s earnings are in dollars while all of its costs are in roubles. 'With the rouble devaluing against the dollar, this only further enhances the company’s profitability.'
Meanwhile Sberbank makes up 2% of the fund and, as with Surgutneftgaz, he holds preference shares to benefit from its 5% dividend yield, which he said was far higher than ordinary shares. 'While this stock has suffered a bit, I still see value in the long run.'
Over the three years to the end of March 2014 the fund has returned 4.7% compared to the average manager return of -10.6% in US dollar terms.