Don’t be fooled by ‘absurdly cheap’ Russia, says star value duo

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The ‘absurdly cheap’ Russian market holds little allure when you consider the sheer weight of political, economic and cultural challenges investors face there.

That is the view of Citywire AA-rated duo David Samra and Daniel O’Keefe, who co-run the $1.14 billion Artisan Global Value fund.

In a market update, the managers said they had paid closer attention to opportunities in Russia in wake of the Ukrainian crisis but had opted for an increasingly cautious stance.

‘As price-driven investors, normally a double-digit loss similar to that experienced in Russia would attract us. In fact, many equities in Russia by standard valuation measures look absurdly cheap,’ the managers said.

‘That said, there are significant issues to consider aside from statistical valuation, including government control, cultural and legal corporate governance concerns, and finally to state the obvious, geopolitical risk.’

Samra and O’Keefe have instead focused on one indirect play in the market through Danish brewery group Carlsberg, owners of Russia’s largest brewery Baltika.

‘Our insights into the complexity of operating in Russia through the lens of Carlsberg combined with years of watching minority shareholders step onto multiple legal and regulatory landmines, leads us to conclude that most large-cap listed equities are speculative pieces of paper – even at today’s discounted prices.’

The fund managers said they continue to search for entry points but are set to sit-out the current sell-off, with the exception of potentially adding to their Carlsberg holding. This made up around 1.7% of the fund according to the most recent available data.

Cash cushion

Elsewhere in the fund, the pair said current high levels of cash, which sat at 13.4% at the end of May, was not a sign of a tactical play but of a more defensive stance.

‘Cash levels remain elevated,’ the duo said. ‘As price-sensitive value investors who would very much like to be fully invested, we chafe at holding cash when earnings are robust.’

‘However, we would prefer to hold cash rather than expose our shareholders to overvalued securities or fairly valued securities that offer little in the way of margin of safety.’

The largest positions in the fund are currently US-based IT group Oracle (4.9%), as well as banking firm BNY Mellon (3.4%) and software giant Microsoft (3.3%). This is while IT as a whole is the largest sector bet, with the pair holding 13.7 percentage points more than the index.

The Artisan Global Value I USD Acc has returned 54.6% over the three years to the end of May 2014. This compares to a return of 17.35% by the average manager in the Equity – Global Equities period over the same three-year period.