Neptune Russia & Greater Russia Class A Retail Accumulation

Russia: a brief introduction
The summer months have historically been quiet for stock markets, but this year was clearly different. Markets went through an extraordinary period of volatility, particularly during August, stemming from worries over euro zone debt and the absence of any definitive resolution. Despite these concerns emanating from the West there was a knock on impact on emerging markets, notably Russia.

Views of the fund's manager
According to Robin Geffen, manager of the Neptune Russia & Greater Russia Fund, the fall in the Russian market was caused by an increase in risk aversion across global markets. This was further compounded by political developments. Putin's pending return to the presidency was viewed negatively in contrast to a second presidential term for Medvedev. The Western press believe that Medvedev and Putin have opposing views, but Robin Geffen points out the two leaders have worked closely together for the last 10 years to design economic policies and share a similar vision for Russia.

Robin Geffen believes the Russian economy is set to grow by more than the UK's over the next five years. It has one of the world's largest resource bases and is poised to benefit from growth in other emerging markets. In particular, Russia is a key supplier of commodities to nations such as India and China and their demand for resources will continue to fuel growth.

How the fund aims to benefit from growth in Russia
The fund is a concentrated portfolio made up of 31 holdings, which currently has 27% exposure to the materials sector, and 30% to energy companies. One way the fund is looking to capture the growth is through investment in the oil company, Rosneft. It has huge reserves as well as the potential to increase reserves through exploration. The government is also re-assessing the taxes levied on oil companies, with the aim of reducing the burden and encouraging greater investment and increased production.

Agriculture is also a strong theme for the portfolio. The fertiliser sector in particular is benefiting from rising potash prices, which are underpinned by low inventories and rising crop prices. A top pick for the portfolio is Uralkali, the potash producer, which merged with Silvinit earlier this year to create the third largest potash producer in the world. The company has strong presence in higher risk emerging markets with Asia and Latin America making up more than 60% of sales, and there is plenty of scope for demand to grow.

Domestic consumption continues to remain an important theme for the portfolio. Despite any headwinds in the short term (caused by rising input costs which have put pressure on profit margins), the long-term story for the consumer remains in place. According to Robin Geffen incomes are growing faster than inflation and this should support domestic spending. He expects retail sales to grow by 25% per year on average between now and 2016 and this should be supportive of share prices, particularly for holdings such as X5, Russia's largest supermarket chain.

Another way you could benefit from Russia's thriving economy is through the technology sector. Russia has one of the largest internet markets in Europe with 46 million users, yet internet penetration is still low at around 45% , but it is growing quickly. In the first half of 2011, the Russian online advertising market grew by 57% compared to the same period in 2010, and this is benefiting stocks in the portfolio such as Yandex, the company which operates the largest search engine in Russia (i.e. the equivalent of Google or Yahoo in the West).

Conclusion
While Russia has been affected by the general market malaise this year, many interesting opportunities and valuations are looking extraordinarily attractive; according to James Dowey, Neptune's Chief Economist, Russia trades at a 40% discount (based on a price/book basis) to emerging markets in general. In the short term, there could be further volatility, but if and when the problems in the euro zone are resolved, global markets should start to show an improvement, and emerging markets such as Russia could benefit from a substantial re-rating.