Russian stock prices might be about to rally anew, but many SEC-registered mutual funds and U.S. pension funds won't be cashing in.
Having tumbled in the later part of 1994, Russia's fledging securities market is now seen as exceptionally cheap - with companies selling at a rock-bottom 5% of book value. "Their prices are so deeply discounted as to be ridiculous," said a money manager who asked not to be named.
But for many investors, the level of risk in Russia is equally ridiculous. On top of the war in Chechnya, the weak currency, poor corporate accounting, rampant crime, feeble stock prices and a host of other political and economic woes, is the fact that clearance and settlement problems remain - legally deterring ERISA pension funds and SEC-registered mutual funds from buying Russian shares.
Although some organizations are moving ahead with their fund raising, others are encountering difficulties.
New York's Croesus Capital Management already has two Russia funds - one available to U.S. investors, one an offshore fund. But money raising for a new fund, which Croesus would manage for the Mees Pierson Group in the Netherlands, has been put off until perhaps the second quarter. "We did some marketing in December and January. But with (spillover concerns from) the problems of the Mexican peso and the (environment in Russia) .*.*. investors didn't feel like investing in Russia at that time," said Richard Van Horne, Croesus' chief executive officer.
London's Framlington Group launched its Russian Investment Fund in 1993. But plans have slowed for an additional fund - the Volga Fund - that would take direct stakes in Russian companies. "We're still working on the fund, but given the current environment, we may go with the small number of institutions that are interested in the fund rather than launch it to the institutional investment world generally," said Gary Fitzgerald, managing director of Framlington Emerging Markets.
At Templeton, work on a closed-end Russia fund is advancing. But planning "is taking more time than it would take for a domestic fund," said Donald Reed, president of Templeton Investment Counsel, Fort Lauderdale, Fla. As he explains, "you have to be sure the regulatory environment is right" for the fund.
Given the host of problems in Russia, Nancy L. Jacob, chairman and chief executive officer of CTC Consulting Inc., Portland, Ore., concluded in a recent report that now was not the time to be buying Russian securities - although "it is safe to take direct stakes in Russian companies." In her report, "Investment Opportunities in Russia," she wrote: "At present, there is no safe way for passive (stock) investors to make money in Russia. The big money will likely be made by opportunistic insiders who have active and direct involvement with businesses, and who are physically on the scene in the country. Big money will also be made by those who charge fees to offer investors managed portfolios of Russian securities. Passive foreign investors, however, will bear big risks."
Ms. Jacob believes it may take at least a few months to remove or ease some of the deterrents to Russian investing. Among the issues that must be resolved: "the ruble has to be perceived as stabilizing; inflation needs to be under control and the custody issues need to be resolved," she said in an interview.
Her concerns are generally echoed by Ian Wilson, editor of the Micropal Emerging Market Fund Monitor, Glen Allen, Va. He said last year about eight or nine new Russia funds were introduced; this year, he doesn't expect as many.
"As a rule of thumb, I wouldn't put my own money in Eastern Europe or Russia," said Mr. Wilson. "I prefer Asia, where there is more entrepreneurialism, a more dynamic area and a huge and growing consumer market, as in China and India. I think Eastern Europe is still a basket case."
On the other hand, some close observers cite growing attractions in Russia's - mostly over-the-counter - market.
Dana McGinnis, president of San Antonio Capital, San Antonio, Texas, believes several favorable developments are putting more of a shine on stock prices in Russia. Among the good news is that the Russian securities commission has been elevated to the status of a ministry, meaning its rules will be enforced. Moreover, Russia's prime minister recently went to London with a check for $100 million to pay interest on Russia sovereign debt, Mr. McGinnis said. Moreover, he believes by the end of the year Russia will have adequate systems for clearing, settlement and guaranteed registration of shares.
Last September, Mr. McGinnis' firm launched its Russia Value Fund L.P., an offshore, closed-end fund.
"Russia has calmed down in the last couple of weeks," holds Mr. Van Horne of Croesus Capital. "It seems that the decline in Russian share prices is coming to an end, and there is starting to be some positive (political and economic) news" coming out of that country.
His conclusion: "It might turn out that now is not a bad time to get involved" in the Russia market. "A few stocks are starting to be bid up; and there are funds holding cash on the sidelines and more funds in the works." Overall, he expects "between now and December, there will be some strong upward stock price movements in Russia."
Framlington's Mr. Fitzgerald holds the "secondary markets in Russia are starting to look more like a buy now than at anytime in the last six months. We're moving into the markets .*.*. to invest ahead of (the firm's expected) big increase in international interest in Russian securities." Efficient stock settlement and registration systems will help spur the rally.
But any near-term surge wouldn't benefit U.S pension funds.
Geoffrey Hoguet, president of Creditanstalt International Advisors, New York, underscores the Catch-22: on the one hand, the advent of good clearing and custody systems in Russia would throw open the market to many more investors. But by the time that occurs, earlier investors would have already grabbed shares at their lowest and best prices.
Nonetheless, pension funds and other investors that want Russian shares will have perhaps an even better - safer - way to buy some this year: through American depository receipts and global depository receipts. Experts say this year a few Russian companies, including Lukoil and Gazprom, may issue ADRs and GDRs.