The first Exchange Traded Fund (ETF) based on Russian financial law has been listed on Moscow Exchange (Moex) by Sberbank Asset Management and Sberbank CIB, Vedomosti daily reported on September 17 citing Moex representatives.
Russian law now defines the Bourse Participative Investment Fund (BPIF), which is traded similarly to usual ETFs, is highly liquid, and closely follows the dynamics of the cost of the fund's assets.
ETFs have sprung to prominence in the last decade and now make up the bulk of the equity investment into Russia’s shares. They are cheap and easy to use and as they are traded on foreign exchanges they avoid the country and currency risks some other more direct methods of investing into Russian stocks have.
The disadvantage is relatively few names are big enough or have sufficiently large free floats to be eligible for inclusion in an ETF, which also adds to the volatility of the market thanks to the concentration of investment in a few names. These problems also cut off Russia’s smaller companies from international investment capital which can tap what allocations are made by international investors to ETF holdings. Sberbank’s larger pool of names in its ETF is designed to avoid some of these problems and give investors a broader exposure to the Russian story.
Currently Sberbank’s BPIF includes shares of 42 issuers traded on the Moscow Exchange and tracks gross yield of the exchange indexes (counting pre-tax dividends of the issuers). The fund will reinvest the dividends received from the shares in its portfolio. That will significantly increase the return of the BPIFs as Russia is currently paying the highest dividends in the world – twice the average return from the MSCI EM index average, the industry benchmark. The leader Surgutneftegaz is currently paying a whopping 19% dividend yield, according to analysts, and there are about two dozen stocks that pay twice the MSCI EM average.
Prior to the Sberbank BPIF only 14 Ireland-registered ETFs of companies FinEx and ITI Funds were traded on Moex, and none of those were based on Moex indexes.
Commenting on the high volatility on the Russian market currently, the head of Sberbank Asset Management Evgency Zaytsev told Vedomosti that "this situation is seen as a point for growth." Market maker of the BPIF Sberbank CIB will be able to buy back the stake in the fund at any point from the investors, boosting its liquidity.
The BPIF plans to raise over RUB3bn ($44mn) in one year and plans to launch another three BPIFs, anchored in state securities, S&P500, and Russian Eurobonds, respectively.
The head of FinEx Vladimir Kreyndel argued to Vedomosti that Russian BPIFs are not exactly ETFs as they still lack key ETF features, such as independent trustees and custodians.
The launch of the BPIF is the latest attempt to create a fund industry in Russia that has always been lacking, and Russian individual investors have never had much luck with funds. The BPIF continues in the traditon of creating investment products that can trace its origins back to the closed-end investment funds, known as PIFs in Russia, that were introduced by Boris Yeltsin in 1997, about six months before the 1998 financial meltdown.
Yeltsin’s PIFs caused a great deal of excitement and brought investment stars like Mark Mobius to Russia, where he established a Russian branch of Templeton Asset Management to build the mutual fund business. However, most of these funds were wiped out in the 1998 crisis where the ruble lost three quarters of its value in a month and the RTS index fell from over 500 to a low of 38.
Since then various banks have tried to reestablish a mutual fund business. Previously the oldest funds were established by independent investment bank Troika Dialog that was later sold by its owner Rubin Vardanian to Sberbank and formed the core of the retail giant’s investment arm, Sberbank CIB, that is launching the BPIFs. However, these investment funds never collected much money, partly thanks to the constant shocks investors suffered from due to the volatility of the Russian securities markets and partly because retail investors have traditionally sought safer returns from bank deposits and real estate investments.
But that is starting to change now. With inflation down to historic lows of circa 3% and interest rates on deposit accounts falling in line with the tumbling cost of capital, the average Russian is starting to look around for new investment opportunities that pay a bit more. The interest in funds has been increasing.
The government has been trying to encourage this trend and has introduced “investment accounts” that carry significant tax breaks for small investors prepared to tie up their money in securities. At the same time the Ministry of Finance has been experimenting with the so-called People’s Bond, a fixed income instrument that specifically targets retail investors. Sberbank again (together with VTB) issued the first People’s Bonds.
While no one expects the BPIFs to mushroom, especially amongst battle-scarred retail investors, the timing of the new instrument is good as the tide for investment funds is rising in Russia.