Richard Troue's Fund of the week

When thinking of Russia and the driving force behind its economy the first thing that springs to mind is oil and gas. While Russia is the world’s largest crude oil exporter and supplier of 27% of global gas, 21st Century Russia is far from being purely reliant on energy for future growth. It has enormous reserves of many other natural resources and a rapidly developing domestic consumer economy.

Robin Geffen, manager of the Neptune Russia and Greater Russia Fund, is keen to point out that the Russian economy is far more diverse than many people believe. He considers Russia to be the world’s global resource base.

Crucially, Russia is home to around 15% of global gold reserves and is the only country with the ability to grow its gold production. Gold prices have hit record highs recently as many investors see it as a valuable hedge against inflation, partly because unlike currency it cannot be devalued by printing more. As gold reserves are finite many believe the price can only keep rising over the long term to the benefit of those with the largest reserves.

Russia also has huge mineral reserves, including iron ore, nickel and chrome. Its resource base in this respect is second only to South Africa. Such minerals have wide industrial use and are a vital component of fuelling development across many emerging countries.

This puts Russia in an advantageous position and provides the opportunity to create synergies with other developing nations. China / Russian trade is one of the themes running through the portfolio as Russia exports goods needed to fuel Chinese growth, including metals, chemicals and fertilizers. Just over 24% of the fund is invested in industrial metals and mining companies with around a further 4% in chemicals companies.

This is not purely an export story though. Wages are rising and living standards are improving in Russia. Coupled with a low basic rate of income tax this is fuelling domestic demand for everything from mobile phones to luxury food. The fund has just over 16% and 9% invested in food & drug retailers and mobile telecommunications companies respectively, which should be able to benefit from this trend.

Russia was hit hard by the global financial crisis and the fund suffered as a result. It has since bounced back strongly returning 43.54% over the past year compared to 26.10% for the benchmark . Please remember that past performance is not a guide to the future.

Robin Geffen now believes Russia is in a unique position of strength and the foundations are in place for Russia to become one of the top 5 global economies over the next 15 years. Unlike many Western nations Russia has comparatively low levels of both government and household debt and is even in a favourable position when compared to other emerging markets such as Brazil, India and China.

For investors comfortable taking the additional risk I believe a small allocation to Russia could complement an existing holding in a broader emerging market fund. However, as the Russian stock market is notoriously volatile the fund should only be considered by those comfortable with the risk of investing in a single emerging market through a concentrated portfolio of around 30 holdings.

We believe Russia has enormous growth potential and Robin Geffen is an experienced and talented fund manager who should deliver superior returns for investors over the long term. This fund remains on the Wealth 150 list of our favourite funds in each sector.