Liontrust Russia Fund

Q1 2020 review

The Liontrust Russia Fund returned -25.3%* for the quarter, fractionally ahead of the MSCI Russia 10-40 Index return of -25.5%.

The acute stage of the coronavirus panic and market selloff began on February 23rd, when Italy reported an outbreak in its northern regions. At this point, it became clear that the virus was not a regional concern but a global pandemic. The ensuing collapse of the OPEC+ talks sent Brent crude prices down to $30/bbl (-55% YTD) which put further pressure on the Russian market.

Over the last few years, Russia’s macro indicators and the market performance have largely decoupled from the oil price. The fiscal rule has been the cornerstone of macro stability, but below $40/bbl Russia becomes more dependent on oil price moves. The Finance Ministry will now start selling some of their accumulated FX from the National Wealth Fund to cover the fiscal deficit and support the ruble. Oil prices and the ruble will likely become more correlated than over the last few years, but still not as strongly as in the past. We haven’t witnessed a ruble meltdown as in 2014, but rather a more orderly retreat. This is because Russia’s FX debt has halved since 2014 after five years of repaying foreign debt amid financing sanctions and in response to the shock of 2014. The depreciation of the ruble in 2020 is not dissimilar to other emerging markets, some of whom are much less reliant on oil exports.

One notable difference when making comparisons with the oil price downturn of 2014-16 is that Russian corporates have much stronger balance sheets. Lower leverage and lower interest rates mean that corporate earnings should be around 25% higher than in early 2016, when oil last traded at $30/bbl. Net debt/equity has fallen from 40% in 2015 to less than 20% now, and with lower interest rates debt service costs have halved.

Looking at historical selloffs, they can be split into those triggered by global events and those related primarily to Russia and its market. Globally driven and locally driven selloffs have produced different patterns in the Russian market – global selloffs have usually been deeper and longer, but eventually see a V-shaped, fast recovery. Locally driven selloffs have been less violent but have tended to be L-shaped. There is a fairly straightforward explanation for this – in many cases the path to recovery from global crises is paved with stimulus programs, which typically provide fast relief for all markets. Local crises often have a political component, making the drivers less temporary and the path to recovery typically not accelerated with stimulus.

The key determinants of relative resilience among Russian stocks are balance sheet strength, FCF generation capacity and high dividend payouts. As you would expect, the energy sector has been the hardest hit this year, down 38%. However, even within this we have started to see some divergence in returns. Rosneft has fallen 41.3% as it is most geared to the oil price, most leveraged, and thus generating less FCF. Lukoil has fallen by 35.8% as, at least on a relative basis, it has been supported by lower leverage, higher FCF generation and higher shareholder returns. Novatek sits in between as although we still see a huge opportunity to generate value for shareholders on the Gydan peninsula with their LNG facilities, they aren’t generating that much FCF in the short term and therefore don’t score highly on shareholder returns. As the market stabilises, we would expect more credit to be given to Novatek for the value in their pipeline.

At a broader sector level, domestic focused financials have fallen by 37%, while the materials sector (-11%) has benefited from a falling ruble which has offset lower commodity prices.

There is clearly a huge amount of uncertainty around when coronavirus cases will peak, how deep a recession it will cause and for how long, and how efficiently global fiscal stimulus can see a return to growth. That said, we continue to focus on Russian corporates who are able to generate value for shareholders and offer attractive returns. With valuations having fallen so sharply, we think the current levels represent an attractive risk reward for long term investors.


Discrete years' performance (%), to previous quarter-end:







Liontrust Russia C Acc GBP






MSCI Russia 10/40







*Source: FE Analytics as at 31.03.20.


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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.


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Tuesday, April 21, 2020, 2:21 PM