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What are Russia portfolio managers missing?

The MSCI Russia Index has beaten nearly all Russia fund managers over the trailing three years.

Not one actively-managed Russia fund available for sale in Asia can claim a positive cumulative return over the last three years, underlining the fact that active managers have underperformed their benchmarks, FE data shows.

Only two Russia funds among those for sale in Asia, the two Parvest funds, “beat” their benchmark. In US dollar terms, Parvest Equity Russia Opportunities had a -20% return and Parvest Equity Russia had a -22% return compared to their benchmark, the MSCI Russia 10-40 with -25.7%.

All other Russia funds were in deeper negative territory.

Below the benchmark

Why can’t active managers beat their benchmarks? The question is highly relevant as investors question the value of the fees charged by active managers and capital flows out of mutual funds and into low fee ETFs.

Moreover, companies such as Dow Jones have produced studies that show that the majority of active managers over three-, five- and ten-year periods do not outperform their benchmarks.

Lena Tsymbaluk, a London-based Morningstar analyst, looking at Russia funds in general, suggested two reasons for the divergence between active and passive performance. The first concerns benchmarks. Most active funds benchmark to the MSCI Russia 10/40, which has a significantly different weighting than the other two MSCI indices.

“The 10/40 is more diversified and can have up to 10% in one stock only. Also, most active funds are constrained by UCITS rules, which means no more than 40% in sector concentration.”

Tsymbaluk said another reason for the poor performance is that active Russia funds invest outside of Russia and in companies not on the benchmark.

Active funds have the flexibility to invest in ex-Russia to include, for example, Ukraine and the Commonwealth of Independent States.

With off-benchmark investing, an example is internet stocks such as and Yandex. “The benchmark index has no exposure to tech,” she said.

“Pure Russia fund exposure didn’t do well in the past, and [during that time] Russia funds gained due to ex-Russia and off-benchmark exposure.”

As Russia started to bounce from the depths it reached in 2014, few, if any, active funds had portfolios close to their benchmarks, which went upward as the climate improved. 

“What’s happened over the past year is that the liquid big names, especially energy names, did really well because oil stabilised a bit and so did the rouble. Energy has been best performing sector this year.”


In rouble terms, all three main MSCI Russia Indices have been positive for 18 months. A rouble-based passive fund tracking the Russia MSCI Index 10/40 would have had far superior performance than an actively-managed Russia fund.



Part of the Mark Allen Group.