In April, the Fund continued to be indirectly but significantly affected by the market storm caused by the unlawful expropriation of investor assets in Cyprus. Although the Fund had never had any bank accounts in Cyprus, the entire Russian and CIS equity market, along with the countries in the MSCI EME Index, went into a tailspin during March, spilling over into April and thus bringing losses to the long part of the Fund’s portfolio. Having said that, the Fund had already recouped half of April -3.99% losses by mid-May, with a mid-May intra-month gain of +2.08%.
As the Investment Advisor argued in his March Letter to Investors, each crisis, including the mini-crisis in Cyprus, presents an opportunity. There is now a chance to pick up some very cheap good quality stocks for the longer term. Additionally, in the Fund’s opinion, the current EM valuation in general, and the Russia valuation in particular, present an excellent entry point for a long-biased value play with a 3 to 5 year investment horizon… probably the best one in a generation. EM and Russian stocks have never been cheaper vs. DM stocks in the last 5 to 10 years (depending on the valuation metric), and Russian stocks have also never been cheaper even vs. EM stocks themselves in the last 10 years. If one calls 10 years “a generation” in Russia, then this is once in a generation opportunity! Let us explain why…