Ukraine sparks Russian funds selloff, but winners emerge

Mon Mar 3, 2014 6:00pm EST
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By David Randall and Ashley Lau

NEW YORK (Reuters) - The crisis in Ukraine sent the Russian stock market tumbling on Monday, delivering a blow to already-punished portfolio managers who took outsized bets on eastern Europe this year, but generously rewarding those who had shorted the country.

Investors of the Direxion Daily Russia Bear 3x Shares exchange-traded fund (RUSS.P: Quote), which tracks three times the inverse of the performance of the DAX Global Russia Index, saw their fund up as much as 28.3 percent at its high on Monday. It has roughly doubled year-to-date.

Russia's benchmark stock index dropped 12 percent after the country's central bank on Monday raised interest rates to prop up its currency. The stock market ended 47.5 percent below the peak it reached in 2011 after the recent financial crisis, according to research firm Bespoke Investments.

Popular funds issued by T. Rowe Price and others with large positions in Russia saw some of their largest holdings tumble by 15 percent or more in one day.

A few bright spots poked through, but analysts said more declines may be ahead and some portfolio managers were planning to further trim their holdings.

"It did not feel very good knowing that this is one of our bigger positions," said David Garff, head of Walnut Creek, California-based Accuvest Global Advisors, which builds portfolios based on proprietary country rankings adjusted each month.

Garff holds long positions in the iShares MSCI Russia Capped ETF (ERUS.P: Quote), an exchange-traded fund (ETF) focused on Russian stocks, and his most aggressive model portfolio has as much as 13 percent in the country. He expects to dial back on Russia when he does his next monthly adjustment.

"If you're a value buyer than you have to be looking at Russia strongly, and if you're a momentum buyer, you have to be running from it like the plague," he said.   Continued...

The bell rung at the beginning of trading sessions is seen in front of the logo of the Moscow Exchange after the start of trading in Moscow February 15, 2013. REUTERS/Maxim Shemetov