Russia: Risk and Reward

12/09/2005 12:00 am EST

Focus:

Paul Tracy

Editor, The StreetAuthority Market Advisor

The Central Europe and Russia Fund has been extremely volatile recently, moving as much as 40% in a month. Here, Paul Tracy helps explain the nature of this volatility, while also making a case for investors to remain bullish on the fund's long-term prospects.

"The Central Europe and Russia Fund (CEE NYSE) holds nearly half of its assets in Russian stocks with Poland, Turkey, Hungary, and the Czech Republic accounting for an additional 46% combined. It is extremely difficult for individual investors to invest directly in stocks from these countries; there are very few listed American Depositary Receipt (ADRs) from the region. Further, there aren't many closed-end funds that are as well positioned and heavily concentrated in these highly promising, fast-growing markets as CEE. As a result, many individual investors choose to play the Russian and Eastern European markets via this fund.

"The fund has seen tremendous volatility in recent trading, likely due to two distinct factors: a move in the fund's underlying net asset value (NAV) and the relatively small traded float of the fund itself.  Closed-end funds are simply publicly traded vehicles that hold a portfolio of equities. As a result, the value of the fund does not have to be equal to its NAV. For example, if investors start buying a fund en masse, then that will tend to drive the price of the closed-end fund higher. In some cases, a fund can then trade at a steep premium to its NAV. Investors need to be aware of the risks and volatility that can occur in this fund.

"Another factor to be aware of is currency risk. Russia, Turkey, and Eastern Europe have all seen occasional extreme bouts of currency volatility in the past. Because most Eastern European countries are scheduled to join the euro, this currency risk will soon become a much less prevalent issue. However, Turkey and Russia both could see some wild and important currency swings from time to time. Currency moves can impact the US dollar return for US investors who hold CEE.

"At any rate, this recent volatility does little to dim the long-term prospects for CEE. The Russian and Eastern European markets are growing much faster than developed markets in both Western Europe and the US. Furthermore, economic reforms in these nations are making them far more attractive to foreign investors. In the long run, I'm confident that strong growth in these markets will drive up CEE's NAV. Short-term volatility aside, CEE remains a solid investment idea at today's levels."

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