Bold Funds Buying Ukrainian and Russian Securities

Baron Rothschild famously said, "The time to buy is when there's blood in the streets." The sentiment may be callous, but it highlights how armed conflict, like that between Russia and Ukraine, can create market dislocations. Even if a fund's investment in Russia or Ukraine is a modest one, it still tells you something about its manager's willingness to take on some big risks of one kind in order to avoid valuation risk. The managers of these funds have responded to Russia's meddling in Ukraine either by dialing up or maintaining their relatively hefty exposure to these countries. While Ukraine's market has soared for the year to date, Russia's has fared worse than any other developing economy as sanctions take hold. Investors should check to see if their appetite for risk aligns.

Kopernik Global All-Cap's (KGGAX) November 2013 inception barely predates the beginning of trouble in Ukraine. With a process "designed to capitalize on market dislocations based on fear and greed," manager David Iben has doubled the fund's Russian exposure to north of 13%. Most of that is in oil firms like Gazprom and utilities companies like RusHydro, but there's also a sizable chunk in Sberbank. The fund's Russian exposure tops its foreign small/mid-value category and contends with the leaders in the diversified emerging-markets category as well. So as not to stick exclusively with one side, the fund also has a 1.1% stake in Ukrainian poultry producer MHP. Iben's track record here is too short to be meaningful, but he had success running a similar strategy from 2006 to 2012 at Nuveen Tradewinds Global All-Cap .

Between June 2011 and September 2013, Lazard Emerging Markets Equity Open's (LZOEX) Russian exposure rose to 10.7% from 4.4% of assets. With violence erupting in Ukraine shortly thereafter, manager James Donald has largely stood his ground, trimming here and adding there. The fund's exposure had dropped about 2.3 percentage points by September 2014, but that was still more than two thirds greater than the category norm. Donald doesn't mind standing out from his peers. He completely avoided what he regarded as an over­valued Chinese market from early 2007 to mid-2009, and there are no signs he plans to get out of Russia. Sberbank, for example, remains a top-five holding because Donald likes its ability to take advantage of the country's long-term credit growth. Sberbank's stock may be down nearly 13% for the year to date through Oct. 22, but you wouldn't know it from the fund's overall return, which ranks in the category's top third.

Oppenheimer Developing Markets' (ODMAX) roughly 7% Russian stake is largely concentrated in three stocks, all top-10 holdings as of September 2014: food retailer Magnit, natural gas producer Novatek, and Internet firm Yandex. Of the three, only Magnit's stock has posted a gain in 2014; shares of Yandex and Novatek have lost 25.8% and 39.4%, respectively. Manager Justin Leverenz is unfazed. He's either added to or held steady on all three positions this year, which fits his usual mode of operation. (The fund's 29% turnover in 2013 was less than half the category norm.) For the year to date through Oct. 22 the fund's performance ranks in the category's middle.

As of June 2014, Templeton Global Bond (TPINX) had nearly 1.0% of its assets in Russian bonds and a more sizable 4.4% stake in Ukraine's dollar-denominated bonds. Manager Michael Hasenstab is not concerned about Ukraine's solvency, and he even added to the fund's position earlier this year, citing the ample aid offered by the IMF as well as a belief that structural reforms can continue into the new government's administration. To control risk, though, he plans to keep the Ukrainian position in the mid-single digits. That level of exposure to Ukraine helped the fund during the first half of the year but then hurt in the third quarter. The fund falls not too far behind its typical peer for the year to date, however, thanks to its larger positions in South Korea, Hungary, and Mexico sovereigns, which have paid off.