Back in August, contrarian investor Dave Iben called his big move into Russian stocks perhaps his most extreme ever in 33 years of value investing. He had no idea. At 17.8% of his one-year-old Kopernik Global All-Cap Mutual Fund (KGGAX), the $835 million fund has the fourth-largest Russia weighting of all equity funds with exposure to Russia, according to Morningstar, and is down 22%.
Anyone in Mr. Iben's fund had to know they were making a big bet on Russian stocks. But some 401(k) investors may be surprised by how much their international or emerging markets stock fund has in a country whose currency is in free fall, whose stock market has fallen 35% since Dec. 1 and whose oil-fueled economy is on the verge of recession.
For most people, having some Russian stocks in one of their retirement funds is hardly going to be a killer. Even if Russia's stock market continues to fall, a fund's other holdings should work as a buffer and limit the damage. That said, some funds are going to take it on the chin.
The average global fund has just 1% of assets in Russia, according to Morningstar; the country makes up 3.5% of the MSCI Emerging Markets Index. The top two emerging markets funds in 401(k) plans by assets, according to financial information company Brightscope Inc., are the $37.9 billion Oppenheimer Developed Markets (ODMAX) and $13.4 billion Lazard Emerging Markets Equity Fund (LZEMX). The funds have 7.3% and 8.3% of their portfolios in Russia, respectively, according to the most recent data.
The funds are feeling the heat from Russia's turmoil. Oppenheimer Developing Markets is down 10.6% over the past month, and has lost 6.1% for the year. Over the same periods, Lazard Emerging Markets Equity is down 9.4% and 6.1%. For the past three years, the Lazard fund has gained 4.1% and the Oppenheimer fund 7%.
The funds hold some of Russia's most liquid stocks among their top 25 holdings, including Russia's largest retailer OAO Magnit (MGNT); OAO Novatek (NVTK); OAO Gazprom (OGZD); internet company Yandex NV (YNDX) and bank OAO Sberbank (SBER).
Other big emerging markets funds in 401(k) plans have much smaller stakes in Russia. The $3.8 billion DFA Emerging Markets Equity (DFCEX) had 1.72% in Russia as of Oct. 31, and the $65.6 billion Vanguard Emerging Markets Stock Index (VEIEX) had a 4.4% stake as of Nov. 30, in line with the index it tracks, the FTSE Emerging Index. Rounding out the top five emerging markets funds in 401(k)s is the $22.7 billion American Funds New World fund (NEWFX), with 3.8% in Russia as of Sept. 30, according to Morningstar.
International stock funds have much lower exposure to Russia. Among the 20 international stock funds Brightscope finds with the most assets in 401(k) plans, the American Funds Capital World Growth and Income Fund (DWGAX) has 3.5% in Russia, and American Funds EuroPacific Growth (AEPGX) has 1.2%. Many others, including international stock index funds from BlackRock and Vanguard, have less than 1% in the country.
And what about Russian bonds? If you have much of them in your retirement plan, you're in the minority. Foreign and emerging markets bonds are still considered a "satellite" holding for most 401(k) plans, says Brooks Herman, Brightscope's head of data and research.