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. Last Updated: 07/27/2016

Dead Stock Market Still a Tough Sell




When the investment company Templeton made a splash in October by opening its second fund in Russia in the teeth of an economic crisis, it said "the best time to buy is when everybody is selling hopelessly, and the best time to sell is when everybody is buying greedily."


Sadly no one has been doing much of either lately.


Templeton is pulling the plug on its Russia-based Templeton Capital investment fund after managing to attract less than $20,000 from individual investors over three months.


It's another testimony to the utter and prolonged collapse of stock trading in Russia in the wake of the Aug. 17 financial collapse. Trading on the Russian Trading System, or RTS, amounted to just $28 million for the entire month of January.


By comparison, average daily volume on the New York Stock Exchange is about $40 billion.


Templeton, one of the leading names in emerging-market investing, announced Friday it was liquidating Templeton Capital after falling short of the minimum 2.5 million rubles ($111,111) required by law. Investors in the PIF - the Russian acronym for mutual fund - will get their money back within a week, the company said.


The fund was run by ZAO Templeton, the Russian subsidiary of Templeton Worldwide, a holding company which also set up the separate, U.S.-based Templeton Russia Fund Inc. run by emerging markets guru Mark Mobius. Mobius' fund wasn't affected by Friday's announcement.


ZAO Templeton runs another fund in Russia, called simply Templeton. But that fund is currently frozen, as are all PIFs that had more than 10 percent of their assets in Russian treasury bills, or GKOs. The government froze payments on the treasuries Aug. 17 and negotiated a restructuring deal.


ZAO Templeton plans to reopen the fund, but the government is dragging its feet on paying the debt. Under the deal PIFs got from the government, the fund stands to get 100 percent of its treasuries holdings in cash. Most of the paper has already matured, and the fund could receive 20 million rubles.


The Templeton PIF had assets of about 20 million rubles in the middle of last year, now down to 3.3 million rubles.


Another major asset-management company, Fleming-Guta, also says it is closing its PIF, which has been frozen for the same reason as Templeton. Like Templeton, Fleming-Guta admits it sees no market for the fund in the near term.


"We decided that today it would be appropriate to liquidate the fund," Fleiming-Guta director general Oleg Biryulyov said Tuesday.


"A unit fund needs a class of investors to be able to operate. This class is there, but it is scared. The shock is not over yet."


Templeton Capital was set up in the middle of the crisis with the aim of attracting investments while the equity market was presumably at its lowest point - in other words, offering investors the chance to buy Russian stocks cheap.


But market experts, who had hailed the creation of the fund in the fall as a bold and shrewd contrarian move, said Tuesday it turned out to be premature.


"It was considered to be hopeful for the market," said Martin Diggle, director of Brunswick Warburg brokerage. But opening the fund at the depth of the crisis was "too much of a leap of faith," he said.


"The situation is easily explainable. Large investors who used to create the bulk of unit investment funds, or PIFs' assets, know that their money will be frozen for a long time," said Vadim Soskov, a spokesman for Pallada asset management company, which also saw one of its PIFs suspended over state securities holdings. "PIF structure doesn't fit into a default situation."


But Dominic Gualtieri, managing director of Templeton, on Tuesday defended the idea to open a new fund while the stock market was in shambles. "We saw a good opportunity for investing in undervalued stocks," he said. "The idea was to give people an opportunity to make long-term investments."


But fears of further falls in the ruble's worth against the dollar - which could wipe out any gains - undermined that idea. "We found out that most Russian investors were unwilling to put their money in ruble-denominated instruments," he said.


No one could predict three months ago how long instability and the government's indecision would continue, Gualtieri said: "Hindsight is 20/20."


Both Fleming-Guta and Templeton said they were looking to switch from the individual investors targeted by the PIFs to corporate clients.


"We think that institutions like pension funds or insurance companies have funds left, and they are prone to long-term investments," Gualtieri said.


Biryulyov of Fleming Guta said the company was looking in this quarter to start offering corporate clients a new trust management service, which would manage stocks, corporate IOUs known as veksels, precious metals and cash.