The backbones of Russian passive and active equity funds

A benchmark provides a measurable backbone for a fund. MVIS Russia is the benchmark for the largest Russian equity exchange-traded fund (ETF), and the MSCI Russia 10/40 index is the benchmark for the five largest actively managed Russian equity funds [1]. The sustainable difference in performance between these two indices affects the odds of the largest actively managed funds outperforming the largest ETF.

We think that neither of these two indices has any systematic performance edge. Aiming for a fund to outperform the MSCI Russia 10/40 index is similar to aiming to outperform MVIS Russia.

There is no statistically significant difference between these two indices’ performance. The average annual excess return of MSCI Russia 10/40 over MVIS Russia is 1.6%[2]. The statistical tool, t-test, can help us to understand whether this is a significant indication of a future average positive excess return for MSCI Russia 10/40. It is not[3].

The overlap between the two indices has been growing over the last five years. For example, since 2013 the largest underweight in the MSCI Russia 10/40 index vs. MVIS Russia was in high-tech company, Yandex, at close to 4% on average. This underweight has been the main source of the MSCI Russia 10/40 index’s underperformance in the year to date. After the MSCI Russia 10/40 index was revised on 1 September, the underweight in Yandex became an overweight of around 2%. Yandex has only now been included in the MSCI Russia 10/40 index because MSCI requires a local listing for stocks in country indices. Yandex acquired its local listing only in June this year. Another high-tech company,, is absent from the MSCI Russia 10/40 index, which has led to a current underweight of around 3% in this stock vs. MVIS Russia. acquired a local listing in July 2020 and we expect this stock to be included in the MSCI Russia 10/40 index in the next index revision in November. This will likely lead to an even greater overlap between the MSCI Russia 10/40 index and MVIS Russia.

The overlap between the two indices is close to 97% at the sector level. It is likely to become even more so after the next MSCI index revision in November. The largest underweight in MSCI Russia 10/40 is in Communication Services and the inclusion of should reduce this.

Table 1. Sector structure of MSCI Russia 10/40 and MVIS Russia

Sector MSCI Russia 10/40 MVIS Russia Active weight*
Energy 34.8% 32.9% 1.9%
Materials 28.1% 28.5% -0.4%
Communication Services 13.7% 16.0% -2.3%
Financials 10.7% 11.4% -0.7%
Consumer Staples 9.1% 8.6% 0.5%
Utilities 3.6% 2.5% 1.1%
* MSCI Russia 10/40 vs. MVIS Russia
Note: VanEck Vectors Russia ETF portfolio structure is used as a proxy for MVIS Russia portfolio structure
Source: Bloomberg, MSCI, BNP Paribas AM, TKB Investment Partners; Data as at 4 September 2020

(Please see the full version of the article with graphs in the attached pdf file.)

Authors: Egor Kiselev, Head of International Business & Investment Marketing; Gennady Sukhanov, Deputy Head of Equities & Head of Research

[1] Funds with daily liquidity and availability for sale in many countries

[2] We have also included year-to-data in the calculation

[3] T-test outcome is 1.6. It would need to be more than 1.8 to indicate a significant outperformance of MSCI Russia 10/40 Net Return index over MVIS Russia Total Return index based on our sample of data

The backbones of Russian passive and active equity funds September 2020
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