Business

This Silk Road Fund Struggled As Turkish Economy Collapsed

January and February were positive nearly across the board, but early results suggest March was a bit more difficult for hedge funds. Sturgeon Capital, which invests across the Silk Road region, had a difficult month with a decline of 6.61%. The Kazakh Index gained 3.14% in March, while the MSCI Turkey index plunged 15%. The MSCI Russia and MSCI Frontier Markets index nudged 0.15% and 1.17% lower, respectively.

Silk Road Fund Turkey solid earnings results
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Kazakhstan and zinc lead the way

One thing that worked for Sturgeon in January was gold, but that didn’t pay off so well in March. The two bright areas for the fund last month were a pair of bank stocks and zinc prices, which indirectly affect one of its top holdings. Sturgeon’s two top sectors in March were Financials and Metals & Mining, a sector that was especially kind to the fund in February.

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March was a difficult month for most currencies throughout Sturgeon's investing universe. The Kazakh tenge declined 1.04% despite the strong gains in the nation's stock market. The Georgian lari was down 1.2%, while the Russian ruble was down 0.38%. The Turkish lira was the hardest-hit with a 4.75% decline. Brent oil prices were up 1.89%, while zinc gained an impressive 7.31%. Copper was down 0.41%, while gold prices tumbled 2.78%.

Sturgeon's top two positions in March were Halyk Bank and TCS Group, both of which posted solid earnings results for fiscal 2018. Halyk benefited from the ongoing cleanup within the Kazakh bank sector, while TCS increased its loan book 53% in 2018. The fund's other top positions during March were Liberty Bank, Kaz Minerals, Sberbank Prefs, Centerra Gold, Central Asia Metals, KazTransOil, Yandex and Georgia Healthcare.

Of note, the fund applied a 30% price discount to its stake in Liberty Bank due to the lack of progress in the ongoing court case which has tied up its shares. Sturgeon tendered its Liberty Bank shares after it was acquired by a third party, but the court froze those shares on the last day of the tender offer. The case is related to a 2009 acquisition which occurred years before the fund ever bought shares.

Kazakh politics

In their March newsletter, which was reviewed by ValueWalk, the Sturgeon team outlined significant events in Kazakhstan and Turkey. Kazakh markets clearly reacted positively to the nation's political news. Rumors about President Nursultan Nazarbayev's declining health has been the "elephant in the room" there, so investors seemed pleased to see progress. He resigned in March after having been president since 1991 when the nation became independent.

Although his departure does create some uncertainty, he will remain highly involved in Kazakh politics as head of the National Security Council and of the ruling party. He also will retain the official title of "Leader of the Nation," and Sturgeon expects the economic stability Kazakhstan has enjoyed under his leadership to continue.

As of March, Kazakhstan was the second-largest allocation in the fund's portfolio at 25%, followed by Georgia with a 19% allocation. Russia was the top allocation at 27%.

Turkish selloff

March was an especially difficult month for the fund's Turkish holdings. The Sturgeon team explained that the pullback in the lira and Turkish stocks was due to the central bank's decision to suspend the weekly REPO auctions. That move essentially boosted interest rates and served as a shock to the market, which perceived it as a sign that pressure on the lira will be increasing.

The Turkish lira plunged 5% just on March 22 alone. The central bank attempted to fight back by raising the TRY swap rates, which boosted the currency sharply. However, availability of the lira was limited, which resulted in a selloff in the nation's stock market, which were a funding source for TRY liquidity, according to Sturgeon.

The fund's management warned that although the central bank was able to limit the devaluation, in the long run, an "unorthodox monetary policy" such as that will cause investors to be less trusting of the its policies. Sturgeon was able to slash its exposure to Turkey in half before the extreme turbulence hit the market. The fund cut its allocation to the nation from over 10% at the beginning of the year to under 5% now. Turkey was a notable contributor to the fund's November returns.

Biggest winners and losers for Sturgeon Capital

The Sturgeon team highlighted Halyk Bank, Sberbank Prefs and Globaltrans as the fund's biggest winners in March. All three stocks benefited from positive responses to their respective earnings results. Globaltrans also announced an implied dividend yield of more than 10% and is targeting a similar payout for the first half of this year.

The fund's biggest losers during the month were Turquoise Hill Resources, Coca Cola, Icecek and Altyn. Turquoise Hill's stock was weak despite the company's solid earnings results due to another delay in the development of its underground copper mine in Mongolia.

This article first appeared on ValueWalk Premium