Funds hold on to $2bn of Yukos stock

Despite a constant stream of bad news about Yukos, portfolio investors are clinging precariously to as much as $2bn of the ailing Russian oil giant’s stock and might even get burnt, as a result, fund managers say.

Yukos, facing break-up in a state-run auction of its prize asset Yugansk likely next month, is still traded. Fund managers estimate its free float — the portion freely available — at just under 25%.

That’s worth around $2bn at current prices. Most of it say managers is in the hands of foreign investors — institutional and hedge funds. So why is everyone holding a stock which has lost three quarters its value since April? “It’s like you’re waiting for lottery numbers to come out and you think you have one in three chance of hitting,” said Peter Halloran, who runs $100m in assets.

“I get the feeling that most people are long and wrong,” said William Browder, he runs the $1.5bn Hermitage Capital. YUKOS has become the most volatile stock in Russia on the back of a flurry of conflicting statements as various groups within the state seem to fight over what to do with it.

Many long-only funds are in Yukos because they track Morgan Stanley’s benchmark MSCI Emerging Markets Index. MSCI officials said Yukos’s weighting in the MSCI Emerging Markets index stood at 0.25%. Though down from 1.2% a year ago, that still represents a sizeable chunk of cash.

But, not everyone is bearish on Yukos, which produces more oil than Libya, accounts for 20% of Russia’s crude output and 2% of global production. Even if Gazprom takes over Yugansk, analysts say there may still be value.

“While it is possible that Yuganskneftegaz will be sold below or at the lower end of market valuations, or that the tax charges against the company will be inflated, other more market-friendly outcomes are still possible,” they wrote.

(From The Economic Times, 22.10.2004)