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The notion of index-linked MIFs, as determined by Russian legislation, differs from the criteria which are applied abroad for purposes of recognizing investment strategies as index-linked. The main criteria of an index-linked MIF is the presence, in its portfolio, of exclusively those securities which are marked by the basic stock index, as well as the deviation, in the percentage value of each issue of securities within the total value of the MIFs portfolio from the percentage value of a similar issue of securities within the aggregate capitalization value of the index-linked portfolio, by no more that 3%.

The index-linked funds in other countries are obliged to maintain the correlation value of their yields The coefficient that characterizes the degree of deviation of the changes in the prices of a given asset from the standard assets dynamics, e.g., that of the stock index.

with the basic index yield at the level of no less than 95%. As for the RSM, here the criterion for estimated efficiency of index-linked MIFs management is not the close correlation of their yields and the basic index, but strict compliance with the special requirements established for the composition and structure of the MIFs assets, which is by means a guarantee of yield correlation. Therefore, the yields of the investments in index-linked MIFs often does not differ from that of non-index-linked funds and has no close correlation to the yields on index investments (see Table 2).

Table Beta coefficients of Blue Chips on RSM in 2003-Beta 2003 2004 2005 2003-Open-End Joint-Stock Company (OJSC) Aeroflot (js) 0.57 0.25 0.46 0.OJSC AvtoVAZ (js) 0.64 0.52 0.40 0.OJSC AvtoVAZ (jp) 0.48 0.55 0.42 0.RAO UES of Russia (js)1.14 1.00 0.98 1.RAO UES of Russia (jp) 0.95 1.00 0.86 0.GMK Norilskii Nikel (Nornikel) (js) 0.87 1.19 1.04 1.OJSC LUKoil (js) 0.91 0.86 1.03 0.OJSC Mosenergo (js) 1.04 0.66 1.28 0.OJSC Rostelekom (js) 0.98 0.82 0.87 0.OJSC Rostelekom ( (jp) 0.85 0.61 0.85 0.RF Sberegatelnyi Bank [Savings Bank] (js) 0.75 0.71 0.79 0.RF Sberegatelnyi Bank [Savings Bank] (jp) 0.54 0.60 0.99 0.OJSC Sibneft (js) 1.29 0.85 0.91 1.OJSC Surgutneftegas (jp) 1.22 0.90 1.13 1.OJSC Surgutneftegas (jp) 0.97 0.70 0.97 0.OJSC Tatneft (js) 0.77 0.80 1.32 0.OJSC Tatneft (jp) 0.66 0.82 1.14 0.OJSC Yukos (js) 1.27 1.96 0.82 1.OJSC Gazprom (js) 0.75 0.65 0.71 0.RTS Index 1.00 1.00 1.00 1.Mean value 0.88 0.81 0.89 0.Source: data provided by stock exchanges Bold print shows the most liquid shares on the RTS.

Source: data provided by NLU Fig. Table Yield on investments in MIFs, and indices in 2004-Type Yield on investment of (%), years MIF2005 2004-Index-linked MIFs:


Exchange floor - the MICEX index 85. 1.1 O OMIF Alor - MICEX index 75. 1.2 O OMIF KIT MICEX index 83. 1.3 O PIOGlobal MICEX index 86.40 99. 1.4 I Non-index-linked MIFs, shares:


IMIF LUKoil Fund 2.1 I 100.20 134.OMIF Alfa-Kapital Aktsii 85. 2.2 O Dobrynia Nikitich Asset Manager 2.3 Troika Dialog O 87.80 124.RTS index 90.10 93.3.

MICEX index 83.10 96.4.

Source: data provided by .

In 2005 the yield on investments in the open MIF KIT - MICEX index (83.2%) were almost equal to the MICEX index yield (83.1%). At the same time, the yields on investments in the open-end MIF Alor - MICEX index (75.1%) were significantly deviant from the basic index yield to a much higher degree than the yields of the non-index-linked MIF Alfa-Kapital Aktsii. This is a vivid illustration of the existing necessity for developing appropriate targets that would enable investors in their orientation toward efficient index-linked strategies.

O an open-end MIF; I interval-linked MIF.

Table 3 shows data on the correlation of monthly and daily yields of all the index-linked MIFs with the MICEX and RTS indices in 2005, as well as throughout the whole period of the funds being in operation. Analyzing the correlation of the open MIFs yields with the basic yield index not only on a monthly, but also on a daily basis is important for investors in such funds, who have the right to demand the redemption of their stakes in index-linked MIF on any working day.

Table Correlation of yields on investments in index-linked MIFs with MICEX index and RTS index Type Coefficients of correlation with indices:

of 2005 Whole period since MIF Monthly yield Daily yield Monthly yield Daily yield MI- RTS MI- MI- MI- CEX CEX CEX CEX index index index index Index-linked MIFs:


Exchange floor - the 1.1 MICEX index 0.98 0.97 0.71 0.81 0.97 0.96 0.70 0.AK BARS - MICEX 1.2 index 0.99 0.97 0.76 0.85 0.99 0.97 0.76 0.OMIF Alor - MICEX 1.3 index 0.98 0.97 0.75 0.70 0.97 0.97 0.70 0.OMIF KIT - MICEX 1.4 index 0.98 0.96 0.75 0.86 0.97 0.94 0.77 0.Prospekt - MICEX index 1.5 0.96 0.94 0.58 0.69 0.96 0.94 0.54 0.Solid - MICEX index 1.6 0.99 0.98 0.76 0.83 0.99 0.98 0.76 0.Finam - MICEX index 1.7 0.99 0.98 0.74 0.81 0.99 0.98 0.74 0.BKS MICEX index 1.8 0.98 0.98 0.75 0.85 0.98 0.98 0.75 0.PIOGlobal MICEX 1.9 index 0.99 0.97 0.99 0.Non-index-linked MIFs, shares:


IMIF LUKoil Fund 2.1 0.95 0.94 0.70 0.83 0.94 0.92 0.56 0.OMIF Alfa-Kapital 2.2 Aktsii 0.97 0.96 0.66 0.80 0.91 0.93 0.54 0. OMIF Fond Aktsii Asset Manager 2.3 PioGlobal EM 0.93 0.93 0.70 0.84 0.95 0.93 0.62 0.KIT Aktsii 2.4 0.92 0.91 0.65 0.76 0.75 0.77 0.59 0.Dobrynia Nikitich Asset Manager Troika 2.5 Dialog 0.98 0.96 0.66 0.78 0.92 0.92 0.59 0. RTS index 0.99 1.00 0.90 1.00 0.97 1.00 0.86 1.3.

MICEX index 4. 1.00 0.99 1.00 0.90 1.00 0.97 1.00 0.Source:based on data provided by MIFs asset managers and stock exchanges Based on the data in Table 3, a number of regularities can be singled out in the sphere of investments in MIFs:

1) in the majority of non-index-linked MIFs of shares, their yield correlation coefficient with the MICEX and RTS indices does not differ significantly, and in some instances is even higher than the same parameter of index-linked MIFs;

2) in 6 of the 7 open-end MIFs, the correlation level of their daily yields with the RTS is higher than that with the MICEX index, despite the latter being the basic index for these MIFs portfolios;

3) the correlation level of the daily yields of all the 5 non-index-linked MIFs with the RTS index was also found to be higher than that with the MICEX index;

4) the monthly yields of index-linked MIFs is more closely correlated with the MICEX index yield that with the RTS index.

The high correlation level of the MICEX and RTS indices with the yields of index-linked and nonindex-linked MIFs reflects the limited opportunities for the creation of diversified portfolios on the RSM by means of incorporating in these portfolios Blue Chips with various beta coefficients. The reasons were discussed earlier.

The higher correlation level of daily yields on the investments in MIFs (index-linked and shares) with the RTS index, as compared to the MICEX index, has been predetermined by the peculiarities of calculating the MIFs net asset value, as well as the specific procedures applied for calculating the stock indices and pricing on the RTS and MICEX.

The computation of the NAV of the MIFs and stock indices implied the application of market prices of the shares constituting the MIFs assets or the index portfolio. However, the methods for determining market process when making the computations in respect to these portfolios are significantly different. In accordance with Paragraphs 11.2 and 12 of the Provision concerning the procedure and timelines for determining the net asset value of joint-stock investment funds, the net asset value of mutual investment funds, the estimated value of investment units in mutual investment funds, as well as the net asset value of joint-stock investment funds per one share, approved by Order of the RF Federal Service for Financial Markets (FSFM) of 15 June 2005 No 05-21/pz-n, the NAC of a MIF is to be determined on the basis of the estimated value of its constituent securities. As estimated value, the recognized quotation is applied, that is, the average weighted price in the transactions effectuated in respect to a given security during one day of trading on condition that the number of such transactions is no less than 10. For computing the RTS index, the market share value is recognized as the price in the last transaction effectuated in respect to a given share, as seen by the results of a trading session (the RTS index price). The methodology for calculating the MICEX index implies the application, as a shares market price, its current average weighted price as calculated by the last 10 transactions effectuated in respect to a given security (the MICEX index price).

Table 4 contains the data characteristic of the synchronism of changes in the recognized quotations being applied for computing the MIFs net asset value, as well as the RTS and MICEX index prices, for 6 issues of shares with the highest liquidity28.

Table 4.

Correlation coefficients of daily relative changes in recognized quotations and index prices on the RTS and MICEX in Issues of common shares Correlation of changes in recognized quotations with index prices:

RTS LUKoil 0.721 0.Surgutneftegas 0.732 0.Sberbank 0.788 0.GMK Norilskii Nikel 0.717 0.RAO UES of Russia 0.670 0.Tatneft 0.773 0.Source: published information of the RTS and MICEX In 2005 the correlations of daily changes in recognized quotations of all the 6 most liquid issues of shares with the RTS index prices were somewhat closer than that with the MICEX index prices. This is a clear evidence of the fact that the higher synchronization of the changes in estimated value of stakes in index-linked MIFs with the changes in the RTS index than that with the the MICEX index In 2005, these six issues of shares amounted, on the average, to 65% and 78% of general capitalization of stock in terms of the RTS index and the MICEX index, respectively.

(which serves as a basic one for these funds), as demonstrated in Table 3, can be explained by the closer correlation of the RTS index process with the recognized quotations of shares applied for estimating the NAV of MIFs.

Why is the correlation of the changes in average weighted prices of shares with the changes in the RTS index prices higher than that with the index MICEX prices The answer to this question is provided by the different principles being applied to the pricing of the same issues of shares by the RTS and the MICEX. The daily number of transactions with shares at the classical RTS market29 is much lower than that on the stock exchange represented by the MICEX; however the average volume of a transaction there is much higher than that on the MICEX. In our opinion, in a situation when modern technologies make it impossible to carry out arbitrage transactions with the same shares on different exchanges, it makes sense for investors to use different trading floors only in order to implement their different trading strategies. In this case the MICEX market, where a host of small-scale roubledenominated transactions are constantly taking place, provides large-scale investors with opportunities for obtaining latest information concerning the movement of shares, thus enabling them to plan their large-scale deals. Based on the results of a technical analysis, institutional investors make appropriate decisions concerning purchases or sales of big blocks of shares on the classical RTS market or on the London Stock Exchange (LSE), as the current transaction prices on the MICEX reach certain levels.

This assumption can be illustrated by the registers of transactions with the shares of the OJSC LUKoil, which took place on 14 March 2005 on the classical RTS market, on the LSE and on the MICEX (see Fig. 2).

Fig. Source: calculated on the basis of the data published by the stock exchanges As shown on the chart, the majority of transactions with LUKoils shares on the RTS and the LSE were effectuated when their prices on the MICEX were changing by $ 0.0625 per one share. The consequence of such trading strategies being applied is that the transaction prices on the classical RTS market seldom go beyond the highest or lowest transaction prices on the MICEX registered during one trading day. This predetermines the lower average interday or daily volatility of the prices of shares on the RTS, as compared to the transaction prices on the MICEX. Under such conditions, the closing The prices on this segment on the RTS market are applied for determining the RETS index prices.

RTS prices become closer to average weighted prices than do the MICEX index prices. These differences are leveled in monthly results, and therefore the yields on investments in the index-linked MIFs under study are found to be closer to the MICEX index yields, as compared to the RTS index.

Table 5 demonstrates the yields on and the risks (or volatility) of investments, as shown by the RTS index and the MICEX index during the last 5 years.

Table Yields on and risks of investments, as shown by RSMs indices Mean yield, % per an- Risk 31, % Yield/Risk numRTS in- MICEX RTS in- MICEX RTS MICEX dex index dex index index index 2001 0.23 -9.07 36.02 33.40 0.01 -0.2002 77.03 58.99 29.70 26.24 2.59 2.2003 36.07 41.59 30.31 30.61 1.19 1.2004 32.96 34.26 29.78 34.33 1.11 1.2005 28.64 25.89 20.00 23.61 1.43 1.Source: calculations based on data published by stock exchanges In the years 2003-2005 the daily volatility of the RTS index was noticeably lower than that of the MICEX index, which confirms the assumption as to a lower volatility of the transaction prices on the RTS than that of the transaction prices on the on the MICEX. In the period of 2001-2005, the investments in the RTS index were characterized by higher yield/risk ratios than those of the MICEX index.

Thus, our analysis has shown the presence of a more stable correlation of the yields on the portfolios held by index-linked MIFs and share MIFs with the RTS index yields, as compared to the same parameter of the MICEX index. The main reason is the lower volatility of prices of Blue Chips on the classical RTS market than that of their prices being applied in calculating the MICEX index. This can be explained by the peculiarities of the pricing mechanism being applied on the classical RTS market on, when bigger transactions with shares on this market segment are concluded following the rises or falls, by a certain value, in the prices within the MICEX trading system.

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