“You recommended the Templeton Russia Fund last September, when it was around 22. Today it’s 53, and it’s been jumping up 3 or 4 points every day. What gives? Should I take my profit?” — Arthur

Yes and no. Two things seem to be going on here. The first is that the future looks a little brighter for Russia. Russian stocks — the stuff TRF owns — have risen to reflect that, making TRF itself a lot more valuable. As you know, Russia was recently admitted as the eighth member of the Group of Seven economic powers; and just a few days ago President Yeltsin — himself a new man, it seems — announced that for the first time in five years the economic contraction seemed finally to have ended. The Russian economy seems even to have turned up a bit. It’s a new beginning for Yeltsin (he may no longer be a drunk, though all I know for sure is he feels better and has lost a lot of weight), and perhaps for Russia as well.

Anyway, that’s part of it.

The second thing that seems to be going on is a short squeeze. It has nothing to do with the Russian economy, just the fact that a lot of people seem to have sold TRF short, expecting the worst for Russia, and now, frightened (and in some cases impelled by margin calls), they’re buying it back to cover their shorts, driving up the price.

I don’t know this for certain, but infer it from the fact that a couple of days ago, noting that TRF had jumped to 49 and was selling for a 27% premium to the value of its underlying securities — vaguely like dollar bills selling for $1.27 each — I went to lock in my own profit by “shorting it against the box.”

(That is, I didn’t want to sell TRF and pay a big tax, so instead I would short a like number of shares separately, knowing that from then it would no longer matter to me whether the stock went up or down — my gain or loss with one batch of shares would cancel out my loss or gain with the other.)

But my broker reported that TRF shares couldn’t be found to borrow to do the short sale, meaning a lot of short-sellers had already borrowed most of the shares available to be loaned. (When you short a stock, you are selling shares you don’t own. To do that, your broker has to borrow them for you first. Then you sell them. Eventually you will buy them back to return them to their actual owner. If the stock goes down by the time you do, you’ve made a profit. If it goes up, you’ve suffered a loss.)

Shorting stocks can get scary, and by the look of things, with TRF jumping up 3 or 4 points a day, some short-sellers are scared.

(Short-selling and short squeezes don’t apply to most mutual funds, because they are “open-ended.” But TRF is a “closed-end fund” that trades just like a regular stock. You buy or sell — or short — it just as you would any other.)

So what should you, who own some shares, do?

Well, if you’re lucky enough to own it in a tax-deferred account, I’d take my profit. I remain cautiously excited about Russia’s prospects, but c’mon — up nearly 140% in nine months? You could do worse. I recognize that in a short squeeze anything is possible — TRF could theoretically wind up selling at a 100% or even 200% premium to its underlying net asset value before it peaks (and if the Russian stock market continues to rise, so will that underlying net asset value). Still, that’s just a crap shoot, hoping someone will buy dollars not just for $1.27 or $1.35, as today, but for $2 or $3 each. Not likely and not sound.

If you own your shares in a taxable account, it’s not so clear what to do. It depends on your tax bracket, your risk tolerance, your other assets, your time horizon — all that stuff — and, of course, on your view of Russia’s prospects. If Russia really makes it, then 10 years from now you could look back on TRF at $53 and rue the day you ever sold it. You incurred all that tax (remember, it’s not even yet a long-term gain) and missed what would doubtless be a lot more appreciation, even after allowing for the near certainty that the price of TRF will sooner or later return to about 85 to 100 cents on each dollar of underlying net asset value, the level at which most decently-managed closed-end funds trade (i.e., they normally sell at a small discount, not a premium).

You could try shorting against the box, as I did — from time to time some borrowable shares turn up as some short-seller gives up, takes his loss, and “returns” them to the pool. Perhaps your broker will be able to snag you some.

If you’re in a high tax bracket, you might wait until a year and a day from your purchase date, knowing that at least then you’ll benefit from a lower long-term capital gains bite (or perhaps a much lower one, in case the law changes). But I’m not a big fan of basing one’s investment timing on tax considerations.

Or you could weasel, as I just did, and sell half.



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