Bellweather Russia hedge fund Prosperity posts 16% slide in profits

Bellweather Russia hedge fund Prosperity posts 16% slide in profits
Moscow International Business Centre
By Jason Corcoran in Moscow June 20, 2016

Russia-focussed hedge fund Prosperity Capital Management, once the largest Russia-focused portfolio manager, was hit by a 16% drop in profits in 2015 as sanctions and a collapse in commodity prices forced investors to curb risk.

Full-year profit fell to £834,562 from £991,532 ($1.453mn) last year, according to filings made last month with UK Companies House and obtained by bne IntelliNews

The company's key performance indicator is turnover, which fell last year to £5.3mn from £5.58mn.  Prosperity attributed the drop to a decrease in fund management service fees, which comprise of both performance fees and fixed fees.

Performance fees, which are earned when the return on assets beats and external benchmark, last year sank to £2.48mn from £3.17mn while client service fees dropped marginally to £2.04mn from £2.2mn for the prior year. These were partly offset by a more than trebling of advisory fees to £772,500.

"The decrease in fees generated in the year ended 31 December 2015 reflects adverse investment conditions in the company's targeted markets, which resulted in negative performance," Prosperity said in the company filing. "The amount of performance fees to be earned in the future period is uncertain, however, the directors expect moderate growth with respect to fixed management fees and client service fees."

However, emerging markets hedge fund performance has surged in recent months, led by funds with exposures to Russia, as commodities rebound amid signs of improving relations between the Kremlin and the US.

Mattias Westman, chief executive of Prosperity, is convinced Russian equities will roar again and told bne IntelliNews late last year his firm can repeat the world-beating returns that it posted in the noughties.

Prosperity, once the largest Russia-focused portfolio manager, is one of the few remaining players left standing. The 2008 financial crisis wiped out most Russia funds and the country's subsequent low growth, current recession, and tumbling commodity prices and political isolation over Ukraine has almost led to their extinction.

Prosperity's Quest fund was the best performer globally for the decade ending December 31, 2009, with a return of 3,300%, according to data from Morningstar. The past five years have been tough as performance nosedived and the firm's assets under management tumbled from over $5bn to as little as $2bn. Westman, a mild-mannered Swede, is convinced the stellar returns will return with the firm asset base already ticking up to $2.6bn, as of June 20.

"Why not?" Westman told bne IntelliNews in his office overlooking London's Cavendish Square, a swish area famed for its Georgian listed buildings. "They are the cheapest shares in the world and there is room for a rebound. There was a p/e (price/earnings) ratio of 10 before the crisis and now it’s four, and the companies are certainly better now than before while the market infrastructure is incomparably better."

The firm, which retains just nine staff in its two offices in London and Moscow, has always been a lean operation with a focus on purely Western institutional clients.

Prosperity was hit by 16% in client net redemptions last year, which have been partly offset by 10% inflows this year due to renewed interest from institutions. Its existing clients are understood to include the $820bn Norwegian oil fund.  

Return to favour

Russian assets are slowly returning to favour as the prospect of sanctions being at least partially lifted gathers momentum and the economic slowdown passes bottom. Despite the lingering problems, Russian assets are so cheap that some investors think now is the time to get back into the market.

The change is most notable in the bond market, even after the state's recent botched attempt to woo foreign investors into its first Eurobond issue for years. European and US investors steered clear of a controversial Kremlin Eurobond sale because of US State Department pressure to stay away and the organisers' failure to arrange international clearing in time for the $1.75bn placement of 10-year notes, which were largely bought by domestic investors and some investors in Asia, according to reports

Russia's dollar-denominated RTS Index is up 20.2% year to date as of June 17, making it one of the best performing markets in the world. The ruble-denominated MICEX Index is up 7%.

Sergio Trigo Paz, head of emerging market debt at BlackRock, the world's biggest fund manager, told reporters in London earlier this month that he expects "heavy inflows" into emerging markets over the coming year.

Renaissance Capital is this week hosting its own two-day investor forum and has invited portfolio managers from around the world for one-to-one meetings with Russian blue-chips, trips to the regions and nights in the fanciest Moscow restaurants. 

"RenCap have their troubles but they always put on a good show and their timing may be fortuitious for trying to sell Russia," a Moscow-based portfolio manager, who plans to attend, told bne IntelliNews