Russian-focussed hedge fund Prosperity Capital Management enjoyed a six-fold surge in profits as Russia returned to growth after enduring a painful two-year recession, bne IntelliNews can reveal.

Prosperity, one of the largest investment managers active in Russia, saw its profit jump to £5.47mn in 2016 from £834,562 a year prior, according to filings made by the firm with UK Companies House in June. The result is the best in recent years for the firm, which started investing in Russia in 1996.

Founder Mattias Westman attributed the rise in profits to “a significant increase” on performance-related investment management fees, as well as a corresponding hike in commissions and rebates payable. Performance fees are earned when the return on assets beats an external benchmark.

“The increase in fees generated in the year reflects the improved investment conditions in the company’s targeted markets, which resulted in positive performance,” Westman said.

The company earned a tidy £10mn in performance fees in 2016 compared with just £100,000 in 2015 plus £3.4mn in fixed fees. Prosperity’s managers also pocketed advisory fees during the year to the tune of £284,000.

Westman said the firm, which has offices in London and Moscow, is continuing to assess the impact of Brexit and the decision of the UK to leave the European Union. Assets under management have climbed to $3.2bn from $2bn a year ago due to an increase in the value of underlying assets and new inflows. 

“The company will continue to monitor development and will make appropriate changes to the business strategy once the outcome of the referendum result and its impact on the UK and European service industry is more certain,” Westman said.

The firm has always been a lean operation with a focus on purely Western institutional clients. Clients include US pension funds, European institutions such as the $1 trillion Norwegian Oil Fund, along with high-net worth individuals and family offices.

Prosperity is selling out its 21% stake in the agricultural holding Cherkizovo for 12bn rubles, according to a July 11 report by Vedomosti daily.

Prosperity director Alexander Branis confirmed this decision was part of the firm's current investment management strategy.

Cherkizovo has been struggling this year due to weakening of the ruble and lower prices for poultry meat and pork. After completion of the deal with Prosperity, the remaining shareholders will be sent a mandatory offer to buy back their securities at a price no lower than the price per share paid to Prosperity.

Now Russia’s economy is starting to grow again equity portfolio investors’ interest has been piqued and they are cherry picking amongst the best companies, as their share prices remain undervalued, while their earnings outlooks are improving.

But sentiment in the equity market has soured in the past few months due to sliding commodity prices, renewal of Western sanctions against Russia, and after a dubious claim by oil behemoth Rosneft led to a 40% collapse in the stock of the Sistema conglomerate.

Nonetheless, the Aton brokerage believes there is still still 15-20% upside left in Russian stocks over the year, depending on how the Trump-Putin relationship develops. The two leaders met for the first time last week at the G20 summit in Hamburg.

A pioneering investor in Russia, Prosperity has survived and thrived when most of its rivals have gone to the wall. 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.

As of June 30, its flagship Russian Prosperity Fund has risen an annualised 15.9% since its inception in 1996, against the 5.7% annualised increase in the MSCI Russia Index.

Prosperity’s special situations fund has grown an annualised 25.7% as of June 30, 2017, since its 1999 inception, well outperforming the 4.8% annualised rise in the MSCI Russia Index over this time.

Another survivor since the late 1990s is East Capital, which like Prosperity, was founded by Swedes.

Founder Peter Elam Hakansson, whose various Russian funds charge a 2% management fee, emphasises his firm’s stock-picking ability.

“We are particularly pleased with how our strategies in Russia have developed, where it pays off to focus on top quality names in terms of corporate governance and business models,” Hakansson said in a note to investors on July 11.

In May, East Capital organised a client trip to showcase to investors rapidly-growing companies in their portfolios. Prosperity is hosting its annual Moscow investor trip in September from 26-27.

Data from Bloomberg shows East Capital’s biggest holding is London-listed retailer X5. They also hold an overweight position in Russia’s biggest airline Aeroflot, which makes up 1% of the Russian stock index and has surged 41% to a record high this year.

East’s portfolio managers also like search engine Yandex, children’s toy retailer Detsky Mir, as well as Russian real estate stocks. 

“Geopolitics can provide some upside to Russian stocks when they improve, and sanctions are lifted,” said fund manager Jacob Grapengiesser. “However, more importantly, we want investors to focus on the underlying companies which continue to impress us.”

Grapengiesser said he expects East Capital’s active positions to deliver earnings growth of 47% this year alone.