Jason Corcoran in Moscow -
UK-listed investment group Polar Capital is shutting its Moscow office in March after deciding to relocate its Eastern European operations to the Ukrainian capital Kyiv, citing a lack of quality deals in Russia and the growing attractiveness of Ukraine's economy.
"Russia is entering a period of sub-par returns compared to historical margins and some of the value had disappeared," Anton Khmelnitski, Polar's Moscow-based director, told bne. "Ukraine is insulated from the credit fallout and there's no downside to its top-five stocks, which we won't be able to short. The underlining reason is that we simply need to be closer to our investments."
Polar, which runs traditional and hedge funds, has cut the Russian exposure of its $220m Elbrus fund to 15% from 70% six months ago, and has sold down its holdings in blue-chips such as Russia's electricity monopoly UES and Golden Telecom. "There's a lot of good stuff still in Russia, but we are a boutique and we have more room to manoeuvre in smaller countries like Ukraine, which is about five years behind Russia," Khmelnitski says.
Polar's view on Russian stocks is at odds with Moscow's analyst community, who feel there could be 60% upside this year when the current sell-off ends. Russia's RTS index is down around 13% from the record high hit on December 12, after falling by as much as 20%. "A 20% fall from the high is regarded as a bear market for equities and, historically, in global markets it is a level when buying resumes," says Chris Weafer, chief strategist at Moscow's UralSib.
However, Khmelnitski believes that Ukraine will outpace Russia or any other place in a bull market and during a global slowdown because it's "cut off from the international capital markets." Ukraine's main stock exchange, the PFTS, grew last year 135.4% and is down by about 10% from the start of this year.
"The investment banks are all wrong because they are driven by other considerations. Just ask any banks in Europe which market has received most bank M&A activity, its Ukraine," explains Khmelnitski. "The Russian top-down situation qualifies best, as I often say, as a macro-trap with little value bottom up. See the performance of IPOs - excess liquidity will fall to 15% and eventually to zero."
Khmelnitski joined Polar Capital in April 2006 from Kazimir Partners, which was previously known as Brunswick Asset Management. He spent three years at Kazimir as head of equities. Prior to Brunswick, Khmelnitski was at Swiss group Pictet Asset Management in London where he spent almost six years managing the Eastern European Trust, a $100m exchange-listed company, which collected a number of awards for its performance and investment style. At the same time, he was also responsible for $500m of equity investments in Emerging Europe and Pictet's global emerging market oil and gas sector. Khmelnitski was born in Moscow, but grew up and received his education in Switzerland. A cerebral and quietly spoken man, he holds a Certificate in Financial Engineering from the FAME Foundation.
Khmelnitski says Polar will launch a new Ukrainian fund to invest $500m in public and private companies at early stages and those launching IPOs. Four analysts are to be hired, in addition to the two fund managers transferring from Moscow. Polar has already taken stakes in Ukrainian insurance company Oranta and locally listed property developer Dragon Ukrainian Properties and Development fund. The fund also made money through a series of pre-flotation Ukrainian investments, taking stakes in companies shortly before they listed.
The new Kyiv operation will primarily focus on property, domestic food, pharmaceuticals, high-tech firms and insurance companies. "The property market is at the beginning of its cycle and there are a lot of obvious opportunities in food, consumer goods and the beverage market," says Khmelnitski. "Accession to the WTO is a milestone event and will be key to this economy. "
Polar joins Sweden's East Capital as one of the few foreign investors to set up in Ukraine. East Capital's Bering Ukraine fund has grown to $304.68m and is up 180% since its inception. Investment banks are also being drawn to one of the best performing stock exchanges in the world last year. Credit Suisse opened a representative office in April, while Russia's Renaissance Capital has a full-service operation, competing with domestic market leaders Dragon Capital and Concorde. In November, Deutsche Bank said it was going to open an affiliated branch in Ukraine when the country joins the World Trade Organization.
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