Tim Gosling in Moscow -

The manager of the world's best performing offshore fund is about to launch Mark II, which aims to benefit from Russia's road to recovery.

Returning 46% per year (or 3,500% overall) since 1999, Prosperity Capital Management's Quest Fund is the world's best-performing offshore, non-regulated fund, having enjoyed the huge uplift in Russian equities over the last decade thanks to its long-term horizon. Now the manager is set to launch Quest II, which aims to work amongst second- and third-tier Russian stocks, especially those facing consolidation, as the economy recovers from the crisis.

After raising SEK3.5bn (around $500m), the Quest II roadshow is about to head home to Stockholm, with subscriptions closing on July 7. The fund was listed on the Swedish stock exchange in mid-June, which allows it to accept not only cash, but also Russian assets in return for shares.

PCM's Mattias Westman pushes the fund manager's strategy of "constructive activism" as key to the success of the first Quest fund, mentioning the likes of Bashneft and Magnit as examples of how a board presence has helped the fund add value to its assets. At the same time, he says this also helps alleviate political and corporate governance risks.

Safer climate

Of course, "activism" may put some investors on alert given the experiences of Bill Browder and his colleagues at Hermitage Capital Management. However, PCM has managed to not only survive, but thrive. And even if Hermitage is still fighting its case, the chance that another attack on a major western fund would be tolerated is far slimmer under Russia's new investor-friendly policies. Westman admits, however, that you can't avoid risk entirely, because the Russian economy is changing rapidly. "Sometimes things happen that you don't want to happen."

PCM will certainly need to be on its toes as it dives into the pool populated by smaller Russian companies. Here the waters are even murkier and visibility can recede to virtually zero. The sharks, though smaller, can be even more vicious.

However, the speed of change that Westman refers to and the other risks mean that there are gems to be found. If the average price/earnings in Russia is far below its peers at around 7x, then the bargains to be had further from the headline names on the Russian stock exchange are even more significant if you can identify the right targets. Westman points out that Bashneft's share price is just 3.5x its earnings for instance.

Specifically, Quest II will aim to benefit from the transformation amongst Russia's mid-sized companies as the fallout and recovery from the global crisis sees some fall by the wayside while others thrive, with the associated uplifts in efficiency and production from company and debt restructuring. The main driver in the short term, however, stands to be the widely-anticipated rise in Russian stocks after the summer.