FUNDS: The ABR (Anywhere But Russia) fund veterans now punting on the frontier

By bne IntelliNews October 21, 2015

Jason Corcoran in Moscow -


Dedicated-Russia funds have become a rare species in the years following the 2008-2009 economic crisis. The country’s subsequent low growth, its current recession along with tumbling commodity prices and political isolation over Ukraine have almost led to their extinction.

But what has become of these fund managers? Many have left the industry, some have retired to spend the handsome returns they milked in the glory years from 1998-2008, while others are now applying their skills to investing in Pakistan, Iraq, Iran and other far-flung frontier markets, to form what can be described as the ABR (Anywhere But Russia) crew.

The trail of casualties over the past four years is long, with either the firm going bust or the specialist fund being wound down. The list includes Pharos Financial Group, Third Millennium Russia Fund, Vostok Nafta, Sito Capital, Spectrum Partners, Hermitage Capital’s flagship Russia Fund, Wermuth Asset Management Russia Deep Value funds, Franklin Templeton Investments Russia and East European Fund, East Capital Russia Domestic Growth Fund and Morgan Stanley’s Eastern European Fund.

Johan Elmquist, portfolio manager and partner at Swedish investment firm Tundra Fonder, is spending more time in Pakistan’s capital of Karachi than Moscow over the past four years following two decades of investing in Russia.

"Russia has been a very good training ground to be very alert on not taking the companies’ numbers or statements at face value," Elmquist, who previously ran over $2bn in Russian assets at Swedbank tells bne Intellinews in an interview. "We will always find ways to check the numbers through suppliers or customers, or to find a way to check what they are saying is reasonable."

Emerging markets like Russia have struggled to match the performance of developed markets since 2008, when the global economic crisis triggered a flight to safety. BNP Paribas estimated investors pulled out at least $290bn from Russia, the world’s biggest energy exporter, from August 2008 to February 2009 as the economy sank into its worst financial crisis since the government’s 1998 default on $40bn of domestic debt. 

Investors have pulled about $60bn out of emerging market equity funds in the first nine months of this year as people prefer the sanctuary of steadier returns in US or European markets, or the potential outperformance in frontier markets. While frontier funds have not been immune to outflows, many portfolio managers are taking long-term bets that reforms in places like Iran, Pakistan and Vietnam have created unstoppable momentum for growth.   

The MSCI Frontier Emerging Markets Index has posted a 20.3% return over the past three years compared with a negative 32% return for the MSCI Russia Index, according to data compiled by Bloomberg. 

Sweden’s Vostok Nafta, another cornerstone investor in Russia for two decades, is also busy chasing higher returns in exotic places. Vostok Nafta, which exited its Russian stock market bets in 2012, is now fishing in Pakistan and Saudi Arabia, as well as retaining several private equity bets in Russia.

Paul Collison, a former managing director at Farallon Capital Management, set up the Moscow-based 55 North Capital Partners in 2009 as a long/short hedge fund focused on Emerging Europe. The firm turned away from Russia in recent years and Farallon and his partners Thomas Gochenour and Julia Brookes now run the Iraq Phoenix Fund, a Cayman Islands-based investment fund. Neither Collison nor Brookes returned calls or emails seeking comment.

Gemsstock was set up in late in 2013 by Al Breach and his former colleagues from UBS in Moscow to run multi-asset global funds. A source close to the firm said Russia didn’t feature at all in its initial portfolios.

Atanas Bostandjiev, former head of VTB Capital’s international business, launched Gemcorp a year ago with €500mn raised from its investors. All of its initial activity has been focused in Angola and Sub-Saharan Africa.

The pace of Russian fund closures has accelerated this year as recession and sanctions have gripped the economy and led to the country’s further isolation from international capital markets. Capital outflows from the country could reach $90bn in 2015 after last year’s record of more than $150n, according to Russia's economy ministry.

BNP Paribas exited its €3bn fund management venture in Russia in July. And Franklin Templeton Investments said on October 9 it will soon vote on a plan to liquidate its 20-year-old regional fund, citing a lack of investor interest and trading limitations imposed by the sanctions

Meanwhile, Sweden’s East Capital shuttered its €10mn Russian domestic growth fund in September in a move away from publicly-traded assets. "The liquidation of East Capital Russia Domestic Growth Fund supports our communicated shift from public equity to private equity and real estate," Mia Jurke, CEO of East Capital Explorer, said in a statement.

Since the firm’s initial investment in September 2012, the annualized fund return is minus 23% to the end of August this year.

Peter Halloran, who helped organize Russia’s first IPO, wound down his Soros-backed hedge fund last year to invest in shale oil and gas in Texas.

Halloran, who first came to Russia in 1995, boasted that Pharos Financial’s flagship fund had delivered annualized returns of about 25% in the last decade by stock-picking in Russia and the former Soviet Union. "If you look at Russian capital markets, the trend is pretty clear," he says. "It's a smaller and smaller pond for asset management and, while I love the volatility, it became too hard to grow assets.''

Fund redemptions and a collapse in asset values has led to a decimation in Russia-focused investors. Those who remain standing include East Capital, Prosperity Capital, Verno Capital, Altera, Halycon along with the Russian lenders with asset management units. 

The main transferrable skill that can be taken from Russia to frontier markets is the assumption you can take nothing for granted, according to Tom Adshead, chief operating officer at Macro-Advisory in Moscow. "You can't assume people will obey the law," Adshead, former head of research at the now-defunct Sito Capital, tells bne Intellinews. "You learn in Russia to acquire a certain suspicion insofar as you don’t take everything the government says as gospel, and to be very circumspect at what management says."

The only Russian specialist to truly make it elsewhere and to go global is Richard Dietz, according to Adshead.

Dietz, a founding partner of Renaissance Capital, has built a distressed debt manager with offices in Moscow, New York, Dubai and Buenos Aires. VR Capital has earned recognition for its world beating fund performance and has about $1.6bn in funds under management.

In a Wall Street Journal opinion piece last year, Dietz lectured Argentinian President Cristina Kircher by telling her to tone down her rhethoric and strike a deal with the nation’s creditors.

"If you have done well in Russia, you will have a good rolodex of people who are willing to give you money and that’s half the battle," says Adshead. "But the other things that make a good Russian specialist doesn’t necessarily make a good Iran specialist. If you don’t understand Farsi or the cultural idioms, then you will may very well struggle."

For Tundra Fonder's Elmquist, whose firm has opened a research office in Karachi, the punt in frontier markets is already paying off. The firm has grown its assets in four years from zero to about $200mn, of which the Russia fund represents just $2mn. Its Pakistan fund has risen 184% since inception compared with 105% for the benchmark. The Russia fund is down 16% since its inception four years ago. "I can't at this stage make a pitch for Russia, as event risk is just too high," he says. "Even if the markets bounces and even if we see new inflows, it will take a while for current managers and new managers to launch new products. It will create opportunities for those who survive."

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