Thursday, 1 May 2008

Rabinovich finds diamonds in the CIS rough

Business New Europe

Jason Corcoran in Moscow

April 24, 2008

Befitting for a frontier markets investor, Slava Rabinovich was one of the early adventurers to set up office in the Russian capital's emerging business district of Moscow City.

Rabinovich, founder and managing partner of Diamond Age Capital Advisors, moved into Tower 2000 in August 2004, just before the fund's inception in February 2005. From his 22-storey perch on the right bank of the Moscow river, Rabinvoich can keep an eye on the spectacular rise of Moscow City, located on the Presnenskaya embankment, three kilometres west of the Kremlin.

Rabinovich's pioneering spirit has taken him a circuitous route to setting up his own hedge fund, which invests in Russia, Ukraine, Kazakhstan, Kyrgyzstan, Azerbaijan, Georgia, the Baltics, Uzbekistan, and over 27 countries globally whose principal focus is the former Soviet Union.

"I have been described as a pioneer because I was here at the inception of Russia's capital markets with Bill Browder at Hermitage," he tells bne in an interview. "Some people have been investing with me since 1996 and, at that time, we were the only investment firm in town."

A St Petersburg native, Rabinvoich emigrated to the US in 1988 and returned to Moscow eight years later after gaining an MBA from New York University.

Hired by Hermitage Capital in 1996, he helped its founder and principal Bill Browder build up the business from scratch to over $1bn in just four years. Rabinovich served as head trader and assistant portfolio manager to Browder, who established the fund's aggressive activist stance toward energy giant Gazprom and other Russian blue chips. "I was number two at Hermitage during the wild days of the mid-1990s capitalism," he recalls. "I was second in command, so I was in the spotlight and that carried a risk. I remember [US businessman] Paul Tatum was shot the weekend I arrived at Hermitage in November 1996."

Rabinovich opted to leave Hermitage because he realised Browder was never going to give up the reins. He helped kick-start Renaissance Capital's fund business in 2000 following the 1998 financial crisis, and in 2001 went on to set up an investment unit at MDM Bank.

All that glitters is not gold

His own fund Diamond Age has grown at a decent lick to $102m in assets under management today from $2m at inception. Diamond's clients already include four individuals from the "Russian Forbes 100 Rich list" and several foreign private banks. With a three-year track record just under his belt, Rabinovich is looking to hike assets under management by winning over more Swiss and UK fund of funds clients. The fund, which has a minimum investment of $100,000, posted a 30% annual return at the end of March and a cumulative return of 127% since its launch. "Larger financial institutions are considering us more investable now, that we have cleared $100m assets under management and posted strong three-year numbers," says Rabinovich.

The fund tracks over 500 stocks globally with the only proviso that they are tied to the economic expansion and integration of Russia and the former Soviet states into the global economy. "We don't buy Coca-Cola or Microsoft just because they sell their products in Russia," he says. "We only consider companies where Russia and the former Soviet region has a significant impact on their income levels."

Diamond had been bullish on metals and mining stocks, which has helped performance. The fund is also exposed heavily to financial stock: it has bought shares in state bank VTB as a consolidation play and invested in Austrian and Swedish banks, which have a strong presence in Russia and the CIS.

Rabinovich shorts funds on a case-by-case basis. "We do short on an enterprise specific basis, but I don't have a compelling investment case to be a net short or market neutral in a region which grows double digit and which has earnings per share growth of 18%," he says. "We would be net short if the markets were to boom in a bubble and appreciate by 150% in a short period of time without corresponding growth in fundamentals."

In the third quarter of 2006, Diamond dramatically reduced and sold all of the integrated Russian oil companies and even shorted some of them. "The Russian companies were not making money due to high taxation, but since we were bullish on oil we bought crude futures and shorted some of the Russian oil companies," says Rabinovich.

Diamond cut the fund's leverage from as high as 30% down to zero in mid-January. The decision was taken on the basis of pure risk management rather than the cost of leverage, according to Rabinovich.

Diamond was one of the first investors, along with the European Bank of Reconstruction and Development and New York-based fund Firebird, to cop onto the potential of the Bank of Georgia in 2005. Within two years of investing in the lari-denominated stock, its GDRs had flown by 1,000% in value. Rabinovich had only scaled the bank as 1% of the fund because of its risk profile, but still banked a tidy profit.

Diamond's fund managers use a network of counterparties and brokers throughout the region, and spend most of the long Russian public holidays on the road looking for new opportunities. New recruit Kim Iskyan, former co-head of research at UralSib, knows Armenia and Kyrgystan from his previous incarnation as a journalist. About 15% of the portfolio is invested in what Rabinovich terms "frontier-frontier," which includes punts in 16 Uzbek stocks.

The fund has about 25% allocated to the large caps listed on the Moscow index. In a recent note, Rabinovich wrote: "Since mid-2006, the RTS has corrected by 10% or more on seven occasions and each time bounced back stronger afterwards. This time, given the valuations combined with growth and the overall prospects of the region, we are of view that it will be no different, and Diamond Age is positioned to take advantage of the anticipated strong valuation expansion of multiples, adjusted for growth."

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