Sunday, 7 September 2008

Renaissance Investment looks to riches of the CIS

Business New Europe

Jason Corcoran in Moscow

September 1, 2008

Andrei Movchan, founding chief executive and co-head of Renaissance Investment Management (RIM), is banking on his bulging Rolodex of rich clients to help his firm emerge from the long shadow cast by its investment banking stable-mate, Renaissance Capital.

RIM, the emerging markets fund arm of the Moscow-based financial group, has racked up $7bn in assets under management since its inception of 2003, with $5bn in assets being generated by its wealth management business, where individual accounts range from $3m-5m.

This significant proportion of high net worth clients is in contrast to the more modest growth in mutual funds, where RIM manages just $200m. Conversely, rival Troika Dialog Asset Management has a total of $10bn in assets under management in retail, institutional and private banking, but just $2bn of their total is generated by high net worth clients.

Having analysed the market and crunched the numbers, RIM's management team have decided to freeze development of retail and institutional funds in Russia and adhere to the dictum: follow the money.

"We now manage about $7bn in total and $5bn from CIS high net worth individuals," says Movchan. "This high net worth market in CIS is represented by just under 90,000 individuals with bankable wealth in excess of $3m. A 20% market share gives us over $50bn which, provided a successful strategy execution, will make us grow 10 times in three to five years." Part of the strategy to grow its Russian and CIS wealth business involves recruiting an additional 120 client advisors over the next two to three years.

Mining wealth

RIM can expect fierce competition in the high net worth bracket. Mid-size Swiss private banks such as Union Bancaire Privée, Julius Baer and Vontobel are beginning to target Russia's rich, while larger rivals Credit Suisse and UBS have been investing in their Russian wealth operations for the past two to three years.

The interest has been sparked by the commodities boom, which has spawned more mega-rich. The number of Russians with more than $1m to invest, not counting the value of their homes, grew by 14% last year to 136,000, according to Merrill Lynch's 12th annual wealth report launched in Moscow in June. "Russian wealth is not inherited, it is newly created so it requires a different logic and different approach," says Movchan. "When we sell leveraged African shares, people buy; but trying to sell American diversified market would fail."

It's this mentality that has led Movchan to conclude that Russia's noveau riche will be happier to invest their money onshore than stuff it in a Swiss bank account. "Switzerland is a safe harbour for people who do not want high returns, but who want their money to be 100% safe," he says. "In Russia, where we have inflation of 15%, returns of 3-5% are not sufficient. I suppose Swiss banks will lose Russian money unless they work like Pictet [& Cie private bankers] who propose active Russian- and frontier-market allocations."

Movchan hopes to serve Russian and CIS investors who are starting to look beyond cash deposits and real estate investment to more sophisticated products such as hedge funds. Russian mutual funds, or personal investment funds (PIFs), are too restrictive to satisfy the needs of wealthy investors, says Movchan, and while there are hopes the government will eventually introduce hedge funds for qualified investors, RIM isn't banking on it. The firm is gradually converting its equity and balanced products into alpha funds, which generate higher out-peformance. "You can no longer satisfy clients' needs by giving them index-related returns," says Movchan. "You need to do something else and we started the alternative products programme three years ago and we now have about $2bn invested in absolute-return Russian products.

With inflation running at about 15%, Movchan says double-digit returns have become an absolute minimum requirement, not a target. In fixed income, RIM's dynamic fixed income fund is posting a return of 18%. "It's not luck or talent, but bottom-up understanding of credit quality, leveraging and exploiting the opportunity of high inflation in Russia," says Movchan. "Double-digit returns are a given, but the question is whether you can do 25% and with alternative products we can do 25%. Certainty grows once you get off index tracking, while the index goes back and forth according to what Putin says."

Starting out

RIM began life with five employees and $4m in assets, and has grown to about $7bn in assets, with approximately 220 employees. Movchan, 39, has played a key leadership role in establishing RIM, but is keen to push the firm to the next level where it can be recognised as a world beater like its investment banking brother.

A key lieutenant within the Renaissance Group, he added a leadership role at the consumer finance arm for a spell last year. Movchan, who holds an MBA from the University of Chicago Graduate School of Business, joined Renaissance in 1997 from Troika Dialog, where he was an executive director with responsibility for corporate finance and special client operations. Before that, he worked for the commercial bank Rossiysky Credit as department head for financial services and analysis.

Rod Barker joined RIM as Movchan's co-chief executive from the hedge fund RAB Capital earlier this year as part of RIM's expansion into new markets and push for distribution. London-based Barker is responsible for RIM's growing international business in Africa, Central Asia, the Middle East and its distribution hubs in London, New York, Singapore and Geneva.

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