Prosperity catches up on Hermitage Capital in Russia

Financial News

Jason Corcoran in Moscow

04 Dec 2006

Hermitage shares top investor spot

A shake-up of investors has resulted in Hermitage Capital losing its position as the largest single foreign investor in Russian equities. Prosperity Capital Management, a fund manager founded by Mattias Westman a decade ago, has caught up with Hermitage and is neck and neck with its rival.

Hermitage’s assets under management have fallen from $4.5bn (€3.4bn) to $3.2bn since manager and chief executive Bill Browder was barred from entering Russia last November on the grounds he posed a threat to national security. Meanwhile, Prosperity’s asset base has gone from $1.8bn to $3.2bn, although chief executive Westman attributed a small portion of the inflows to clients switching from Hermitage.

Asset managers, such as Capital Group and Franklin Templeton, which run emerging market equity portfolios, are also investors in Russia but, unlike Hermitage and Prosperity, they make global allocations.

The doubling of the flagship RTS share index over the past two years has gained the interest of western pension funds while this summer’s equity volatility led to the arrival of hedge funds.

Westman said: “Some of the more conservative money is coming into Russia for the first time. We have had more mainstream investors, such as a $125m mandate this year from a European government pension fund.”

Browder, who is managing his fund from London, remains “100% confident” of regaining his visa and returning to Russia.

He said: “It’s been a good year, although we got caught on the wrong side of oil in the second quarter which had nothing to do with the visa. Half our team is Moscow-based and they continue to visit the companies and government officials. I am probably safer in London from a corporate governance point of view.”

The fund registered a return of 31% for the year against an RTS index return of 52%. Since launch, it has posted annualised gain of 36.8%.

Prosperity has also attracted funds for a private equity-style vehicle that listed last month on London’s Alternative Investment Market. The $250m Voskhod fund will invest in small and medium-sized Russian and Commonwealth of Independent States companies involved in corporate restructuring and consolidation.

Prosperity is fighting plans by oil group Lukoil to merge one of its fully-owned
production units with Ritek, in which Lukoil has a 65% stake. It has offered to buy Ritek shares at a 21% premium from shareholders if they vote against a planned restructuring at next month’s annual meeting.

Westman said: “We have the backing of a large number of shareholders and it is going to be quite tight. It is clear the merger proposed by Lukoil is not accretive for shareholders.”

Prosperity’s funds recorded an average return of 150% last year while they are up 45% this year, according to Westman.

New York-based Firebird Management, which has more than $2bn invested in Russia and the CIS, has returned 50% for the year in its two main Russian funds.

Ian Hague, a co-founder of Firebird, said it had won mandates from US endowments, US and European pension funds, family offices and fund of funds, such as Permal. He said: “We are getting more interviews with the consultants and we have won a mandate from a northern English city pension fund.”

The top three Russian fund managers – Prosperity, Hermitage and Firebird – employ a buy-and-hold strategy and rarely hedge investments. But the equities sell-off in May provided a new generation of long/short funds with the opportunity to prove hedging can be beneficial.

Troika Dialog’s Russia Fund, which has $75m under management, takes short and long bets in Russian-listed companies and, to a lesser extent, in CIS countries such as Ukraine and Kazakhstan.