Back in 1999, an unnamed trader told the Financial Times he "would rather eat nuclear waste than invest in Russia". It was a colourful quotation but - alas for the trader - deeply misguided. Anyone who invested in our Prosperity Quest Fund ten years ago would, as of August 2009, have seen their money grow 20-fold in dollar terms, an average annual return of almost 40 per cent.
The S&P500, which presumably did enjoy our florid-tongued trader's approval back in 1999, has since been flat - returning nothing at all. So, despite all the talk of a 'New Cold War', and a relentlessly negative western press, don't let anyone tell you only fools invest in Russia.
Since 2000, emerging market (EM) economies have grown five to six per cent per year, while 'advanced' OECD nations have managed only one to two per cent. That out-performance is set to continue. The EMs will expand four per cent in 2010, says the IMF, while the west will struggle to grow at all, with higher EM growth continuing until around 2015 and beyond.
That's not surprising. The largest EMs - the BRICs - boast low economy-wide leverage, hefty reserves and have dynamic, ambitious workforces. Western growth, meanwhile, will be weighed down for years by heavy debt-service, systemic risk and worsening demography. For some time now, the EMs' share of global portfolio investment has steadily climbed. But the subprime fiasco - and the resulting loss of faith in western markets and institutions - will accelerate and accentuate that trend.
As emerging giants come into favour, Russia will benefit disproportionately. So far in 2009, EMs account for all of the world's top-ten performing equity markets. Russia is among them - up almost 70 per cent since the start of the year. Yet the RTS index of leading Russian shares still has an average valuation of only 7.9 times earnings - the lowest P/E of any major market.
Having risen from post-Soviet ashes, Russia is full of firms with strong fundamentals and low debts, providing non-complex goods and services for which there is demonstrable demand. The world's eighth largest economy is also, as of last year, Europe's most valuable retail market.
While foreign direct investors have piled in, portfolio money remains coy. A combination of the post-Lehman EM sell-off and continued international scepticism means Russian equity remains very cheap.
There's something else. As western governments print money, debase their currencies and rack up more debts, mainstream global investors seek 'tangible' assets - not least as an inflation hedge. Russia will benefit from this trend too. As well as world-class hydrocarbons reserves, the country has an abundance of metals/minerals and 'soft commodities' such as timber, water and agricultural land.
Prosperity Capital Management (PCM) was founded in 1996. It specialises in Russia/CIS and control investments worth $3bn, making it the largest stand-alone asset manager in the region. By focusing on second-tier stocks and tapping into 'special situation' restructuring and consolidation plays, its Quest fund has returned no less than 2,008 per cent since 1999, while maintaining monthly liquidity terms and with no leverage. Nuclear waste?
When Quest launched, Russia was in chaos. Annual inflation was 84 per cent. The country had no reserves and had just defaulted on its Soviet-era debts. Today's situation could hardly be more different. Russia now has the world's third-biggest forex reserves, practically no foreign debt and single-digit inflation. Real average wages are 13-times higher than in 1999.
In fact, just about the only thing that's the same as in 1999 is the average valuation of the RTS. That's why PCM is now launching Quest II. Not only are Russian 'blue-chips' back at 1999 valuations, the less liquid second-tier stocks targeted by the Quest strategy are lower still.
Taking their cue from the press, many scoff at the idea of Russian investment. Yet PCM's client base is comprised entirely of western money - and includes highly-respected pension funds, family offices and endowments, as well as Norway's NBIM, the world's third biggest sovereign wealth fund.
Yes, Russia is a nascent capitalist society. Yes, investing there requires stamina and skill. But while the situation is challenging, it's not nearly as bad as the newspapers would have you believe. That's the real investment opportunity - that yawning
gap between perception and reality.
