Russia is more than geopolitics. Savvy investors have been ignoring the political chatter and making... [+]
The last two years have been nightmarish for Russia. But the worst of nearly three years of recession may be behind it, says David Herne, fund manager for Moscow-based Specialized Research & Investment Group's offshore Russian hedge fund, known as Specialized Russian Growth.
"Russia might already be in positive territory," he says via email. "I think you'll probably see some growth in the second half this year."
Falling oil prices and sanctions on banks already hindered by locally high capital costs have been the two biggest negatives. Incomes are stagnant or dropping outside of the main hubs of Moscow and St. Petersburg. The negatives are well known, meaning they are already baked into the cake of Russia-based investment funds.
Herne and his fund were profiled in the FORBES Investment Guide in December. The only major, investable country that took Russia out of running for this year's boldest equity investment, as the article's headline forecast, is Brazil. And that's only because of the rapid collapse it faced in early 2016 due to
David Herne (in blue) at a road show for St. Petersburg based electric components maker Lez. (Photo... [+]
As of Friday, Aug. 18, the Cayman Island's registered Specialized Russia fund was up 5.54% on the month and 40.14% on the year, beating every single Russian equity bench mark there is.
es.
The RTS is up 4.2% on the month and 27.6% year-to-date. Micex is up 0.99% on the month and 11.5% YTD. The
Herne's fund also beat the Market Vectors Russia ETF (RSX), up 4.6% in the last four weeks ending Aug. 18 and up 30% YTD.
The fund's top performers are Aeroflot, real estate developer LSR Group, and mining company
Russia is often considered the Wild East among investors, and nothing but a play on oil and gas. Oil is important for the ruble and for the government budget. More than 70% of Russia's government revenues are in some way tied to the oil or gas price.
Stable oil is good for Russia, particularly if it is closer to its budgeted target price of $50 a barrel.
Retail sales picked up sequentially in July, while industrial production had yet another set-back. The Russian economy remains on track to grow modestly at a rate between 0.5% and 1% on a quarterly basis in the second half, according to a research note from the Ashmore Group on Tuesday.
Mike Reynal, a long-time Russia and emerging markets investor with Sophus Capital in Des Moines thinks Russia has hit the trough.
"I think that Russia has already had the beginning of a bounce, with oil stability having a positive impact on confidence," he says. "The fiscal numbers remain robust because of oil; the current account is still positive and the political news has abated, but let's leave that aside," he says about baiting Russia as the bad guy in an election year. "I think investors are seeing an improvement for 2017."
The Victory Sophus Emerging Markets mutual fund (GBEMX) is up 10.4% year-to-date ending July 31.
Herne's fund is a different animal altogether. It's standard 2/20 hedge fund fee structure was recently changed. They now charge 0.95%. The 20% fee is paid only on out-performance over the index. Herne's fund tends to do better in the good times, then in the bad times.
SPRING Russia Growth compared to the indices.
Getting into Specialized Russia via the Caymans is not cheap. But so far this year, there has been no redemptions, according to the firm's investor relations department. They've taken in $100 million in fresh money from a European sovereign wealth fund as investors there look for dividends and yield and whatever else they can do to limit the impacts of negative interest rates back home. This reason, coupled with a stabilization in oil, has Russia looking better for investors than it looks for political pundits who forget the market still has its eyes on the Wild East. For some, Russia continues to be a money maker.
