Russia’s funds of funds

Untapped investor opportunities are bolstering the Russian market, says leading fund manager Timothy Enneking. He spoke to Andrew Barton


It is safe to say that Tera Capital Fund (Tera) is far and away one of the most innovative funds in the world.
It was and remains the only fund of funds in the world with its specific geographic focus – Russia. It is also unique in that Altima Asset Management, the investment management company that manages Tera, charges no fees other than a success fee.

We spoke to Timothy Enneking, who has been managing funds in Russia for 11 years, to get an insight into the country, Tera and the particular benefits of investing in a fund of funds.

Tera Capital Fund was launched by Altima Asset Management in April 2005 as a fund of funds focused primarily on Russia.

‘A popular idea’
The fund of funds came about when Mr Enneking was working on a private equity deal, explaining that he and his colleague at the time came up with an idea that could solve a common problem:

“We had many friends who all had a common issue: unless you had $5/10m you couldn’t develop a diversified investment portfolio in Russia.

“So we initially set the fund up for high net worth individuals who weren’t extremely high net worth, to allow them to achieve diversification with a single investment and without having to put all of the money into a single fund because of high minimum investments.

“Instead, they could invest in Tera and automatically get far greater diversification across all sectors, market caps of companies and funds, strategies, etc., with a single investment.

“That seemed to be quite a popular idea,” he concludes.

But why Russia? Why should investors choose Russia as opposed to other countries?

Mr Enneking speaks passionately about the country and its untapped investment opportunities, citing the phrase “fear arbitrage”; a term the company has in fact copyrighted, to describe the over-the-top fears people have about investing in Russia:

“There’s a reason why Russia should have some sort of discount from developed markets, but markets and investors have pushed that discount to a level – even today – that makes no sense.”

‘A tremendous place to invest’
The proof of this was in two polls taken several years ago. One poll asked major international companies, who had already invested in Russia, a simple question: do you plan to expand your exposure in Russia? The answer, in 90 percent of the cases, was yes.

“During the same time period, there was another poll which asked international companies that had not yet invested in the country whether they planned on investing in Russia. 85 percent of them said no.

“Such a distribution just makes no sense; it’s a question of being afraid of Russia or being concerned about Russia, being unwilling to invest in Russia, unless you’re already here and have an understanding of the country and how it works.

“Once you’re here and you figure out how to invest and how to make money, it’s a tremendous place to invest, and given its PE ratios, which Bloomberg ranks as the lowest in the world, it’s arguably the best place in the world – right now − to invest.”

Tera second in the world
There are a number of reasons to choose a fund of funds in particular, according to Mr Enneking, but three major reasons stand out.

“The first is country knowledge,” he explains. “If you’re trying to pick funds from outside Russia, you can’t meet the analysts, meet the managers – really understand what their approach is – as we can with a fund of funds based here.

“Secondly, all funds, even funds that claim to be generalist funds, end up developing specialties. None of the funds here have huge numbers of analysts, all the analysts inevitably develop specialty areas and favourites, they claim to be completely diversified – but they’re not.

“The third reason is performance. Tera has been able to outperform the RTS over the last several years, it’s outperformed at least 80 percent of Russian funds since it was created and last year it was the number two ranking fund of funds in the world in terms of performance out of over 2,500 funds of funds.”

So, the investor has two choices: buy volatility and performance, or get the same or even better performance without the volatility, with Tera.

Incredible advancements
When Mr Enneking first arrived in the country in 1992, he admits that it was “like living in the 1950’s or 60’s,” but the country has advanced incredibly since then.

“Literally, the country has gone from being 50/60 years behind [everyone else] to being caught up in a lot of significant ways.

“That being said, outside of the major cities, there’s a huge amount of catching up still left to do, and for that reason, Russia is an excellent place to invest.”

He also sums up the investment opportunities that Russia has to offer, with some astonishing statistics.

“The average living space in Russian per person is 21m2; that’s how much living space is currently available.

“In Western Europe it’s over 50 m2 and in the US it’s over 70m2, but here’s the amazing statistic, in China with 1.2 billion people, it’s 27m2. So in China, notwithstanding its enormous population, the Chinese have more living space per capita than Russians do.”

‘A good, long stretch of growth’
The future looks secure for those choosing to invest in Russia and a fund of funds, with further investment opportunities arising as time goes on, but it is vital that those choosing to do so know where to invest.
“I see a good, long stretch of stable growth” explains Mr Enneking, “At least three years or maybe five or six before an interruption, unless there’s an externally-generated, global crisis.
“Nevertheless, with the PE ratios still as low as they are here − they’re still under seven looking at 2011 − and even though the market has gone up this year, earnings are increasing for many companies in Russia; in many cases, they even increased during the crisis, while stock prices were falling.
“So, the opportunities here to make money on existing companies and on future growth, as the economy diversifies, are just enormous − if you know where to invest − and in order to know where to invest, you have to be on the ground here.”
For potential investors, these externally generated, global crises are on the whole unavoidable, but what is vital when it comes to these crises, is how a country deals with and overcomes them.
The global economic crisis hit Russia like the rest of the world, but it was how the country dealt with the disaster that stands out, says Mr Enneking:
“There was a tremendous drop in the RTS here and about a quarter of a trillion dollars left the country. People looked at it and said ‘Oh that’s horrible,’ but in reality, we should be looking at it and saying, ‘Oh that’s wonderful,’ because funds were redeeming money, they had margin calls, they had redemptions and they had to take money from where they could.

Overcoming the crisis
“Russia never put any controls on redeeming funds or redeeming any monies from Russia. The Ukraine and Kazakhstan both put up restrictions, as did other countries world wide.”
Russia – like every other major country in the world − financed its way out of the crisis and inched back into expansion. It spent about $250bn doing so, which was roughly the same amount of money that was sucked out of the stock market by foreign investors having to pay off other investors.
Mr Enneking does note, however, that “investors didn’t pull their money out of Russia because they didn’t like it as an investment; they pulled it out because they needed it elsewhere.”
“What happened was in stark contrast to the US, Germany, France and the UK: rather than printing any money whatsoever to finance their way out of the crisis, Russia paid cash. If you look at a country like a company, it equity financed its way, if you will, as opposed to debt financed, out of the crisis.
“So, if you look at it from a balance sheet stand point as a country, Russia, is the best macro-economically situated country in the world, despite the crisis.”

A bright future?
Russia pulled itself out of a global crisis before so many other countries, but it does have some major challenges to overcome.
Mr Enneking explains that “hands down, the biggest single problem is corruption, but despite this, people have still been able to make a lot of money here.”
“However, if the country succeeds in overcoming corruption or even significantly reducing it, easing it back, the country will simply become a more attractive business market, even as it is now a very attractive investment market, even with the problems that it has.”
Mr Enneking expects Tera to keep growing and he is confident that the success of the funds and the company in general will continue:
“Our investment goal is 20 to 25 percent per year. We grew at 24 percent last year and I think we’ll grow at more than 24 percent this year.
“In short, I see the fund doubling in just under every three years – at least quadrupling over the next five to six years.”