Russia’s waning economic growth has quite understandably had an effect on financial markets. However, there remain a few players who’ve successfully adapted to the changing climate and now look set to capitalise on an influx of new opportunities. World Finance spoke to the CEO of VTB Capital Investment Management (VTB Capital IM), Vladimir Potapov, about the ways in which the country’s economy has been affected in recent years and how the business of asset management has shifted its focus accordingly.
How have recent changes to the economy affected asset management in Russia?
Changes are inevitable when growth slows and down-to-earth expectations replace trend extrapolations. The most positive of these changes is that the investment management industry is being cleansed of non-committed players and those who survive are becoming more robust, efficient and client-oriented.
Our business strategy has seen a very logical shift from growth to efficiency. The investment process has improved, risk management has become a more integral part of the business, incentive schemes have become long-term oriented, and the focus has shifted from simply selling a product to selling it properly.
How would you describe VTB Capital Investment Management’s position in the Russian market?
VTB Capital IM is one of the key business divisions of VTB Capital, Russia’s leading investment bank. This connection provides VTB Capital IM with unrivalled insight and access to the markets, as VTB Capital holds a leading position in the debt and equity capital markets internationally, as well as in the Russian and CIS league tables.
We believe that our local presence and extensive experience, focusing on Russia and the CIS, combined with the global distribution of our products to a diverse group of investors, sets us apart from our competitors. We offer a full spectrum of investment strategies for active investment in Russia and CIS stocks, bonds, balanced strategies, absolute return, real estate and venture capital vehicles. We are our own product, and our task is to ensure that this product is of the highest quality, so that if an investor – be they an individual, educational endowment or international sovereign wealth fund – is interested in Russia and the CIS, they will choose VTB Capital Investment Management.
In just three years, VTB Capital IM’s total AUM has increased by 1,323 percent from $0.4bn to $6.2bn (approximate figures). This has been made possible by a strong development strategy, a high degree of professionalism from our team and having an optimal risk management structure in place. We plan to further expand our range of investment products, which will offer clients interesting investment solutions and strengthen our market position.
What services do you offer and how do they differ from those of your competitors?
We believe that our on-the-ground presence, research, vast local market experience, and dedication to compliance and risk management set us apart from our competitors. Our main products and services include the management of open-end and close-end funds; investment fund advisory; discretionary managed accounts; as well as venture capital vehicles.
We bet on growing demand for unique technology and innovative business models specifically tailored for different industries
Institutional clients are one of the key segments for us. Our client list includes 30 of the largest pension funds, insurance companies and endowment funds in Russia, making us a top asset manager for Russian institutional clients.
VTB Capital IM offers a diverse line-up of 32 mutual funds with varying investment strategies, including investments in foreign assets. The company offers money market funds, bond funds, hybrid funds, index funds, diversified equity funds and Russian sector funds.
Our venture business has backed over 30 companies, rapidly growing sectors of the Russian economy including cloud technology, artificial intelligence, nanotechnology, energy efficiency, Russian e-commerce and internet consumption. We bet on growing demand for unique technology and innovative business models specifically tailored for different industries.
VTB Capital IM’s award winning Portfolio Management Business has 35 front-office professionals headquartered in Moscow. We take the protection of our clients’ assets very seriously and insist on gaining a firm understanding of their investment goals and restrictions. We thoroughly monitor fund portfolios to ensure we comply with fund regulations, fund-specific investment restrictions and objectives.
Tell us a little about your background in asset management
I started my career in investment management at the beginning of 2003 after graduating from the People’s University of China in Beijing, and the Higher School of Economics in Moscow. I worked at Troika Dialog Asset Management for over seven years as chief portfolio manager and became an associated partner in 2006. I joined VTB Capital IM as global head of the portfolio management business and CIO in 2010, and took on the role of CEO in February 2013. As a member of the Young Presidents’ Organisation, I take an active role in fostering entrepreneurship in Russia.
How have you changed the firm’s strategy?
After I joined in 2010 we developed a three-year strategic development plan for VTB Capital IM, which was successfully implemented. This plan focused on the fastest-growing segment of the Russian and CIS AM industry – institutional money – and also called for diversifying our business, building effective distribution in retail with our mutual funds and launching the first funds for international investors. This was all done based on three steadfast principles of investment management: understanding the needs of our clients, outstanding investment performance, and reliability.
Today, these principles have become the pillars of our business. Our team has the ability to identify and profit from niche emerging market investment opportunities where inherent, exploitable market inefficiencies exist. I believe the strategic development, professionalism and risk management structure at VTB Capital IM have helped transform the company into the leading investment management business it is today.
A new three-year strategic plan is now underway, with a focus on diversifying our client base to international institutional clients and the region’s emerging middle class, offering our award winning Russia and CIS-focused products and mutual funds.
What changes do you expect to see in Russia’s economy in the near future?
We see Russia’s growth slowing down due to softer demand for commodities and a high-base effect coming into play. But for the first time in many years the Russian economy is entering a period of low and stable inflation. We believe this process, which Russia has experienced since 1998, to be the most important macro development yet to be appreciated by financial markets.
Disinflation supports both the equity and fixed income markets and promotes healthy savings and investment processes. Russia has relatively high national (see Fig. 1) and personal savings rates, but only a small fraction of savings are being channelled through the domestic investment management industry.
The reasons for this are that the industry is relatively young, bank deposits have a preferential tax treatment compared to investments in securities, and deposit rates for individuals are strong in real terms. We expect this to change as the domestic investment management industry develops and banks’ appetite for deposit funding subsides. Another important area of change is the pension system. We hope that the regulatory overhaul of non-state pension funds will result in better industry oversight, as well as a better alignment of investment processes with a view to long-term capital appreciation.
Do you have any plans to expand to new markets or launch any new products in the near future?
VTB Capital IM’s most recent business line is an international strategies platform catering to international institutional investors. The investment team places strong importance on a diversified and fundamental stock and bonds selection process, while focusing on liquidity and preservation of capital. The actively managed strategies offer accredited investors exposure to undervalued Russian and CIS equity and fixed-income markets.
In 2014, VTB Capital IM plans to offer a Russia and CIS Debt Fund in UCITS IV format domiciled in Luxembourg and available to professional investors in Europe. The fund’s investment objective is to achieve medium/long-term capital appreciation by investing in a portfolio of Russian and CIS fixed-income instruments, denominated in local and international currencies. Investments may include fixed income securities issued by governments, local municipalities, corporate and other issuers in Russia or other CIS countries, including Eurobonds and convertible bonds.
The fund is denominated in US dollars and utilises the same portfolio management team of other award winning VTB Capital IM fixed-income strategies, with a total AUM of more than $3.6bn. This Luxemburg-based UCITs fund will borrow the investment strategy of the well known and top performing VTB Treasury fund, which has more than doubled the investment performance of the IFX- Cbonds Index since inception.
Aside from new products, VTB Capital IM has big global expansion plans. To attract large amounts of capital and achieve top quartile investment performance, it was necessary to utilise an institutional approach to investing, with a rigorous investment and risk management process run by experienced individuals. As asset management is a very scalable business, VTB Capital IM’s investment process and team can be utilised to manage additional products with similar strategies, for a wider range of investors in different countries. Now we have preliminary plans for PIFs for Russians, UCITs for Europeans, hedge funds for offshore investors, and mutual funds for US investors.
Now, VTB Capital IM is launching UCITs funds with these same equity and fixed income investment strategies for European clients. Many European investors are interested in the Russian and CIS markets because yields on European and US bonds are at extreme lows, with 10-year yields at 2.85 percent. In the current environment, with the 30-year US bond market rally coming to an end and a slow down in global GDP, we think long/short equity strategies will be able to generate significant alpha. Emerging markets like Russia and the broader CEEMEA region provide much inefficiency to be arbitraged by active traders focused on beta-neutral pair trades.
VTB Capital IM places a higher priority on top quartile performance and risk management than on growth through asset gathering. Growth needs to be managed carefully, and creating value for clients over the long term is the best way to ensure growth.