Dividend yields are also soaring, led by state behemoths such as Gazprom, whose distributions to shareholders have jumped from 1 percent of equity value annually to 8 percent over the past few years. And this bounty is available to investors at prices much cheaper than in any other major emerging market. The average price-to-earnings ratio of the RTS hovers around 5, compared with 11 for the Shanghai Stock Exchange. Sooner or later those values will be recognized for what they are, Westman concludes.
Leaders of Russias young asset management industry were frustrated a year ago even though their country, like other emerging markets, was on a roll. Retail investors were too traumatized by the crash of 2008 to buy mutual funds, they complained, and pension regulations were stifling the development of an institutional business. These days, the frustration is deepening. The market is shrinking, says Vladimir Bragin, senior analyst at Alfa Capital Asset Management Co. Clients want conservative products that pay very low fees. Its survival of the fittest. So far, Alfa is surviving just fine. The firms assets under management jumped 42 percent in the 12 months ended June 2012, to $2.5 billion, putting it in seventh place on the Russia 20, Institutional Investors second annual ranking of the countrys leading money managers. Alfa was one of the few winners on the list, though. Most other Russian managers hemorrhaged assets. Troika Dialog Asset Management, which dominated a burgeoning retail market in the heady days before September 2008, saw its holdings shrink by 26 percent, to $2.46 billion; the firm slipped to ninth place in the ranking from fourth in 2011. UralSib Asset Management, Troikas traditional domestic rival, posted a 19 percent drop in assets, to $3.27 billion. Prosperity Capital Management, the best-known agent for global institutions in Russia, slid by 29 percent, to $3.44 billion. That decline pushed the firm from first to fourth place in the rankings. These dispiriting numbers largely reflect a cratering Russian stock market. The benchmark RTS Index sank by 26 percent in the year to June 30. A decent summer rebound the RTS gained 13 percent from June 1 to September 1 did little to brighten fund managers outlook. Most Moscow professionals contend that the market will need a lot more than a one-off rebound to regain its animal spirits. The retail market looks all but moribund thanks to recurring financial crises and high interest rates available from Russian banks. The countrys stock market has only existed for about 17 years, and equity investors saw portfolios shrink by more than half twice during that period, in 1998 and 2008. The RTS still trades 45 percent below its peak of four summers ago. Meanwhile, Russian banks hungry for liquidity offer a 9 percent interest rate on one-year deposits, a comfortable margin over the countrys 6 percent inflation rate. As a result, Russian savers are voting overwhelmingly for the safety of the bank account. A year ago asset managers were excited about Troikas pending acquisition by state mega-bank Sberbank, anticipating an explosion of mutual fund marketing across Sberbanks 20,000-branch network. That purchase is now complete, but the big fund rollout has yet to start. We will eventually start the sale of mutual funds in every Sberbank branch, but not tomorrow, says Anton Rakhmanov, Troikas asset management chief. Global investors have shown little inclination to take the place of Russias retreating small investors. To many outsiders the past year has seen hopes of economic modernization under former president Dmitry Medvedev give way to kleptocratic stagnation in the form of a new six-year term in the Kremlin for Vladimir Putin. You kind of feel that Russia is always the underdog compared with other emerging markets in selling to international investors, says Igor Danilenko, senior equities portfolio manager at TKB BNP Paribas Investment Partners, a fund management joint venture between the big French bank and state-owned Russian Railways. TKB BNP seems to have lured a few adventurous foreign institutions to Russia nonetheless. The ventures assets shrank by just 8.5 percent over the past year, enabling the firm to oust Prosperity from the top spot in the Russia 20. Danilenko says slightly more than half of its asset base is international. (Russian Railways, the countrys biggest employer and corporate pension provider, has a long financial tail. TransFinGroup Asset Management, No. 2 in the II ranking, is an in-house manager for the railroad.) Russias pension market, meanwhile, has failed to deliver the way managers had hoped. A 2003 reform gave workers the option of steering at least part of their retirement savings to private pension funds rather than to the states, and the pool of cash in these institutions has swelled to more than $80 billion. Restrictive regulations make it difficult to generate profits from managing that wealth lode, though. Consider this rule, which sounds like a vestige of central planning: Pension funds are forbidden to lose money in any calendar year regardless of the performance of financial markets. That stipulation ensures that few pension assets are invested in the stock market; the vast majority are parked in Russian state bonds and a few other supposedly risk-free instruments. Even worse, from the point of view of asset managers, current law forbids them from charging management fees to pension funds. They can collect only success fees, which, given the obligatory low-return strategies, are thin. Some managers, like Alfa, conclude that handling pension money just isnt worth it. We are not inclined to expand further in this business, says Bragin. Others players are pushing to consolidate the pension field in the hope that it will pay off with sufficient volume, though. They also anticipate that regulatory change will come now that Putins reelection is out of the way and a (partly) new government is getting down to business. The outstanding example here is VTB Capital Asset Management. The firm, the financial markets arm of Russias No. 2 bank, state-controlled VTB Group, had the largest asset surge of any Russian manager this year, more than doubling to $3.56 billion and jumping from ninth place to third on the table. VTB has become the go-to manager for the retirement stashes of big Russian corporations like Norilsk Nickel, says portfolio management chief Vladimir Potapov. You need economies of scale to make this business work, he comments. Potapov and VTB also see a realistic chance that the state will finally liberalize pension management rules not to help asset managers, but to enable pension funds to play their natural role of providing long-term money for equities and other instruments whose year-to-year performance can be volatile. VTB is not alone in its optimism. Troikas Rakhmanov says he spends one quarter of his time lobbying for regulatory reform, focusing on a pensions working group drawn from the ministries of Finance, Economic Development and Social Protection. We are sure that they listen to our recommendations, he says. Danilenko of TKB BNP goes so far as to predict the timing of a bureaucratic catharsis. Pension system reform is one of the top two or three items on the agenda of this government, he says. It will happen very soon, within the next six months. Not everyone agrees, of course. Alfa is focusing instead on luring back funds from rich Russian individuals, who by all accounts moved billions abroad during the relatively tense period preceding Putins reelection in March. (Alfa Groups chairman, Mikhail Fridman, is himself Russias sixth-richest man, with a fortune clocked by Forbes at $13.4 billion.) Capital flight in the first quarter of this year came to $34 billion, or nearly 2 percent of the countrys gross domestic product, according to Russias central bank, then dropped to $9.5 billion in the April-June quarter. Alfa has made headway among the nouveau riche with innovative fixed-income products based on the corporate bond market in Russia and neighboring ex-Soviet countries, Bragin says. Although Russian stocks have been volatile since the 2008 crisis, the bond market has come into its own. Dozens of companies, finding the gates of the Eurobond market slammed shut, have refinanced at home. Investors in ruble bonds now have a choice of some 500 issuers, from giant state companies like natural-gas monopoly Gazprom to junk bond credits yielding well into double digits. The central bank has fueled the markets growth by accepting corporate paper as collateral for Lombard credits, Bragin explains. Alfa doesnt use these state credits, but it has developed similar repo-type instruments to generate leverage and juice up fixed-income portfolios for its high-net-worth clients. Such tactics work well today, when the investing mantras are safety and wealth preservation. VTBs Potapov says the steep losses of the crisis years have turned swashbuckling Russian investors into cautious rentiers. Before 2008 if you mentioned risk management, people would say, What are you talking about? he explains. Now they want products that will preserve value for two or three years. For Prosperity, the battered intermediary of global capital in Russia, the right response to lean times is simply to stay the course. The manager has no plans to alter its exclusive focus on long-only, all-equity country funds, says Mattias Westman, Prosperitys Swedish-born founding partner. Putins bad press has obscured big management and governance improvements in Russias corporate sector since 2008, he contends. The average profitability of Prosperitys shareholdings is more than double its precrisis peak, Westman says: Companies are being better run to the point of being unrecognizable.