Q&A: Hedge Fund Manager Michael Kart Says Investors Shouldn’t Fear Russian Market

Mar 24 2010 | 9:04am ET

Michael Kart is a managing partner and fund manager at Marshall Spectrum, a Moscow-based emerging markets equity manager founded in 2009 and specializing in Russia and the Commonwealth of Independent States (CIS).

Marshall Spectrum has over $75 million in assets under management across two funds – the Spectrum CIS Value Fund, a long-only strategy that achieved a net return of 134.5% in 2009; and the Spectrum Russian Phoenix Fund, a long/short equity fund that generated a net return of 50.4% in its first nine months of trading in 2009.

Kart recently spoke with FINalternatives senior reporter Mary Campbell from Moscow, telling her why investors should not fear the Russian market.

FINalternatives: Russia and the CIS is a huge territory, what size investment team do you have?

Michael Kart: Well, our team is relatively small – we have nine full-time employees – [but] we also have a private equity investor in the firm, at the management level, which is called Marshall Capital Partners. We share offices and we have access to their analytical personnel – so we have two analysts which are shared by two companies.

Where are your clients located?

Well, our traditional market is Europe. That’s the market to which we are very close and where we have already quite an established footprint, a certain track record, and a certain reputation. And the majority, if not 100% of our investors, are from Europe.

Do you find clients are nervous about investing in Russia?

Well, you know, [first] a brief history – in 2008 there were a couple of events that were not related to the global financial crisis that frightened quite a lot of investors from the market ...you probably  know all those issues with regard to TNK BP [a joint venture between BP and four Russian billionaires in which the Russian government has been seen to be favoring the Russian partners], then this Mechel case [shares in Mechel, a coal mining and steel company, plunged almost 38% on the NYSE after Russian PM Vladimir Putin complained that the company was charging its domestic customers more than to its foreign ones] and, in addition to that, there was this war in Georgia. All these events were pretty scary and forced some people to redeem.

And then the [financial] crisis came and basically a new wave of selling hit the market and, as it turned out, a lot of Russian business owners and investors were highly leveraged and that enhanced the selling pressure and [the Russian stock market] …lost almost 75% in 2008. And all that, of course, frightened the general investor or dampened the general investor sentiment towards Russia and it hasn’t rebuilt yet. Right now investors remain rather hesitant to come back. Some of them have come back; some of them have not redeemed and have added, and maintained a certain level of trust in the country and in the markets but quite a lot of people have exited the country, have exited the equity markets, and have not returned yet.

From your perspective, though, Russia remains a good investment. What do you tell people to encourage them to return to the market?

Well, definitely, because we think all these fears with regard to political stability in the country, with regard to the relationship between politics and business are quite exaggerated. Business and politics are aligned in their interests in Russia and, from a valuations point of view, we see quite substantial discounts to other emerging markets and other developed markets. And we urge our investors to increase their weight in Russia [because] it’s not so beloved, and it’s probably good timing in terms of being a bit contrarian to the general market.

I read an interview with a Russian investment banker who said if he were advising a friend about investing in Russia, he’d tell him to avoid the oil and gas sectors – that these are the most prone to government interference – but that other sectors are safe. Is there any truth in that?

Yes, to some extent, that’s correct. I mean, if you look at the oil and gas sector, it trades probably with the highest discounts to its emerging market peers and that is partly explained by the general absence of investors in that particular field. People are scared of the tax regime, they feel that you can play the rise in oil differently – not through the Russian oil majors, [where] the taxes reduce all the benefits of rising oil [prices] quite significantly.

Marshall Spectrum targets sectors driven by domestic demand – areas like telecommunications and consumer goods – can you discuss the thinking behind this strategy?

First of all, we feel that there is strong growth potential for consumption in the country. These markets are relatively new markets in Russia and basically, businesses are built from scratch and you are dealing with non-state owned companies…private businesses that are developed by private managers who are business owners, and their interests are aligned with the interests of investors. And it’s probably the safer way to invest long-term in Russia. The markets are not very penetrated yet, and, again, there is huge growth potential across various sectors.

We also like sectors like power utilities or telecoms which are undergoing … restructuring. Telecoms is being restructured. There are quite a few regional telecom companies where the interests of minority shareholders are going to be swapped into a big company called Rostelecom, and that’s quite an interesting investment opportunity for the next 12 to 16 months.  And besides that, power utilities are extremely cheap in Russia, based on their asset multiples, and we feel that this a good value play over the long-run, as electricity prices are going to be liberalized completely as of 2012 and basically we’re seeing rising consumption. The whole sector needs to be overhauled and there is a huge potential for investment.

Your funds also target the rest of the CIS – is there any one country or sector you’re particularly interested in?

Well, if we talk about CIS, we mainly focus on three countries: Russia, Ukraine, and Kazakhstan.  Outside of those three, we also have investments in Georgia and Turkmenistan. We travel quite extensively through the regions and basically we are always seeking new investment opportunities outside of these five countries. So, we travel to Belarus, to Armenia, to Uzbekistan. But we feel…those countries still do not fit into a liquid investment like the funds that we manage. So if we were to invest there (I mean in countries like Uzbekistan and Belarus) that would probably be more a private equity investment rather than an investment through one of the existing funds.  But …we have no specific sector preference [in the CIS], so we look across various sectors, and again, we look at liquidity, since the funds are traded frequently.

Can you tell me about your investments in Kazakhstan?

You know, we like Kazakhstan for its proximity to China and of course the country is very much resource rich – it has coking coal, iron ore, copper, titanium, and all the other commodities, and of course oil, and it is very close to China so the transportation costs are very small compared to other countries. And basically, that’s the major advantage of that region and we focus our investments in Kazakhstan primarily in these resource-oriented companies, like mining and … oil.


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