Russia cannot be ignored

Liam Halligan is a one-man cheering section for the investment opportunity in Russia. As a former Economist and Financial Times correspondent in Moscow, Halligan is far from naive or gullible. His views on the Russian economy are firmly based on economic facts, not fictions. Halligan is chief economist and a founding board member of Prosperity Capital Management, set up in 1996 to focus purely on Russian and the former soviet republics and now with $2.8 billion assets under management (AUM)

Its client base is purely non-Russian, made up of sovereign wealth funds, family offices, private banks, insurance and pension companies and endowments. PCM is a purely long only business, "never shorting, no derivatives and no leverage. That's why we survived. We've never gated or imposed any redemption restrictions. We have weekly liquidity on one fund and monthly liquidity on the other," says Halligan.

PCM is an active investor. It sits on the boards of 40% of its assets.

"The main game in Russia is not politics, not macro economics," declares Halligan. "The problem is corporate governance." To know what companies are doing and how they do it, Halligan says an investor needs to sit on the board.

As an active investor PCM sits on the boards of 40% of its assets. It is also not shy of going to court (and most often winning) to force companies in which it invests to behave properly. This is made easier by the fact that the entire team at PCM are fluent in Russian and aside from Halligan are Russian nationals.

Although corporate governance is a problem, as a market Russia cannot be ignored says Halligan. "It is not the largest of the BRICs (Brazil, Russia, India, China) but it is wealthier per head than China and India. It is the largest retail market in Europe, the biggest car and white products market. It is the eighth largest economy in the world."

The investment approach of the company is a long-only, bottom-up buy and hold. Halligan says the extensive contact network the company has built up and its over 500 company visits a year keep it close to the action. He believes successful investing is based on an analysis of fundamental value, understanding and monitoring companies and standing by your choices.

At present the company runs three main funds. The flagship Russian Prosperity Fund was launched in 1996 and has $500 million AUM. It offers weekly liquidity and invests in blue chip mid-cap companies. The average annual return is 20%.

Prosperity Quest Fund is a special situations fund launched in 1999 and now with $125 million AUM. Its focus is on event-driven and restructuring focusing on second-tier companies. It offers monthly liquidity and also has had an average 20% a year return.

The newest fund is Prosperity Quest II which is focusing on distressed and restructuring of companies that are listed or private holdings. This is a closed-ended fund expected to launch this year.

In general Halligan says Russia is "an enormous untapped market". He believes it is in much better shape to withstand any ups and downs of the world economy. On a macro economic level he points to the extremely low economy-wide leverage and the fact Russia holds the world's third largest foreign exchange reserves.

The rouble is stable and he believes the Medvedev/Putin "double act" offers continuity and stability. Despite negative press, Halligan says reforms are continuing, pointing to the privatisation programme, specifically in the power and railway sectors.

Banks are consolidating and institutional reform is continuing. With a low 13% income tax and corporate tax at only 24% he believes the environment for businesses is a good one.