A Switzerland-based investment banking firm announced Wednesday the launch of a new $50 million Russia fund that will offer retail investors their first real chance to take a ride in the country's fledgling stock market.
Eastern Capital Fund Limited, set up in the British Virgin Islands by Geneva-based Connor & Associates S.A., began accepting investments of $10,000 and up on Nov. 1, and plans to have $50 million fully invested in Russian equities by early next year, according to Benoit Mounier, one of the fund's two Moscow-based managers.
The open-ended fund's $10,000 minimum represents the first time that a diversified portfolio of Russian equities has become easily accessible to individual investors. Russian brokers, faced with an array of costly bureaucratic barriers, are rarely willing to make single trades of less than $20,000, while the larger brokerage houses have minimums of $250,000.
"We set a $10,000 minimum to attract both an institutional and retail investor base," said Mounier. "The retail side is mainly sophisticated investors who are interested in the huge potential of the Russian market."
Russian stocks have been in the doldrums since early last month, when hedge funds pulled out to reap profits and restructure their portfolios. Foreign investment in the market has also been hindered by archaic registration and settlement systems and a lack of custodial services, in which a bank or other financial institution keeps custody of stock certificates on behalf of investors and guarantees ownership.
Mounier, however, believes that a more civilized and lucrative market is just around the corner, making now the right time to invest.
"In the next few months, I think that adequate custodial services will be available on the market," he said. "When that happens, big foreign investors will come into the market, which will cause it to explode.
"In my opinion, the average share price of good companies in Russia will quadruple in two years."
Western banks Credit Suisse, Chase Manhattan and Citibank are all working on the problem of custodial services, while the Deposit Clearing Company -- an association of Russian brokerages advised by Deloitte & Touch and KPMG Peat Marwick -- is developing a computerized system to replace the country's archaic, paper-based registration and settlements.
Mounier, who has been working in the Russian market since January, said that Eastern will apply a two-pronged investment strategy, buying relatively liquid stock in "blue-chip" companies such as LUKoil, Rostelekom and United Energy Systems for short-term gains, and investing in lesser-known companies in sectors such as construction, utilities and metallurgy for longer-term gains.
By all accounts, shares in Russia's privatized companies are still a bargain. According to Eastern's prospectus, the average Russian oil company is presently valued at between 10 and 40 cents per barrel of proven reserves, compared to $5 per barrel for North American oil companies; paper and pulp companies go for between $10 and $30 per ton of pulp, compared to $950 per ton in Western Europe.
The Russian market's potential has attracted a number of new stock funds this year. Emerging market giant Templeton has announced plans to set up a Russian country fund worth between $300 million and $400 million, and Fleming Investment Management has raised $55 million for a closed-end Russia fund. Other funds active in Russia include Pioneer, Framlington, Warburg Securities and Bering Asset Management.
Mounier said that during the initial offering period from Nov. 1 to Dec. 1, Eastern will waive front-end placement fees, which would otherwise be about 2 percent of the given investment. The fund charges an annual management fee of 1.25 percent of net asset valuation, as well as 20 percent of net asset growth if that growth exceeds 8 percent a year.
Eastern Capital Fund Limited, set up in the British Virgin Islands by Geneva-based Connor & Associates S.A., began accepting investments of $10,000 and up on Nov. 1, and plans to have $50 million fully invested in Russian equities by early next year, according to Benoit Mounier, one of the fund's two Moscow-based managers.
The open-ended fund's $10,000 minimum represents the first time that a diversified portfolio of Russian equities has become easily accessible to individual investors. Russian brokers, faced with an array of costly bureaucratic barriers, are rarely willing to make single trades of less than $20,000, while the larger brokerage houses have minimums of $250,000.
"We set a $10,000 minimum to attract both an institutional and retail investor base," said Mounier. "The retail side is mainly sophisticated investors who are interested in the huge potential of the Russian market."
Russian stocks have been in the doldrums since early last month, when hedge funds pulled out to reap profits and restructure their portfolios. Foreign investment in the market has also been hindered by archaic registration and settlement systems and a lack of custodial services, in which a bank or other financial institution keeps custody of stock certificates on behalf of investors and guarantees ownership.
Mounier, however, believes that a more civilized and lucrative market is just around the corner, making now the right time to invest.
"In the next few months, I think that adequate custodial services will be available on the market," he said. "When that happens, big foreign investors will come into the market, which will cause it to explode.
"In my opinion, the average share price of good companies in Russia will quadruple in two years."
Western banks Credit Suisse, Chase Manhattan and Citibank are all working on the problem of custodial services, while the Deposit Clearing Company -- an association of Russian brokerages advised by Deloitte & Touch and KPMG Peat Marwick -- is developing a computerized system to replace the country's archaic, paper-based registration and settlements.
Mounier, who has been working in the Russian market since January, said that Eastern will apply a two-pronged investment strategy, buying relatively liquid stock in "blue-chip" companies such as LUKoil, Rostelekom and United Energy Systems for short-term gains, and investing in lesser-known companies in sectors such as construction, utilities and metallurgy for longer-term gains.
By all accounts, shares in Russia's privatized companies are still a bargain. According to Eastern's prospectus, the average Russian oil company is presently valued at between 10 and 40 cents per barrel of proven reserves, compared to $5 per barrel for North American oil companies; paper and pulp companies go for between $10 and $30 per ton of pulp, compared to $950 per ton in Western Europe.
The Russian market's potential has attracted a number of new stock funds this year. Emerging market giant Templeton has announced plans to set up a Russian country fund worth between $300 million and $400 million, and Fleming Investment Management has raised $55 million for a closed-end Russia fund. Other funds active in Russia include Pioneer, Framlington, Warburg Securities and Bering Asset Management.
Mounier said that during the initial offering period from Nov. 1 to Dec. 1, Eastern will waive front-end placement fees, which would otherwise be about 2 percent of the given investment. The fund charges an annual management fee of 1.25 percent of net asset valuation, as well as 20 percent of net asset growth if that growth exceeds 8 percent a year.
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