FOREIGNERS WITH PORTFOLIO
All funds invested od in Russia can be divided into three groups: global funds (they invest in developing markets in the whole world), European funds (they invest only in developing markets of Central and Eastern Europe) and specialized Russian funds funds for the NIS)
In the beginning of 1997 the gross assets in Russia of 162 funds of all the three types, according to Micropal, were about 2.5 bln dollars. The Micropal Company seems to be the only company in the world which systematically collects information on investment funds of the world. It became the recorder de facto for 28 thousand funds which regularly send Micropal their reports, information on the size of assets, etc. The Micropal data cover at least 80% of portfolio funds even in such regions with quite a low transparency as, for example, Russia.
Taking into consideration that the data are not complete, the assets of foreign portfolio institutional investors can be estimated as 3 bln dollars. These investments are very moderate now. Let us suppose that foreigners buy only highly liquid shares. At the beginning of the year (1997) their summary cost was about 25 bln dollars. If we exclude government blocks of shares and blocks of big long-term investors, then it will become clear that the real sum of these shares on the market is about 9 bln dollars. Thus, foreign investment funds control not more than one third of shares circulating on the market.
There is an apprehension that the domination of foreigners will cause a crisis as in Mexico (when the majority of investors left, the market collapsed), commented Boris Jordan, head of the Renaissance Capital, one of the largest Russian investment companies. Now the dynamics of quotations is mostly determined by the money flow from abroad.
Still, the comparison with Mexico is not quite correct. Unlike Mexico, big funds have not yet come to Russia - either reciprocal (pool) funds or pension funds. Therefore the movement of the foreign capital cannot lead to such a serious consequence as happened there: the capital is not large enough.
As for the futures, by the end of this year or early next year the money of home investors will enter the share market.But the home investors are not in a stable position.
As soon as the profitability of government short term bonds exceeds 25%, they instantly put all their money in to government securities. When the profitability is in the range 20-25% investors hesitate and think.
But as soon profitability drops to less than 20% per year, which is possible, given the plans of the government and the Central Bank, a mass purchase of shares will result. This flow of money may well counter-balance western investments.
Global funds make up 48.3% of foreign portfolio investments, specialized Russian funds are 42.68% and only 8.9% investment funds are in the developing market of Europe. The investments in Russia in the assets of global funds increased from 0.7% at the beginning of 1995 to almost 3% in early 1997. This approximately corresponds to the share of capitalization of the home share market in the whole capitalization of developing markets (according to the International Financial Corporation), therefore a sudden increase of Russia's share does not seem likely.
An average investment size of a fund in Russia is usually 15 mln dollars.
High concentration is typical of investment funds, 93% of assets in Russia are controlled by only 10 managing companies. There are only about 60 of them altogether.
Table I shows managing companies which manage most assets in Russia.
Table 1.Managing companies who directed most assets to Russia.
Compared with 25-35% per year provided by the rapidly growing American market, investments in the developing markets looked weak, to put it mildly. Their average profitability in 1996 was a little more than 10%, while during the last three years these investments, in their aggregate, were unprofitable (the losses reached 5% on average).
Table 2.The most profitable funds with the orientation to Russia (as to January 31, 1997)
Here are the opinions of some of the heads of foreign funds about the situation influencing Russia's investment market, about the work of their companies in 1996, and about the perspectives of 1997.
Fleming is the unquestionable leader. Steven Bates, Director of Fleming International Management Ltd: "The company invests the assets of its funds mainly in the blue counters". But still sometimes Fleming risks and buys the shares of companies which are not known or small. But it is a negligible part of its investments. Last year investments in Russia gave quite good profits and there is reason to believe that in the future their effectiveness will not be lower. So, in 1997 we are planning to add to the existing funds another fund of about 50 mln dollars. The investors are pleased that political risks in Russia have become a few times lower than in 1995-1996. However, economic risks come to the forefront now.
Julian Mayo, director of one of the funds of the Regent Pacific Corporate Finance Ltd:
Says Gor Nakhapetyan, executive director of "Troika Dialog".
Taken from the Expert magazine