Renaissance Investment Management

Looking to be in the vanguard of asset management in frontier markets

SIMON KERR
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Renaissance Group was founded in Russia by investment bankers in 1995. It is an independent group of investment banking, asset and wealth management, merchant banking, and consumer finance companies specialising in high-opportunity emerging markets. Renaissance Capital, the investment banking unit, has been a conspicuous local success story in a territory which has seen foreign investment banks come and go and come again in the period since. Renaissance Capital has been responsible for 40% of the IPOs in the Russian markets, and in a market that is expected to see IPO volumes double this year (to around $22 billion) that is good evidence of the extent that the firm is well connected in Russian business circles. Asset management subsidiary Renaissance Investment Management is in only its fifth year of existence, and has gathered $4.5 billion of assets (as at July 2007 see Fig.1), and has approximately 180 staff. It is already Russia's largest non-captive asset manager.

Managing and maintaining such growth rates can be a challenge to management in an operating environment that is in some ways very developed and in others very immature. The Hedge Fund Journal went to the 7th floor headquarters of Renaissance Investment Management in an anonymous Moscow office block to find out directly how the local business is coming along, and why the company is so excited about its expansion overseas.

Integrity in frontier markets

Daniel Broby is the recently installed Chief Investment Officer of Renaissance Investment Management: "I'm responsible for people, process and performance across the investment factory. We have asset management centres of competence in Moscow and London, and analytical capability on the ground in Kiev. We are looking to have analytical capability in Lagos and Nairobi next year," he explains. "I bought into the Renaissance Investment Management (RIM) vision, and that vision is very different from what you see in the traditional long only business. We want to be in high-return space, and in frontier markets and products within that high-return space."

The CIO sees RIM as at the bottom of the 's' curve, believing what has been achieved to date is just the start. "The explosive growth will continue," he states in a matter-of- fact way. "I believe in the scalability of what we have: we are only constrained by the scope of our product portfolio." Broby is confident to this degree because he has seen this growth pattern before in a previous firm. "There is an immense similarity in the stage we are in the business, though we can and do get products to market quicker than I have seen elsewhere." q

"The market we are based in is in a very strong trend," Broby expounds. "This is a very good time for capital markets in Russia for a number of reasons. We believe in the peak oil theory, and Russia is a prime beneficiary of the commodity super-cycle. When you look at the location of global oil and gas reserves, Russia is well placed. Part of our vision of where we are going as a firm is that the globalisation of resources is going to drive markets." He continues, warming to his theme, "We strongly believe in the asset classes we invest in, and you have to be passionate about what you are invested in, and where you are invested. But I'm not denying that the markets in which we deal are difficult. This makes due diligence critical, and the bottom-up elements of the investment processes are core to what we do. For our approach you have to look to become the trusted local partner. That's why we intend to have people on the ground in Lagos and Nairobi, so we can achieve that status in Sub-Saharan Africa."

The CIO says that their entire business model is based upon the product delivering to the client what they want, and that RIM builds products around individual portfolio managers and the markets that they are interested in. Further, every element of the business is designed to be scalable. This is done by putting in scalable systems from the start, and RIM benefits from being a new business in that it doesn't have legacy issues. "I can go to any of our offices anywhere and sit down and use the systems there. Ten years ago that wouldn't have been the case for any asset management firm anywhere," says Broby.

According to the Renaissance CIO, integrity is a core competitive advantage, and that is reflected in the strong compliance culture at the firm that has been built on best practice. In the case of Renaissance the operating standards required by the UK's Financial Services Authority are viewed as the highest experienced, so that standard is applied across RIM. "We have to build faith and trust in what we are doing here, and so we take issues like money laundering very seriously, to the extent that we turn clients away," says Broby. He says that when it comes to client servicing RIM have to give what is appropriate for the client base.
 

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Staffing is not an issue for the management team at Renaissance. The CIO laughs: "we are well known for getting the cv of everyone operating in Russian financial markets, it's such a well-regarded name. We employ the best talent we can get in Russia. In fact often we bring them back to Russia. We are able to attract Western-educated Russians with Western capital markets experience that have been working elsewhere and want to come back to Moscow."

The next phase of development for RIM is filling out the palette of products. CIO Broby says "We have learned how to generate returns from the bottom up, and we intend to translate that experience to other frontier markets. As investors you get alpha in places where risk is mis-perceived, and that is what we are very good at. Russia has been mis-perceived by foreign investors and is still mis-perceived by most managers. It gives an institutional advantage in the way that we perceive risk and how to diversify it in difficult market places with low liquidity."

Russia Debt Fund – invests in growth

An example of investment strategy based on the bottom-up is that used to manage the Renaissance Russia Debt Fund. The Fund is managed by Elena Kolchina and her small team, and it aims to deliver long-term capital growth through investments in municipal, sovereign and corporate fixed-income instruments of issuers whose principal operations are located in Russia and the CIS. If this were a fund in a developed economy the manager would talk about varying risk to play the phases of the credit cycle and about managing duration versus competitors. For Russian funds the manager expects "to drive returns from a decline in interest rates in Russia and on the back of an on-going improvement in the Russian economy and credit quality of Russian companies" according to fund literature. This secular thrust along with others that arise because Russian companies are increasingly turning to public markets for financing make the investment management focus very different from bond managers based in Zurich, Frankfurt or London.

"We focus on credit analysis and the search for growth stories," summarises Senior Fixed Income Portfolio Manager Evgenij Minkin, "and currency is an important contributor to performance." Over the last year he estimates that of the total return of around 12% perhaps a quarter to a third has come from currency appreciation for this US$-denominated fund. As Fig.2 shows, the denomination of securities held is a key decision for Kolchina and Minkin. Rouble (RUR) denominated bonds have been over-weighted through the history of the fund's 18-month life.

"The Rouble is managed by the Russian central bank on a basket basis, so occasionally we have to hedge exposures on a tactical basis," says Minkin. "For example we correctly forecast that US$ would retreat from 1.38 to the €, and indeed it went to 1.35, and the Rouble declined too. We hedged this with Eurodollar futures. We tend to hedge when the Rouble outlook on a two-month view is not as strong. For this we can also use an NDF (non deliverable forward) to play the currency without being involved in the local market."

 

In looking for "growth stories" the Renaissance bond managers look for low-leveraged growing companies. Usually they are mostly domestic demand stories – the companies likely to benefit from booming consumer demand including consumer goods companies and retailers. "I believe in the de-coupling theory (endogenous growth making emerging market economies becoming less reliant on G7 growth). This is increasingly a domestic story," says Minkin. Another area looking more positive is agriculture. This is partly driven by the recent creation of a state owned Agri-Bank that was being capitalised by the government in an effort to boost the growth of agriculture. The non-energy sectors that excite the equity managers at Renaissance, growth areas like infrastructure and utilities, are difficult for the fixed income managers to like because heavy bond issuance is expected.

* Credit analysis

Credit analysis has been a growing part of bond portfolio management across the developed world over the last decade. The Renaissance fixed income team has a focus on it in a different way from their developed market counterparts. The US$60 billion investment universe may be 580 corporate bonds in Russian, plus 200 or so Municipal Bonds, but three quarters of Russian companies do not have financial statements compiled to internationally recognised accounting standards and rating agencies have not penetrated very deep down the rankings of Russian companies. This means that there can be a good return to original credit analysis in the corporate bond market in Russia.

Structurally the financial markets deal with this uncertainty in a similar way to the way they coped with uncertainty about Japanese corporate funding in the early to mid 1990's through embedded put options (a re-settable element). "Typically we see 3-year bonds with a put-option for a re-set after a year," says the Senior PM. "The majority of domestic bonds are in the second and third tier of credit quality. They would have a duration of a year to 18- months, and have put options in 1-1.5 years." This higher yield corporate bond portion of the fund can amount to up to 50% of the fund.

Renaissance themselves cope with the demands of the market by undertaking a lot of company visits. So there is a large bottom-up element to the process in which each member of the team participates, though there is a dedicated and highly regarded credit analyst.

"We spend a lot of time meeting company executives and the relationship banks for the companies that have upcoming puts. The corporate bond may have a 10% coupon and be trading at 97 3-months before the put. We then assess the company's ability to roll over the financing and put a probability on the coupon they may have to pay. When we like what we hear in a meeting we add to positions. If we get it right we can pick up a couple of points and benefit from a good carry in the meantime."

Before issuing Eurobonds, many small- and mid sized Russian issuers may access the debt capital markets through Credit-Linked Notes (CLN's) or Loan Participation Notes (LPN's), in which the Renaissance Russia Debt fund may also invest. The fund may employ up to 30% leverage, however it is rarely used.

The workflow for the team is constant as there are a couple of new issuers a month in the market. These are companies that are new to capital markets, and so investors can sometimes benefit from mis pricings when the companies are not broadly well understood. "Over the last couple of years new issuance has grown a lot, and importantly for us so has the issue size. We can't be more than 10% of an issue so it helps that we now see $40-60 million issues coming to market," explains Minkin.

* Correction tactics

The recent setbacks in credit-related markets gave an opportunity to assess the maturity of the Russian debt markets and the resilience of the Renaissance Russian Debt Fund within it. In the first stage of the correction emerging market Eurobonds sold off early in August, and then domestic bonds followed. The manager notes that "liquidity shrank and credit spreads widened: Russian sovereign debt has been stable at near 150-over Treasuries; a corporate spread of 200-over went out to 300. Dealing spreads also widened: dealing spreads of 50 went to 100 (and in the worst cases to a dealing spread of 200), and up to 5-6 percentage points in price terms."

The response of the bond team was to improve the credit quality by reducing the weaker credits in the fund. They took the view that smaller companies will find refinancing more difficult, which looks to have been spot on. The managers increased cash to the top of the range (about 6% in cash), and increased the weight of short-term issues with maturities less than nine months. This cut duration to only a year, and the running yield was around 14%. If this sounds very high it should be borne in mind that bank deposits can earn 10% in Russia, and so there is an element of managing for absolute return in running money in all forms in Russia. According to the manager letter for August "the liquidation of many positions before the sell-off helped the Fund to end the month almost flat".

* Liquidity analysis

The Renaissance bond team devotes time to analysis of liquidity flows, and their recent work tells them that liquidity has not materially declined. According to their analysis the composition of flows to emerging markets has changed, and is more diversified than previously: American and European capital as before, but now also Asia is a source of capital and some comes from other emerging markets. For example, Asian investors have shown interest in Russian CLNs and new issues recently. "It is not like before when a few London hedge funds or American mutual funds totally dominated flows," states Minkin.

In addition, domestic sources of liquidity are becoming more important to the Russian markets. The current account surplus allows accumulation of capital within Russia. There is a growing pool of pension fund assets, the Russian stabilisation fund (funded from oil exports, now funding a stabilisation fund set at 10% of GDP), and currency reserves of US$420 billion.

Dedicated Russianfunds and emerging market funds have been sitting on cash, and have stayed on the sidelines, waiting for the right entry point according to Minkin. "We have seen some outflows from the Russian markets, but we think the largest part of it has taken place, and funds focused on Russia see the value in the Russian bond markets at the moment," he says. These investors have been waiting for the dust to settle in markets, and specifically waiting for the Fed meeting in September. According to the view at Renaissance a cautious return of investors to markets has been seen and there have been some small flows back in. "As markets normalise more capital will flow back," says bond manager Minkin.

Looking out further, the Ukrainian born Minkin sees potential for investing more than the current 2% of the fund in the bonds of companies beyond Russia. "We have started looking at the market for Ukrainian local bonds. I'd say that it is about 7 years behind Russia," he postulates. "Ukrainian companies will be increasingly looking to public markets instead of financing via bank loans. Of course the issues are smaller, but they will grow." He also sees potential to add exposure to other former Soviet Republics such as Kazakhstan, Uzbekistan and Turkmenistan in the course of time.

Minkin sums up the offering. "This fund gives access to Russian corporate credit. To date that kind of exposure has appealed mostly to Russian investors, but that may be changing. Since April, when the fund could first show a 1-year track record (see Fig.3), its assets have grown 5-fold and we expect growth to continue."

A Russian equity fund

The Russia Renaissance Fund, a Russian equity fund managed by RIM, has not long completed a three year track record. It is a long-biased long/short equity fund which employs bottom-up analysis like the bond funds, but also has significant top-down elements.
 

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The equity team at RIM consists of three portfolio managers (soon to be joined by a fourth) and five analysts. Portfolio management responsibility for the Russia Renaissance Fund is shared between Head of Equity Group Andrey Ivanov, CFA, ACCA and Alexander Krapivko MBA, Senior Portfolio Manager in the team. The fund also draws on the derivative specialist in the team, whose job is to listen to the investment plays the managers want to make and devise two or three different ways for them to consider how to implement them best.

Krapivko explains about the use of derivatives: "We use derivatives in several ways. We use shorts and derivatives to limit major drawdown risk as you often see, but we also use them to put on relative value plays, and manage the portfolios more efficiently. Up to 25% of the fund may be in derivatives." If this sounds like a lot, it reflects the growth of volume in the markets. "Equity derivatives trade about a third of the volume of the underlying in Russian blue-chip equities," explains Krapivko. "You can do a $40-50 million trade in a few minutes here." These may not be listed derivatives though – according to Renaissance the OTC markets are more developed than the exchange-traded for leading Russian equities, and one can expect keen pricing from OTC counterparties. Derivatives are not used for outright leverage – although the Russia Renaissance Fund can use leverage it has not been used much if at all to date.

Rather like the banking sector used to be for Japanese equity portfolio managers, the significance of energy companies to the Russian capital markets make them a particular focus. For RIM this is played in several different ways in the Russia Renaissance Fund. As Fig.4 shows, the fund has been managed with an under-weighting in gas and oil for just about its whole life. "We like to take a directional view on commodity prices", explains Krapivko, "and that can result in a very different weighting in the fund compared to the index. We can play our view in a hedged fashion. So we have put on a long call spread on oil futures versus a put spread on Lukoil."

He continues: "At the moment we prefer the gas industry to oil, as we see it benefiting because net backs are high and, unlike Russian oil companies, they do not have a tax drag. We were underweight in Gazprom from January to August this year, but have now gone overweight. There is also a domestic kicker in this story, as over time domestic gas prices will converge on international traded gas prices."

 

RIM has also researched the oil service sector in detail. According to their analysis at below US$55 a barrel international oil companies can't justify more cap spending for development. The Russian industry is in a different state. Up to the year 2000 the oil industry in Russia enjoyed the benefit of Soviet era exploration, but now Russian oil companies have to explore and develop afresh on a commercial basis. As such they have the choice of paying the likes of Schlumberger big fees or develop a Russian solution, including more internal capability in the E&P companies. So far the high quality international oil service companies have been carrying out high-margin low volume work in Russia. A new domestic alternative is Integra. This newly listed company has been a consolidator of the domestic oil service industry, and it has been able to cope with the basic servicing needs of Russian oil companies. "We bought it on the IPO:" says Krapivko, a former trader in petroleum derivatives, "we got our 15% gain then got out. The question for us is whether Integra can add more value for the Russian oil companies. We don't know the answer to that yet."

Asset management in London

To complement the investment management taking place in Moscow, RIM has an office in London. The Pall Mall office carries out client servicing and marketing for the various funds, but CIO Daniel Broby also sits opposite Jack Arnoff and Jury Ostrowsky, who joined from Pictet Asset Management last year.

The pair launched the US$40m Renaissance Emerging Europe Value Fund last December, and it has done well since. The long/short equity fund is up 9.3% in the first eight months of the year. "They have done a fantastic job," enthuses Broby, "and they have read the markets really well this year. They were ready for the disturbed markets of July and August when many funds stuttered." The fund was up 3.5% in July and 0.1% in August.

Not that the style of the Emerging Europe Value Fund is top-down. Whilst the managers like the economic growth prospects of Eastern Europe, Russia and Turkey the returns come more from the selection of the 50 or so equity positions, which are protected by judicious hedging. The fund also shorts for profit. Like the rest of the investment professionals at RIM, Arnoff and Ostrowsky expect the fund to benefit from a consumer boom in emerging Europe. Positions are selected mostly on the basis of relative value, with the aim of identifying mis-pricings and value gaps in individual securities. This is consistent with the holding period of six months or so. The managers have a preference for the presence of a catalyst ranging from M&A and restructuring activity to governance, regulatory, political and shareholder changes.

In the course of time it is expected that the London office of RIM will be the company's centre of international (non-Russian) investment.

No bears in Russia

According to the Senior Portfolio Manager taking relative bets within the portfolio has become more important this year, as the market has traded in a wide range. "We like to trade relative value in a sector, says Krapivko. "Takethe retail sector – we have a good analyst there. We identified a stock with a 35% growth rate, but with a high p/e. We went long a better value retailer and shorted that over-valued retailer when we were able to identify a couple of triggers for it to fall. We also play GDRs against locally listed stocks. So for example when the GDRs of Norisk Nickel traded at only a 1% premium to the local shares in early September we went long the GDRs and shorted the local shares. A couple of weeks on the spread traded out to 3-4% and we closed for a profit." Outright shorts are rare but the fund did short telecom companies this year when they were very rich in valuation terms.

Krapivko has been encouraged by recent market action. A new positive development was that when the market has dipped this year retail investors remained interested in the market. "We had flows into our open-ended funds in the period when the market went to the bottom end of its recent range," he says, "and I can understand why. The Russian story is becoming more compelling for me. Fundamentally we are one of the most attractive markets in the world right now – and the likes of Morgan Stanley and UBS all rate it at their highest ratings. The domestic Russian story is still one of the most attractive investment stories in the world, and so the market now has two cornerstones – domestic consumer plays and an energy story. Overseas investors are more afraid of the political factor in Russian investments than domestic ones, but I believe we have got a compelling case for 30% upside on a one-year horizon."

Alternative Products Group

Sergey Bubnov is the Head of the Alternative Products Group at RIM, a unit managing closed ended specialist funds. "The key service we provide to clients is access," he says. "We think that the best opportunities in Russia lie outside the public markets or on the fringes of them, and because of that are inaccessible to most people." He says that Russian markets have old and new elements. The old elements are the energy focused big cap names, and the new economy names in Russia have been established by entrepreneurs in the last 15 years to meet rising consumer demand.

"Very interesting things happen outside the public markets," Bubnov maintains. "Take national utility RAO Unified Energy System. The re-structuring of the power sector was the largest restructuring in the world when it was taken out of the public domain. Then there was massive consolidation within the sector and power sector companies came back to the public markets. Such activity creates liquidity and the opportunity to make money by arbitrage themes in a sector. We invested in the 500 private companies as we believed they would consolidate to 20 to 30 names." Another example is banking in Russia. There are around a thousand banks in the sector that has grown at 50-60% for the last five years, but there are only five listed banks, and liquidity in only two of those. Unsurprisingly then, RIM has a power fund and a banking fund, and also a Pre-IPO Fund.

The ebullient Bubnov continues, "as well as access we provide professional expertise in the sectors, as these funds are actively managed even though they are closed ended vehicles. The funds are listed giving investors secondary market liquidity." Renaissance builds on the success of these specialist sector funds by issuing new tranches – as many as six in the case of the Utilities Fund.

These sector funds, which Renaissance themselves call hedge funds, have hedges in them in various forms. The hedge could be put options or shorts, or an operational hedge. So in the Utility Fund the non-public equity is hedged with put options on a quoted utility equity. For the Pre-IPO Fund all the Shareholder Agreements contained provisions allowing the RIM fund to put the shares back to the treasury of the company or the controlling shareholders of the company at predetermined and profitable levels. In the early stages 75% of the Pre-IPO Fund was hedged in this way. The Bank Fund is about 50% hedged, as is the Utilities Fund. "We get these kinds of terms because we are in exclusive negotiation with the companies. They are not talking to anyone else." Bubnov describes this situation as a proprietary pipeline of business. It arises because of the calibre of the personnel working on the sector funds. For example the banking fund, Renfin Fund, is managed by Marina Chekurova and Sergey Nazarov. Marina Chekurova was a manager of the Agency for Restructuring of Credit Organisations (total assets under management of over $450 million) set up by the Russian Government in 1998 to resolve the financial crisis in the banking sector. Chekurova successfully restructured and sold 21 banks across Russia. For his part Sergey Nazarov has 10 years experience in finance, including more than 5 years at the EBRD where he was responsible for due diligence, financial modelling, valuation and deal structuring for the financial sector in Russia.

When it comes to exiting the positions in the sector funds RIM is opportunistic. "Like private equity we will use a straight sale, or exit through a consolidation, or an IPO," says Bubnov. "We get a lot of potential buyers coming to us because of our investment bank Renaissance Capital. They have such a high profile that there is a spill-over effect on us."

The utilities fund is the most mature of the sector funds, since it is two and a half years into its three year life. In January fund holders will vote on an extension of the life of the fund for an additional year. The holders should be acquiescent as the Utilities Fund is up nearly fourfold over its life, and this year its 45% return compares favourably to a flat Russian equity market return. Around half of the companies in the fund are now quoted and traded; the rest are listed but don't trade. In contrast the Banking Fund is all private companies, and the Pre IPO Fund is somewhere in between in terms of the status of the constituent companies.
 

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Bubnov says he is now looking at the opportunity in distressed for a closed ended alternative fund. "Yes there has been a consumer boom here in Russia, but with that level of growth you will get bad consumer debt and bad corporate debt. We are also launching an infrastructure fund to build on the success of the Utilities Fund. Russia has not spent much money on infrastructure in the last 15 years. It will contain exposure to the power engineering sector, construction material companies, and transport related opportunities. The companies are so small that it is very difficult for investors to get access to liquid investments. Again the key point will be access."

Bubnov himself set up and runs the half-billion dollar Utilities Fund. Given its success, the Renaissance senior management then charged him with finding other well connected professionals to run sector funds. This entrepreneurial streak that seeks to follow the momentum in sectors ripe with opportunity is typical of Renaissance management. Bubnov works in effective joint venture partnerships with his colleagues running the other alternative funds at Renaissance. "My real job is to constantly look for talent, fund managers. I will interview or assess hundreds of people a year and work with one or two. When I meet someone, in the back of my mind I'm thinking do they meet my criteria of deal flow pipeline, ability to hedge, booming business sector, and is the sector inaccessible for clients."

A CEO in a hurry

Andrei Movchan is a man in a hurry; having started RIM from scratch in 2003 he has high expectations. "I'm looking to be running US$6 billion this year, US$10 billion next year. Our goal is to have RIM make a difference to the Renaissance Group. Strategicallywe will do this through good new products and better distribution."

In terms of products Movchan expects to see growth in 'alternative' absolute return or sector funds, that is the specialised vehicles that have a higher value-added. "We also have a tiny bit in property in the CIS – US$100 million. At the moment it could be classified as a microscopic asset class for us, but we see that figure moving to half a billion dollars soon. Selecting and investing in properties is going to be a target area for us," he says in a way that commands belief.

A sector which has lacked attention in Russia over the years is agriculture. "Very locally there is no agriculture near here, says CEO Movchan. "There is little growing if any for 100km around Moscow – there are just cottages and villages. Further out agriculture just serves local needs. You have to bear in mind the historical perspective on this. It was only in 1861 that we had the emancipation of the serfs in Russia that ended slavery. After the October Revolution it was difficult to say who owned the land. After WW2 you weren't allowed to move from the land, so there has not been a history of commercialising crop growing. In fact even now there are no specialised companies: there are no companies that provide animal feed; milk is not picked up for processing, we do not have the infrastructure. In the Ukraine it is different. Agriculture is a long-standing business there, and they want to be part of the EU with all the agricultural support it provides. So the majority of the good agricultural assets are in the Ukraine."

The distribution is to a variety of client types. Although RIM does run mutual funds the retail savings is not large in Russia though there is great potential. CEO Movchan explains: "The domestic retail business is only US$5 billion in total. For comparison, the retail savings market in Poland is ten times as large as the one we have here in Russia." So Renaissance has to take advantage of the savings pools available, and so it has developed a sizeable HNW business. This category can be very demanding and has to be serviced where they are. The Renaissance office in Geneva is part of the wealth management business that tends to serve the ultra-HNW end of the client spectrum, as does the London office to an extent. The administration of offshore business can be carried out in a number of locations where Renaissance has offices, such as Bermuda, the BVI, and Cyprus. Movchan recognises that wealth management is a people intensive activity and resources that business unit appropriately.

"There are some activities where we have just got going," says Movchan. "We have only just started in the use of derivatives in some parts of the business. For example it was only this year that we got involved in our first CDOs." Also slated for development in the near future is an expansion of the distribution capabilities of RIM. "To fulfil our ambitions we need to build a full scale international distribution capability, and we have barely started beyond Russia." However one region of the world is already receiving a lot of attention from the Renaissance Group including RIM, and the surprise is that it is not emerging Asia or emerging Europe, but Africa.

Moscow to Lagos and Nairobi via London

The second opportunity of a lifetime is how some Renaissance staff describe the push by the Renaissance Group to work across the range of its activities in Sub-Saharan Africa (SSA). The investment banking division Renaissance Capital already has a presence of more than 70 people on the ground in the region and will have around one hundred by year end. Movchan has rationalised the strategic thrust for his own division.

"It is in the nature of the asset management business that we take risk for our clients," states the RIM CEO. "Looking back to after the crisis, an institutional investor would have said no to investing in Russia in 1999, and in 2006 they would have said yes, but made no money. We think that as Russia was then, so Africa is now."

Renaissance CIO Broby has seen that some investors looking at Russia see a glass half empty rather than half full. He can see international investors being swayed in an even more biased fashion towards Africa. "There are several ruling mis-perceptions about Africa," he says. "They start with the idea that coups d'état still happen. Another is that corruption is thought to be endemic and gets in the way of basic business; and finally that if assets exist in Africa they get quickly siphoned off to Swiss bank accounts instead of staying onshore."

"The reality and opportunity is based on a new leadership in Africa," he affirms. "This new generation has been educated in development banks and multi-national institutions. There is an economic renaissance going on (pun intended) – partly from globalisation and partly from technology. For example it is easier to start a business now that mobile telephony is instantly available rather than waiting three years for a landline, as used to happen in Africa. Social change is also positive as a result of an emerging middle class that will be willing to embrace the benefits of capitalism."

According to RIM there is a strong economic fundamental case for SSA based on it being one of the fastest growing regions in the world. The higher growth trend in SSA is due to higher oil prices, growth in non-oil exporting SSA and improved positive external developments, and strong domestic investment and productivity gains. Renaissance research shows that there has been an increase in foreign demand with the improved domestic and political conditions and stability attracting foreign investment.

The RIM CEO continues with the theme, "We think that Sub-Saharan Africa has high potential for investment returns in the medium to long term, but that access is hard, even for institutional investors. So for example the Nairobi Stock Exchange is not open to foreigners. In our investment management division we specialise in getting access to interesting but difficult ideas for clients. For those potential investors that have liquidity concerns I would say that over time liquidity will improve after the early investors have made big gains" states Movchan positively.

RIM is launching the Renaissance Africa Fund in November, managed by portfolio manager David Damiba in London. "This will be an interesting product for our Russian client base," claims Broby. "The estimated correlation for this Sub-Saharan Fund is as low as 0.05 with Russian equities, so it is a terrific diversifier. Our access to Russia through the likes of our alternative products group etc.is exceptional, and our clients value that distinctive quality. Then having bought into what we do domestically our clients are prepared to back our judgement elsewhere."

Eventually RIM expects to have an analytical capability based on the ground in Lagos and Nairobi, but intends to start the process of managing assets in Africa from the London office, hub of international money management. The most senior management expresses enormous confidence in this large African detour from the international hotspots of money. "We have done it in Russia, and we will do it in Africa," states CEO Movchan. "We are very well positioned for growth from this. I see this is so much of a Group strategic thrust that I have career risk in not trying to fulfil our African ambitions."

Working within the Group

Asset management subsidiaries of broader financial companies often have atypical relationships with the banking or broking arms of their parent companies. So does Renaissance, but in a good way. There is an element of co-operation and 360o analysis in the common tasks. The equity management team will send a member to a company meeting with a member of the fixed income team at RIM. Whenlooking at particular companies and sectors the fixed income team at RIM will see the relevant (stock-broking) analysts of Renaissance Capital, and for good reason.

"The analysts at Renaissance Capital are the best analysts of Russian securities," states an unabashed Minkin of the Fixed Income Team. Says RIM CEO Movchan "We are treated as preferred clients of RenCap Group, and that's the way we like it."

RIM has an interesting culture. It was described as "very entrepreneurial" by a recent joiner, and it combines professional working with this entrepreneurialism as applied to new markets. The management can be very fast moving as a consequence, and maybe of necessity, given the sorts of markets that the firm chooses to operate in.

RIM has achieved a lot in a short space of time. It is a good reflection of the new paradigm in the asset management industry, as reflected in the work of Alexander Ineichen and Casey, Quirk and Associates.

In this paradigm there is a coming together of the traditional and alternative investment milieus, and in particular the investment strategies of hedge funds are being co-opted by funds other than hedge funds. This is mostly plainly observed in the development of 13030 funds.

Also other forms of fund structure have adopted the terms of business of hedge funds. So we see funds with performance fees pursuing strategies with limited liquidity and so demanding restrictions on redemption terms and requiring long notice periods. RIM is at the cutting edge in these regards. It is also setting a precedent in the commitment to business in Sub-Saharan Africa. Is this the ultimate test of the management's entrepreneurial professionalism? The firm can make the case for the African adventure, but their asset management competitors and imitators will be asking "Can they make any money there?"