The Interview – Michael Kart, Marshall Spectrum: “Rusal’s successful IPO in Hong Kong should open doors for other Russian and CIS issuers”

Michael Kart, manager of the Spectrum funds at Marshall Spectrum, says the firm’s two equity funds are poised to benefit from expected new equity placements, restructuring of the telecoms industry and continued liberalisation of energy markets in Russia and other countries of the former Soviet Union.

GFM: What is the background to your company and funds?

MK: Marshall Spectrum is an emerging markets equity manager specialising in Russia and other countries of the former Soviet Union. Founded in April last year, the firm brings together the seven years’ investment management experience in Russia and the Commonwealth of Independent States of Spectrum Partners and that of Marshall Capital Partners, a private equity firm operating in Russia and the CIS with more than USD1.1bn under management.

The company has two funds under management, both managed by myself: the Spectrum Russian Phoenix Fund, a long/short equity fund investing in Russian and CIS equities launched in April 2009, and the Spectrum CIS Value Fund, a long-only strategy investing in a diversified portfolio of small- and mid-cap equities launched in April 2006. Marshall Spectrum has a total of more than USD75m in assets under management in the two funds.

GFM: What is the structure of your funds, and who are your service providers?

MK: Both the funds and the Marshall Spectrum management company are domiciled in Bermuda, where we are applying for a licence. The funds are open-ended.

The funds’ key service providers are Credit Suisse in London as prime broker and custodian, Harbour Financial Services in Bermuda as NAV administrator, PricewaterhouseCoopers in Bermuda as auditor and WakefieldQuin as law firm.

GFM: How and where do you distribute the funds? What is the profile of your current and targeted client base? What is the split of your assets under management between institutional and private clients?

MK: Our traditional market is Europe, with a strong focus on the UK and Swiss institutional investors, but we are actively exploring opportunities to capture other prospective markets in the US, Asia and Middle East. Our major effort in 2010 will be on strengthening our distribution team by hiring an experienced sales executive as well as expanding our existing distribution channels by finding distribution partners and/or professional third-party marketers in prospective markets.

Currently, our investor base consists predominantly of European institutions such as family offices and funds of funds, while international private clients hold around 20 per cent of the assets in the funds. Our target client is either global institutional investors seeking exposure to a high beta region or specialist professional investors with a focus on emerging markets that are seeking to diversify their portfolio with products that offer appealing risk/reward profiles.

GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?

MK: The crisis has offered us a unique opportunity to address these issues at the corporate and fund level. The market landscape has changed significantly – some investment management companies have just disappeared while the others have suffered heavy performance losses and redemptions, reducing their assets under management by between 60 and 90 per cent.

Managers such as Marshall Spectrum that are in a strong position financially and operationally post-crisis and that have met all their obligations toward clients during the difficult times are the main beneficiaries of the crisis and will continue to grow stronger.

GFM: What is your investment process?

MK: In the Spectrum Russian Phoenix Fund we focus on thematic top-down analysis focusing on cyclical/secular economic sector beneficiaries. Quantitative and fundamental analysis is applied to identify suitable investment opportunities within highlighted sectors. Emphasis is put on identification of events or triggers that might strengthen the investment case at the sector or single stock level.

An embedded part of the investment process is the identification of appropriate hedging strategies that are applied to reduce market risk. This involves single stock shorts, as well as various derivatives strategies aimed at yield enhancement and/or downside protection.

The Spectrum CIS Value Fund builds on the same investment platform in terms of top-down sector allocation, but in this strategy more emphasis is put on bottom-up stock selection. We aim to detect companies that due to their size, shares’ liquidity or corporate specifics remain under-researched, under-owned and undervalued. We invest the major part of the fund’s assets in companies that are expected to increase significantly the liquidity of their shares through an IPO, mergers and acquisitions, or restructuring or consolidation of the assets.

GFM: What is your approach to managing risk?

MK: Our risk management approach is different for the two funds. The Spectrum Russian Phoenix Fund is a long/short product with a long bias that actively uses hedging instruments including derivatives and single stock shorts to reduce market risk. Within that product we place concentrated bets within certain industry sectors following a top-down approach, so diversification of the portfolio is not a primary objective of the fund. Leverage is typically taken through derivatives and can be as high as 100 per cent of the fund’s assets. In practice, leverage is used from time to time and typically doesn’t exceed 50 per cent of the assets.

The Spectrum CIS Value Fund aims to reduce market risk through geographic diversification across the CIS countries as well as through diversification across the portfolio’s positions. The fund typically has 40 to 45 positions with a 10 per cent limit for a single stock exposure in the portfolio. Maximum leverage is capped at 25 per cent while hedging of the portfolio is not a pivotal element of the strategy.

GFM: How has your recent performance compared with your expectations and track record?

MK: We had a good performance in 2009 with the Spectrum CIS Value Fund posting 134.5 per cent net return and the Spectrum Russian Phoenix Fund gaining 50.4 per cent since its launch in late April. Both funds started the new year well with net returns for the first two months of 2010 of 9.6 and 7.8 per cent respectively. These results correspond to our previous track record of consistent performance, which saw both our products in the top quartile of their respective peer groups.

We have a track record of managing various strategies in the Russian and CIS equity space ranging from long-only to absolute return. The current two funds’ strategies are the result of a process of evolution and are those we consider to most appropriate in the markets in which we operate.

GFM: What opportunities are you looking at right now?

MK: One of our most preferred investment themes this year is the Russian power utilities sector, which is enjoying strong reform momentum as well as a significant recovery in electricity consumption and prices, boosting margins and earnings. We also favour Russian fixed-line telecoms firms, which are set to make major efficiency gains as evidenced by 2009 financials ahead of the Svyazinvest reorganisation. Additionally, we seek to exposure to bulk commodities producers across the CIS that are set to benefit from structural market deficiencies and strong production growth potential.

GFM: What events do you expect to see in your sector in the coming year?

MK: Russian and CIS equities had a good run last year, recovering some of the heavy losses that the markets suffered in 2008. We believe that the coming year is going to be more challenging with a broader market being most probably range-bound.

We expect further easing of capital markets with Russian and CIS issuers tapping both debt and equity markets in 2010. Rusal’s successful IPO in Hong Kong earlier this year was a positive sign that should open doors for other issuers. We expect further progress in the reforms of the telecoms and power utilities sectors.

GFM: How will these developments affect your own portfolio?

MK: Expected new equity placements, restructuring of the telecoms industry and continued liberalisation of energy markets create attractive investment opportunities and investment triggers for our funds that we exploit in one way or another.

GFM: How do you assess investors’ current expectations?

MK: Investors have a cautious stance towards Russia, which remains the least preferred equity market of the four BRIC countries. Despite being fundamentally inexpensive and trading at significant discounts to markets in Brazil, India and China, Russia is not attracting as much investment as those countries.

The fact that the Russian economy remains very much dependent upon commodities and was one of the hardest hit in 2009 makes investors hesitant to commit long-term to the region’s capital markets. However, we are confident that investor appetite will return as they begin to see the benefits of investing in the region.

GFM: What differentiates you from other managers in your sector?

MK: Our team offers a strong combination of analytical capabilities and proven trading skills. We are a local expert with an extensive regional network and in-depth knowledge of the regional markets, but that domestic expertise is combined with the truly international background of our team. We have a seven-year track record of managing money in Russia and the CIS, during which period we always maintained a high level of operational transparency and met all obligations toward our investors.

GFM: How do you view the environment for fundraising over the coming 12 months?

MK: The environment for fundraising remains quite challenging, as general appetite for risk remains low despite improving fundamentals across the region. However, this could improve in the second half of the year if Russia maintains the economic recovery momentum that started to develop in the second half of 2009. A strong commodity price environment coupled with positive dynamics in consumption trends and currency stability are conditions necessary for improving investors’ stance toward the region’s equity markets.

GFM: Are you considering any mergers or acquisitions in the foreseeable future?

MK: We have no imminent M&A plans right now, but given that the marketplace remains fragmented with a number of smaller specialised managers, we might consider such an option to strengthen our expertise in other market segments.



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