“A disciplined approach”: How emerging markets manager Balchug is trading through the turmoil

Moscow River

Named after the riverside district in central Moscow, Balchug Capital – the long/short emerging market equities and fixed income investment manager launched by David Amaryan in 2009 – focuses on event driven and value-based opportunities predominantly in Russia and the former Soviet Union.

Armenian-born CEO/CIO Amaryan, who began his investment career at AllianceBernstein in 2001, believes Balchug’s investment style – which trades high-conviction, concentrated positions based on fundamental value in mispriced securities which have been re-rated by the market following certain events – is vital in the prevailing investment climate.

Speaking to Hedgeweek from the firm’s HQ in the Russian capital, he says recent events and negative shocks following the spread of the Covid-19 pandemic have created buying opportunities.

“These situations give you the opportunity to look at some things other people aren’t looking at,” he observes. “We are an active manager and the strategy requires you to be selective and dig deeper, particularly at times like this, and especially in markets like Russia, where active management works better where markets are often less efficient.”

Amaryan started as an associate portfolio manager at AllianceBernstein in New York some 20 years ago, trading US value and growth equities. He later joined Citigroup in Moscow in 2004, before moving to Russian investment bank Troika Dialog the following year where he developed and managed investment products for its high net worth clients. 

After Troika Dialog was bought by Sberbank CIB in 2009, Amaryan struck out on his own and launched Balchug. Today, the firm has around USD250 million in assets, managing money for mostly high net worth and family office investors who tend to be either Russian nationals or individuals with Russian heritage.

A competitive advantage

The strategy’s portfolio-building process explores catalyst ideas ranging from potential M&A transactions, restructurings and spin-offs, changes in dividend payouts, and shareholder conflicts to natural disasters, political upheaval and sudden equity and bond price moves.

“We will look at all emerging markets, but we try and put our money where there has been some form of negative shock,” he says of Balchug’s approach. “Our allocation really depends on various factors, including the availability of special situations that will fit our criteria, our conviction on the idea, the overall market conditions, the cycles, and our in-house algorithms that help us construct the optimal mix to reduce risk, manage volatility, and achieve the best risk-adjusted returns.”

Though the fund is geographically diversified, having traded positions in China, Turkey, South East Asia, and Latin America, its focus remains predominantly on Russia and the CIS nations. The firm is swiftly building expertise in countries like Uzbekistan and Armenia which are going through the formation of their capital markets and initial privatisation phase. 

“I think we have a competitive advantage just by being here in Moscow and having that experience,” Amaryan says of the fund’s geographic focus. “I’ve been involved for about 15 years, both on the buy-side and sell-side, in these markets. We know these markets and all the players very well and I believe we’ve gotten better in terms of identifying investment opportunities.”

This belief appears to be borne out by the numbers: the firm’s flagship fund posted a 46 per cent return in 2019, and the firm has averaged around 18 per cent per year after fees since inception. 

The investment portfolio is heavily concentrated, comprising a maximum of 15 or so positions long and short at any one time, trading mainly equities as well as fixed income and bonds. Event driven situations contribute most of its alpha, while value dividend stories, typically considered less risky and more stable, offer steadier returns.

“We don’t believe you need to have 30 amazing ideas at any given time,” he says of the concentrated mix. “Most of our ideas are stories in themselves – they’re not correlated to the market or correlated to each other.”

He continues: “There are a lot of differences in event driven and value strategies, different time horizons and different approaches. But both look for catalysts that will unlock value and re-rate the company valuation. In both cases we conduct fundamental analysis of the health and the prospects of the company.”

Portfolio positioning

Last year’s 46 per cent gain was partly fuelled by a number of key bets in Russia’s utilities market, with Balchug taking positions both in dominant players such as Gazprom, as well as in names like Tatneft, Rosseti, Surgutneftegaz and Mechel. 

“Utilities was a sector which was not doing anything for many years, and investors were not paying attention to it. But we saw a lot of changes coming in, both in terms of investor behaviour and in terms of government regulation,” he explains. 

“As the dividend yield got higher than bank returns and government bond returns, a lot of the pension funds and a lot of individual investors started switching and reallocating to equities. This was a big push last year in Russia, a lot of money was coming into equities, and we benefited.”

Heading into the crisis, Balchug’s strategy was up 7 per cent for the year. While each of its positions took a hit from the shock, Amaryan notes that the companies in the portfolio continued to have fundamentally strong balance sheets. “For me, that just means we should buy more of them. Nothing has changed; none of them are cancelling their dividends,” he says.

As the Covid-19 pandemic has tightened its grip on markets, Balchug has shorted several of the large casino and gaming companies with an emerging markets presence, along with some larger luxury retail names – positions the fund has since closed.

“We feel that with some of them down 60-70 per cent, this run is done now,” he adds of shorts, noting how this helped cushion the blow during last month’s shock.

“We’re not down as much as the market, we are very comfortable sitting through this turmoil, that’s why we are keeping a cool head and maintaining a disciplined approach to risk management,” he explains. “When we feel the timing is right, we have cash to either start accumulating new positions or just add on to the ones that we have that have gone down 20-30 per cent.”

Keeping a cool head

Reflecting on the recent turmoil, Amaryan concedes that emerging markets have been hit harder by the Covid-19 spread and oil price shock than developed markets. But he remains optimistic on the longer-term outlook for the sector.

“Don't get me wrong, I'm not downplaying the seriousness of the situation – we have a severe public health crisis, a medical crisis, but I’m confident we will deal with it. Despite the pessimism, I think this will be one of the great buying opportunities of the next decade.

“During a crisis like this, some people think that it may be too hard or too stressful. But if you’ve been in the game long enough, and you know how to control your stress level, then you should not panic,” he observes. 

Expanding on this point, he believes there will be “consequences and lessons to be learned” from the coronavirus pandemic and the resulting economic shock, but notes: “If you’re being bombarded with frightening news and opinions every day, this affects stock market behaviour. In my opinion, though, most of what we’ve had is noise, caused by fear and uncertainty.

“When we’re in this situation, and there’s turmoil and panic, it is difficult to keep a cool head and a disciplined approach. But that’s the most important thing you have to do – remain disciplined – both in terms of how you invest and also how you manage risks. I’ve been doing this for more than 20 years, and it’s something that I’m very passionate about.”