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.

Some statistics

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.

Managing company Assets in Russia(Mln USD)
1. Fleming 470,8
2. Capital International459,5
3. Baring243,6
4. Templeton 209,3
5. Pictet207,2
6. Schroder161,6
7. Morgan Stanley148
8. Grantham, Mayo, Van Otterloo91
9. Foreign & Colonial85,9
10. Emerging Markets Investors Corp. 59,2

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).
The average profitability of investments in Russia in 1996 was more than 150% per year. It is not surprising that the managers of the funds are happy with the results olstuined in Russia.
Table 2 gives the list of the foreign investment funds which received the highest profits from the investments on the Russian market in 1996.

Table 2.The most profitable funds with the orientation to Russia (as to January 31, 1997)

Name of the fund Profitability per year, %
1. Regent White Investment Co., Ltd.250
2. Firebird Fund LP (E)244
3. Regent Red Tiger Investment Company236
4. Regent Blue Tiger Investment Company236
5. Regent Golden Tiger Inv Co. (FKI)232
6. Fleming Russia Securities214
7. Russia Fund Ltd.167
8. Eastern Capital Fund Ltd. 153
9. Templeton Russia Fund Inc.143
10. Optima Opportunty Fund Ltd.143

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.
Templeton is one of the oldest managing companies on the developing markets. The company declared itself officially in Russia in the summer of 1995. The fund invests only in the shares of the companies whose registers made a contract with a permanent partner of the fund, one of the largest world depositories, the Chase Manhattan Bank.

Mark Mobius:
We want to expand our activities in Russia, but the shortage of information and the discrepancy between the accounting and reporting systems of Russian enterprises and the world standards are obstacles to this.

Another problem is an imperfect system of re-registration of shares. But we hope that this problem will be solved as registrars get government licensing.
Regent Pacific is one of the most prolific companies in Russia.

Julian Mayo, director of one of the funds of the Regent Pacific Corporate Finance Ltd:
- In comparison with other countries where we invest, Russia is the best place and our investors are very grateful to us.
We want to continue and increase our investments in Russia. The new investors want to invest in the "blue counters", while the old ones invest in shares with a high potential for growth. The Russian economy is growing, inflation is going down - so why shouldn't we invest?
We can be stopped only if Russia stops the process of reforms and market economy.
As for the problems with the re-registration this process is even more complicated in India or Indonesia than in Russia.
"Troika Dialog" is a managing company of the American mutual fund Lexington Troika Dialog Russia Fund. It was officially opened on July 3 last year, but it did not get into Table 2 only due to its young age. It is the only American fund managed by a Russian company.
In the first quarter of this year it became the second in profitability among all American mutual funds.

Says Gor Nakhapetyan, executive director of "Troika Dialog".
The price of the share at the moment of distribution was 10 dollars, now it has reached almost 16 dollars. Besides, there are pleasant developments on the market itself.
The risk of investments is going down You won't find a register now which would cross out a share-holder without batting an eye-lid. The market is expanding, and we can speak now about dividing it into echelons.
Dialogues with the heads of enterprises are possible now, they are not hostile to investors as before, investors are welcome there now.
As for the expansion, we can well understand that the Russian market is not yet ready for big sums and can hardly digest even 200-300 million dollars. This limitation is mainly due to an imperfect market infrastructure.

Taken from the Expert magazine
16, 1997

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