March 28, 2012
Reposted from the Investors Chronicle
By Maike Currie
Growing up in eastern Europe, Plamen Monovski recognised the fall of the Berlin Wall as not only the single most important political change of the last century but also a great money-making opportunity. “It was quite clear given how low the valuation of assets were that being in a business that capitalises on financial assets would probably give you the most leverage. So I took a conscious decision to educate myself and partake in that,” says the CIO of Renaissance Asset Managers, an investment house focused on what it terms “high opportunity markets” across emerging Europe, Russia, Africa and other frontier markets.
In 1997 he moved to London and joined Mercury Asset Management (later acquired by Merrill Lynch which in turn merged with BlackRock). It had the most vibrant emerging market house at the time and was a pioneer in funds focused on eastern Europe. After building his reputation over 13 successful years, co-managing the BlackRock Global Funds Emerging Europe Fund, he joined Renaissance Asset Managers in 2010 as chief investment officer.
“For Renaissance, the geographies are secondary to the philosophy. Yes, we are a complete emerging markets house but we are of the view that not all emerging markets are equal,” explains Mr Monovski. “The markets that we want to be in are usually underpenetrated, somewhat undiscovered, inefficient with a low institutional presence – a bit off the beaten track and further up on the risk curve. These markets tend to suffer from negative media coverage and a corollary of this is that competition is low – people are put off by headline media risk but less competition means higher growth rates and bigger profit margins.”
While the overall philosophy is contrarian, Mr Monovski is quick to explain that the focus is not on distressed assets but rather assets that are severally undervalued purely because of perception – the group invests in strong, healthy companies but the prices do not reflect these opportunities.
Of course emerging markets are not without risk but part of Renaissance’s investment process is to understand and mitigate this risk by comprehensive due diligence and by paying the right price for assets.
A bigger concern for Mr Monovski is that the world is getting less adventurous. “An aging population coupled with low interest rates has left an older generation looking for income. Meanwhile, you have a younger generation – the so-called Generation Y which started building their wealth as the economic crisis was unfolding. This is likely to taint investor preference for emerging markets which are perceived as more risky.”
He suspects that while equity and bond markets might go up, investors will stay risk shy and miss a lot of the investment opportunities in underpriced emerging markets. To illustrate this, Mr Monovski draws a parallel with China. “The idea was to invest in China in the early days when it was cheap and productivity growth was booming. The idea was not to invest when $50bn a day was flowing into the country, the market of fund management companies operating in the region over a trillion dollars and the profitability of Chinese companies on a declining trend – that’s when everyone ‘discovered’ China en masse. Fidelity did not launch its China fund in 1999 – it launched it in 2010.”
While he recognises the psychological difficulty investors may have investing in emerging markets given all the issues, the reality is when you invest in a cheap emerging market about to undergo productivity growth, foreign direct investment and privatisation, you are on the brink of an incredible wealth creator and a long-term winner. And Mr Monovski speaks from personal experience. Working in his native Bulgaria in the mid-1990s as an accountant at Coopers & Lybrand (today PricewaterhouseCoopers) he experienced the devastating effects of hyperinflation – he and his colleagues were paid three times a day as the Balkan country suffered inflation in excess of 500 per cent. But as privatisation and foreign investment took hold, inflation declined and the economy rebounded significantly.
Today, Mr Monovski sees the formation of one of the most exciting investment themes globally in the market where Renaissance started its business – Russia. He believes the west’s perceptions of Russia are wrongly shaped by negative media images but rarely on the vast business opportunities. And while the west may view Vladimir Putin’s re-election to the presidency as a fatal step backwards, Mr Monovski sees it as the beginning of a new cycle of transformation.
“The hard truth is that there is no other country in the world as large as Russia whose fortunes are determined so much by factors outside its control – like commodity prices. And a repeat of 2009 when they all collapsed is simply not an option,” says Mr Monovski, highlighting that there is an obvious correlation between the staying power of the ruling regime and its ability to raise living standards by generating economic growth, which means in short Putin needs to act.
Mr Monovski believes he will start with a massive privatisation programme to increase productivity. “Russia will become an unlikely trend-setter in trimming state reliance. Red tape and regulation will be cut, improving business conditions especially for small- and medium-sized enterprises by further streamlining taxation, providing investment incentives and, believe it or not, tackling corruption, starting with the mid-level,” he says. President Putin is also expected to preside over the roll-out of one of the largest infrastructure cycles that the world will see – about $1 trillion – which will lift potential GDP by at least 1-2 per cent a year. “These won’t be bridges to nowhere but will dramatically upgrade Russia’s dilapidated infrastructure and generate employment on a mass scale.”
Mr Monovski is also positive that Putin will open the floodgates to foreign and direct capital, which the Kremlin needs to generate high growth in investment. “To the savvy investor, Russia looks like a treasure trove of opportunity, where the low asset prices and the future transformation are likely to affirm Moscow’s position as the best-performing stock market in the world.”
These are the type of long-term opportunities which Mr Monovski and his team at Renaissance Asset Managers seek to tap into. And, to date, they seem to be getting things right. Despite its relatively short life, the asset manager has already grown to $3bn-plus in size. Its Russian Fixed Income and Russian Equity Allocation products are global leaders in their category and the company is already the largest private manager of infrastructure assets in Russia, with its London-listed Russia Infrastructure Fund in the top decile of infrastructure funds globally.