Jupiter Asset Management's Elena Shaftan has become the No. 1 fund manager in the UK by investing in Russian oil companies that didn't exist when she was growing up in Siberia in the 1980s.
With crude prices down 22% from their July 14 record, Shaftan's £473 million ($927 million) Emerging European Opportunities fund is betting on Russia's consumers. She has bought shares of mobile phone operators, such as OAO Mobile TeleSystems, and banks in the past four months. Both are profiting from rising consumer spending. She has also sold oil stocks, raising her proportion in telecommunications and lenders to 42% from 28% in 2006. „There has been tremendous growth in disposable incomes,” Shaftan said in a phone interview from her London office.
„The middle class is coming in. It's a sustainable trend.” Russian retail sales have risen more than 10% every month since February 2005 as a 37% increase in oil and gas sales last year filters into consumer incomes. Shaftan says she's counting on consumers to help maintain her rank as manager of the best performing fund sold in the UK over the past three years, according to Standard & Poor's.
While Shaftan's fund has about 55% of its assets in Russia, it also invests across eastern Europe and the former Soviet Union, and in more developed counties such as Austria. Over the past three years the fund has advanced 189%, compared with a 180% return for its benchmark, the Nomura Central & Eastern European Index. It lagged behind the index in 2006, returning 29% compared with the index's 30%, which Shaftan says was partly due to the index's higher proportion of smaller company shares that outperformed last year. Shaftan avoids some small companies if she feels she cannot sell their shares with ease. Shaftan's co-manager is Ingrid Kukuljan.
The time to invest in eastern Europe may have passed, according to Alan Steel, who runs an investment brokerage in Linlithgow, Scotland and three years ago advised investors to buy into Shaftan's fund. Now, the fund will probably see returns slow as stock valuations in the region approach those of more developed markets, he said. The Russian Trading System Index has advanced 42% over the past year, compared with an 11% gain for the Dow Jones Stoxx 50 Index.
The price of the Russian index is now 14.4 times future earnings, more than the 12.8 times earnings of the Stoxx 50 Index, according to data compiled by Bloomberg. „The easy money has probably been made,” Steel said. The RTS index has fallen 1.3% this year from a record set on the last trading day of 2006 as investors sell oil shares. From May 6 to June 13 last year, it fell 30%, more than the Morgan Stanley Capital International Emerging Market index, amid concern about falling commodity prices and a rise in global interest rates.
„I'm very much waiting for a correction like last May, so I'm trying to stay in liquid stocks,” said James Beadle, head of research at Pilgrim Asset Management in Moscow, which manages $35 million in Russian stocks. Shaftan says she can provide returns by focusing on a part of the Russian market that she says was eclipsed by soaring oil and gas company shares. The MSCI Russia/Energy Index rose 177% in the three years to December 2006, while the MSCI Russia/Telecommunications Services Index went up 82%. In September she bought shares of Moscow-based OAO Mobile TeleSystems, eastern Europe's largest mobile phone company, and OAO Comstar United Telesystems, a telecommunications operator owned by Russian billionaire Vladimir Yevtushenkov, also based in the Russian capital.
Shares of Mobile TeleSystems, which has 67.6 million subscribers in the former Soviet countries, rose 21% in the Q4. Those of Comstar, which said in December net income climbed 42% in the Q3, also advanced 21%. Shaftan has also been buying more shares of banks, whose lending enables Russian households to spend more.
Consumer debt in the country stands at 5% of GDP, compared with 100% in the UK, she said. „In the end what drives consumer spending across the region is the ability to leverage up,” she said. Oil revenue has helped as well. Sales of Russian oil products were almost $41 billion in November 2006, up from $30 billion in November 2005, according to the Russian customs service. She bought shares of Raiffeisen International Bank, an Austrian bank that is Russia's biggest non-domestic lender.
Its stock advanced 38% in Vienna in the Q4. Her largest holding is in OAO Sberbank, Russia's biggest lender, which last week said it was seeking to raise a record $12 billion in a share sale. Its stock soared 57% in the Q4. To fund the purchases, she sold off energy companies. The price of oil has fallen from its July 14 record of $78.40 per barrel.
Shaftan's allocation to energy companies dropped to 25% in December from 40% at the start of 2006, she said. She cut down on holdings of OAO Lukoil, Russia's largest oil producer, OAO Surgutneftegaz, the country's fourth largest oil producer and OAO Gazprom, the world's largest natural gas producer. None existed as corporate entities before 1990. While shares of all the companies advanced in the Q4 „their earnings this year will at best be flat,” she said.
Shaftan grew up in Yakutsk in the eastern part of Siberia - „the coldest part” - in the 1970s and 1980s. She was in college studying engineering in Latvia, then part of the Soviet Union, when the Communist system collapsed in 1991. She worked at Russia's Space Research Institute as an intern. „When Mikhail Gorbachev came to power, it was very exciting,” she said. „You could freely discuss things. By that stage everybody knew the regime didn't work.”
She moved to the UK in 1993 and originally worked in publishing before landing a job at investment company Govett in 1995. She joined Jupiter, a unit of Commerzbank AG, in 2000 and started the fund in 2002. Kukuljan, who is from Croatia, joined the fund unit in 2004. While many of the companies Shaftan covers come to London to meet investors, - she is seeing 20 companies in the city this week - she sometimes travels to her home country to research her investments.
Attitudes to women are „unbelievably sexist,” she said. When meeting a senior manager from a Russian oil company last year, the executive at first mistook her for one of his assistants rather than one of his major investors, purely because she was a woman, she said. „I held out my hand to shake hands, but he just said „who am I supposed to be meeting here?” Shaftan recalled. To deal with companies in Russia „you need to play the ball much harder than a man would have to.” (Bloomberg)