Letter from... Russia

Howard Gethin reports from Russia

The financial press has coined the term “Pifomania” for the wave of money flowing into Russian mutual funds this year, from the Russian words Payeviye Ivestsioniye Fond (PIF).

The year 2005 was a record one for Russian PIF investment, with 7.8bn roubles (about $2.7bn) invested, up by 400m roubles on 2004 - and, if the trend continues, 2006 will exceed it.

Given the returns, little wonder so many are investing so much. The year-on-year performance of Dobrynia Nikitich, a rouble based stockmarket fund operated by Russia’s Troika Dialog investment bank, was 99% in mid-January. The same company’s Druzhina fund, which invests in municipal debt and obligations as well as stocks and bonds, turned in a thumping 38% return over the last six months (to March 2006).

The success of the funds is down to surging growth on the Russian stockmarkets. The summer, normally a relatively quiet period, witnessed a boom, with the RTS (Russia’s rouble denominated market) rising by around a third in just four months.

It takes little imagination to see why. Most of Russia’s blue chip stocks are commodity or energy related, and with oil and gas and metals prices soaring ever higher, the nation is cashing in. Other one-off factors have come into play, such as consolidation of the state’s involvement in the oil sector by acquiring Sibneft, and liberalisation of trading in Gazprom for foreigners, which drove the market up in January.

The main reason for the flow of money into mutual funds is the high level of liquidity in the Russian economy, and the lack of alternative ways for most Russians to invest, says Alex Kantarovich of Aton Capital’s Research unit.

“Also, this is a market Russians can understand - they know the names of the firms on the markets and can read about what’s happening in the newspapers,” he says. “The culture of equity investment in Russia is picking up.”

Not that many investors necessarily invest when they should. “Many people have carried on buying in even when there was bad news, but no market reaction,” Kantarovich says.

The easy access to mutual funds is also another factor. While real estate has been an even more profitable avenue for investors in Russia in recent years, prices have risen to a level where many small investors are out of the picture, and many people are fearful of the volatility of real estate prices.

The level of investment in the last quarter of 2005 has surprised even experienced players on the markets.

“We waited for a flow of clients but we didn’t think that demand would be so high,” says a fund manager. No less than 5.2bn roubles flowed in just in the last quarter, compared to an overall figure of 7.8bn for the year.

Almost all of the money has been sunk into open funds, “more or less the most liquid instruments”, says Maksim Kapitan, an analyst at Management Tsentra, in the Russian business daily Vedomosti.

Most popular have been investment bank Troika Dialog’s funds, which in total saw investment of 3.6bn roubles last year.

The boom in investment is set to continue, analysts say.

“It’s sustainable, because there is no imminent end to high liquidity,” Kantarovich says.

“We are calculating on attracting much more,” says Vadim Sachkov, general director of Solid Management, in Vedomosti. “Yesterday, in spite of the freezing cold, we had 15 new clients visit our office.”

Given the past history of collapsing investment schemes, bank crises, and the vagaries of the stockmarket, it is a remarkable change in attitudes by the average investor, and a reflection on how Russia has moved on since the financial crisis of 1998.

Howard Gethin is a business journalist based in Moscow.