By Jamie Allsopp, Fund Manager, Insparo Asset Management
In 2009, Russia suffered a decline in the wealth of their richest citizens. According to a Merrill Lynch report, the number of Russians who qualified as high net worth individuals fell by 28.5% - more than a quarter of its original wealthy population.
While the fall in the high net worth population is by no means a crisis, the arrest of this decline has been a major concern for the Russian wealth industry, and – given Russia’s influence in international trade – the wider global market. Much of the discussion has centred around a broadening of the investment spectrum away from the historically conservative philosophy of many high net individuals in Russia.
With the subprime crisis having a knock-on effect on markets, sectors and asset classes throughout the investment industry, many of the previously successful investments, even those considered as safe havens, have been losing money for Russian investors. Their traditional priorities of portfolio management, which favour capital preservation with consistent, steady growth, have failed to stand up to the damage wrought by the downturn.
The pervasion of this contagion has led to investors looking more closely at esoteric investments that have no correlation with other markets, and more and more Russian wealth investors are looking at frontier markets. Some of these markets, those contained with the CIS like Kazhakstan and Ukraine, are long familiar to Russian investors, but many of the best returns are available in more far flung parts of the world, in Africa and the Middle East particularly.
The upshot of this phenomenon is the emergence of a new breed of Russian investors leading a more sophisticated investment culture. The property funds and overlooked Swiss bank accounts that were a fixture of wealth portfolios are being increasingly overlooked in favour of more esoteric investments, as investors look to less correlated investments and better risk return profiles.
Across these regions GDP growth is seeing upward revisions and inflation numbers are being revised downwards. The deficits major African economies ran throughout the downturn in order to provide stimulus for their economies are now being eroded and we expect surpluses to be posted in the not too distant future.
The underlying economic growth and stronger fiscal positions within frontier markets, particularly as global markets recover from the downturn, mean that attractive risk adjusted returns are prevalent, and there are many attractive opportunities in the equity and credit of African frontier markets. We have seen significant recent interest in our fund (the Insparo Africa and Middle East fund) from Russian high net worth investors, and we expect to see significantly more in the near future.
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