Burned in Russia? Join the club. Even George Soros has lost a bundle. So how have Mikhail A. Filimonov and Dimitri A. Sogoloff made a 7% return on their $24 million Russian investment portfolio this year--on top of a 31% gain in 1994?
It's not just good fortune. Filimonov, 38, and Sogoloff, 33, managing directors of Hermes Capital Management Ltd., are Soviet-born New Yorkers with more than a decade's experience on Wall Street. As such, they seem to have acquired special insight into Russia's tricky markets.
Now, the partners are offering their skills to high-roller investors and Western companies that want to do deals in Russia. They recently launched the $30 million Russian Renaissance Fund, a closed-end fund with a minimum purchase of $100,000 that will be listed on the Dublin Stock Exchange. They also created Amerus Finance, a Moscow company specializing in corporate finance. And with Russia's Mosbusinessbank, one of Moscow's largest commercial lenders, taking a 30% stake in Hermes late last year, Filimonov and Sogoloff have joined the rush to set up a Western-style investment house in Russia. Says Sogoloff: "We are trying to build a full-service investment bank in both countries."
TRADING JEANS. The partners are returning home by circuitous routes. Filimonov grew up in Odessa, where he traded Led Zeppelin albums and Levi's jeans with other youths before emigrating to the U.S. with his mother and brother at the age of 15. While studying to become an eye doctor at the City University of New York's Bernard M. Baruch College, he got his first Wall Street job trading bonds for Arnhold & S. Bleichroeder Inc. That experience led him to abandon the study of ophthalmology and plunge into Eurobond arbitrage for investment houses such as Baring Securities, Quadrex Securities, and LIT America.
At Quadrex, he met Sogoloff, who had arrived from Kharkov at 18. After receiving a bachelor's degree at Columbia University, Sogoloff became one of the first Russians to be admitted to its MBA program. Then, in 1992, Filimonov and Sogoloff pooled their money with that of other investors and set up a $5 million convertible-bond hedge fund, which has since grown to $70 million. In 1994, they set up their portfolio investing in Russia.
The Hermes strategy relies heavily on timing, local contacts, and well-honed instincts (table). Early last year, they bought up privatization vouchers and turned them in for shares of such Russian blue chips as Lukoil, the petroleum producer, long before many investors had even heard of them. As Western investors piled into Russia last summer, Hermes sold its positions for a profit. By mid-October, the market had crashed.
Now, they plan to take the same approach with the Russian Renaissance Fund. They won't disclose the names of their stock picks, but say they're putting money into little-known outfits in banking, transportation, communications, and high technology--often far from Moscow. After analyzing the financials, they always travel to meet with management, sometimes for late-night vodka sessions. "The moment we drink the first bottle of vodka, we understand whether it's the type of management we can invest in," Sogoloff says.
UNDAUNTED. That's not to say Hermes can't make mistakes. Along with other investors, Hermes lost money last year on the oil company Komineft, whose management secretly diluted the shareholdings of outside investors. But Filimonov and Sogoloff remain undaunted. They note that as Russia strengthens its securities laws, Western investors are already coming back.
To Filimonov and Sogoloff, the $60 million Templeton Russia Fund, now in registration with the Securities & Exchange Commission, is only the first sign that Western buying will pick up. "We think there will be a tremendous inflow of world capital into the Russian marketplace," says Filimonov. If that comes to pass, he and his partner insist, the obscure companies they're buying now could become full-fledged blue chips. Even if they don't, the Hermes stock-pickers may have a line into the most dynamic players in Russia's capitalist revolution.
HERMES' GUIDELINES FOR RUSSIAN INVESTING
AVOID the best-known stocks
IDENTIFY second-tier companies in banking, transportation, high-technology
SEEK OUT companies with young, Western-educated managers
CONVERT financials to Western standards
FOCUS ON companies with price-earnings ratios under 1
INTERVIEW suppliers, customers, and bankers to detect problems
BUY UP blocks of shares privately
SELL when the big players come in