Fund Manager Who Shuns State Companies Finds Growth in Sberbankby
Baring Emerging Markets Fund beats 79% of peers in past year
Country's largest lender part of `New Russia,' Scandella said
When Jean-Louis Scandella set about overhauling Baring Asset Management’s emerging-market stock fund, entrepreneurial growth stocks were in, and state-controlled monoliths were out -- for the most part.
He veered from his “out with the old, in with the new” strategy when he bought London-listed shares of Sberbank PJSC, the state-controlled Russian lender that holds about half the country’s deposits. Scandella, Barings’ head of equities, added Sberbank in mid-December as the London-traded stock was near the lowest price in two months. It has appreciated 13 percent this year. The stock makes up 0.8 percent of the Global Emerging Markets Fund.
Since Scandella joined Baring Asset Management, an affiliate of Massachusetts Mutual Life Insurance Co., in 2014, he has sold the big state-controlled stocks that had dominated the fund’s holdings, such as Petroleo Brasileiro SA and PetroChina Co., and replaced them with younger-entrepreneur-driven businesses. Sberbank’s strong position in the market, its management team and growth prospects made it different than the traditional government-owned enterprises, which Scandella calls “dinosaurs.”
“It’s part of the New Russia, even if it was originated in the Old Russia,” Scandella said by phone from London. “When I look at the quality of a business model, I see that the growth is secured by its position as a leader in Russia, by the management, which managed to make a real bank, even if it’s controlled by the state.”
Scandella’s investment approach is paying off. The $336 million Baring Global Emerging Markets fund has outperformed 79 percent of its competitors over the past year, data compiled by Bloomberg show. That compares with an underperformance against 72 percent of its peers in the past five years.
Sberbank, widely seen as a proxy for Russia’s economy, has suffered the consequences of the country’s recession after slumping oil prices weakened the currency, intensified capital outflows and spurred inflation. Higher financing costs and a contracting economy have crimped the bank’s profit.
The lender is scheduled to report fourth-quarter and full-year results Tuesday and will probably say that its provisions for bad loans increased in the fourth quarter as the ruble depreciated more than 10 percent in the span, according to Tomasz Noetzel, an analyst at Bloomberg Intelligence.
That doesn’t deter the London-based fund manager, who looks for companies with double-digit growth and conducts a quality test, scoring a company’s balance sheet, business model and management before investing.
“I don’t care too much about current figures, I am trying to find a growth story for the next five years, a trend,” Scandella said. “I see this trend in Sberbank.”
Shares of Sberbank have gained this year amid the first signs the economic decline has reached its bottom and the conflict in Ukraine is easing, possibly bringing an end to months of sanctions on Russia that isolated the nation’s biggest companies.
Elsewhere in Russia Scandella likes retailer Magnit PJSC, search engine Yandex NV as well as Switzerland-based Luxoft Holdings Inc., the software developer that started as a Moscow-based startup. His other emerging-market bets include credit-card terminal provider PAX Global Technology Ltd., Sunny Optical Technology Group Co., a provider of camera lens components as well as government-controlled China State Construction International Holdings Ltd.
Scandella started covering emerging markets for a unit of Societe Generale SA in the early ’90s, when he traveled across Central and Eastern Europe and witnessed the formation of markets in the region. In the 2000s, he saw the potential in then-startups Yandex and Magnit. Now he says that while there’s potential in some Russian stocks such as Sberbank, he would like to have seen Russia produce a new pipeline of entrepreneur-driven firms.
“We see a moderate growth story in Sberbank,” Scandella said. But “I am somewhat disappointed not to find future Magnits or future Yandexs,” he said.