Star Manager Rajiv Jain Sees Russian Stocks as `Super Cheap'

(Bloomberg) -- Rajiv Jain is unfazed by one of the world’s worst-performing stock markets.

While Russia’s equities benchmark has declined 4 percent this year amid a global rally, the former star fund manager at Vontobel Holding AG has turned bullish on the country’s publicly traded firms. Russian companies have increased dividends and cut costs since the U.S. and European Union imposed sanctions on the world’s largest country in 2014 for its annexation of Crimea.

“I was very negative on Russia,” said Jain, 49, who helped build Vontobel’s U.S. unit into a $50 billion powerhouse over the past two decades. “I’ve changed my mind because I think things are beginning to change.”

Jain resigned from Vontobel in March last year, causing the Swiss firm’s shares to tumble as much as 11 percent on the day of the announcement. He started investment boutique GQG Partners three months later and has since amassed $9 billion in assets. Jain said more institutions have committed to investing in his funds, which will bring the assets under management to more than $10 billion by year-end.

Jain’s Goldman Sachs GQG Partners International Opportunities Fund, a partnership with the New York-based bank, has gained 27 percent this year through Oct. 26, beating the benchmark index’s return of 17 percent, according to data compiled by Bloomberg. Its emerging market fund has advanced 26 percent, compared with the MSCI Emerging Markets Index’s gain of 31 percent. While an overweight position in Russian stocks has caused the fund to trail the benchmark, Jain said stocks such as Sberbank of Russia PJSC are too cheap to pass up.

Jain also warned that investors may underestimate the risk in so-called “quality” stocks, such as consumer staples and utility companies. He criticized hedge funds for charging too much and said that the asset-management industry does a “poor job” of aligning their interests with investors. Here’s an excerpt from the interview:

Question:

Where do you see value in today’s markets?

Answer:

Russia is super cheap for the growth it’s getting. I was very negative on Russia. A lot of things went wrong over the past few years: sanctions, oil collapse, you name it. I’ve changed my mind because I think things are beginning to change. Valuation is attractive. Corporate governance has improved. I am not saying Russia is the next Singapore or next Switzerland. But things are getting better.

Companies are paying more dividends, which is a big change compared with the past. There’s massive cost-cutting going on. Sanctions forced a lot of these companies to behave. It got them in a very lean position. Now, as revenue picks up, you get a massive increase in earnings because the cost is lower. The future looks a lot brighter than the recent history. But because it’s Russia, as bullish as I am, I don’t go crazy.

Question:

Where do you see dislocations in the current market?

Answer:

A lot of areas have done well recently: for example, consumer staples, utilities. Those areas are not really growing, but multiples kept expanding. Stability and quality are not synonymous -- a lot of these names have higher leverage too. When interest rates go up, what people call “defensive” stocks may get killed. That will hit a lot of people. There’s higher rate-sensitivity embedded than people realize.

Question:

Why did you decide to start your own active shop when investors are moving to passive vehicles in droves?

Answer:

For the above-average, the reward should be exponential if you can deliver. There’s room for active, clearly, but interests have to be aligned. The industry does a poor job of client alignment. One of the things I am committed to is that we will always have the majority of our net worth invested in the same products we offer to clients. More than 50 percent of my personal net worth is invested in the same funds.

The problem with hedge funds is that they charge too much. There aren’t that many smart people who outperform the indexes and justify the “2 and 20” structure. The industry has its head in the sand. Just because you charged X percent before, it doesn’t mean it’s the right thing to do. If you really outperform by 50 basis points, can you justify 100-basis-point fees?

The case for active managers is also predicated on interest rates. If interest rates go up, there’s a chance that more active managers will outperform than not.

--With assistance from Natasha Doff and Ksenia Galouchko

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net.

To contact the editors responsible for this story: Michael P. Regan at mregan12@bloomberg.net, Margaret Collins at mcollins45@bloomberg.net, Neil Callanan, Andrew Blackman

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