An investment lesson for all

Monday, 01 September 2008

Sultan Sooud Al-Qassemi on why The Hermitage Fund's arrival is welcome news for GCC markets.

When William Browder speaks, the investment world listens. You get that kind of power when you administer more than US$8.5 billion of assets under management.¹ Bill Browder founded The Hermitage Fund, an asset management company that specialises in the Russian market, in 1996. According to Dow Jones, since the fund started investing, it has constantly beaten the Russian index by returns averaging 32.6 per cent versus the market’s 29 per cent and has done so with considerably lower volatility.²

What is especially interesting about Browder’s investment strategy isn’t the fact that he does quite well, but rather the fact that he is one of the few so-called activist investors. These self-proclaimed torchbearers, like any other investors, seek to maximise returns, increase stock value and enhance company performance. Unlike passive investors, they are keen to unlock diminished stock value that they believe is due to governance factors.

For example, The Hermitage Fund states on its website that it aims to “increase the value of [its] investments by improving corporate governance, transparency and accounting practices of the portfolio companies”.³ Typically, activist investors start by conducting their own research on various firms’ financial positions;they are usually attracted to ones that have hidden value. When such investors find“corporate malfeasance”, because they own a significant amount of equity, they are able meet with top management and can attempt to rectify any wrongdoing. Finally, if the management declines to meet with these investors or correct what they see as shortcomings, they resort to the media to convey their message.

The Hermitage Fund has been so active in exposing corporate governance in Russia, especially in several state-majority- owned firms such as the Russian gas giant Gazprom, that Browder was famously detained in 2006 while entering the countryand is now barred from re-entering Russia. This condition is probably due to Browder’s outspokenness; for instance, he has stated that corporate governance in Russia “has been on the transition from horrible to bad”.⁴ This brings me to the GCC.
 
Although Browder’s methods are considered unorthodox, many see them as a blessing to the rather bland stock markets of the Middle East. The GCC investment companies and banks that offer research have been too easy on listed companies for far too long. A large part of it is due to the GCC having a substantial amount of cross-share ownership. For example, investment bank A would not issue a 100 per cent genuine report on real estate firm B because there is an overlapping in board membership, familial relationship and sometimes what some people deem Arabian courtesy. Today, The Hermitage Fund has, to a large extent, exited the Russian market and has begun to concentrate on the emerging markets of the GCC.

In an interview with Abu-Dhabi-based The National, Browder stated that the fund has deployed via its new US$1.8 billion Hermitage Global Fund a significantamountin the GCC capital markets, with only US$600 million going to the UAE. Browder has also been singing the praises of certain UAE-based firms such as ALDAR, which he labelled “one of the cleanest, clearest stories I have ever seen” at a major investor’s conference in New York. In fact, Browder is so bullish on the stock that it is his biggest holding in the UAE.

Browder argues that ALDAR ties in with the ambition of Abu Dhabi to become a leading cultural centre because it directly owns much of the land on which the hotels, museums and other attractions are to be based.⁵ Equally, Browder does not shy away from criticism; he has said that the biggest risk the UAE faces is that of incomplete real estate projects, warning that investors must be very picky when choosing where to invest.

Browder has spoken highly of the GCC, telling The Times of Britain: “Corporate governance is so much better [in theGulf]. In Russia, it was all about fraud. We have never seen anything like that in the Middle East.”⁶ One of the main things that attracted him to the Gulf was the market crash of 2005. He believes the crash turned ALDAR into the “cheapest real estate developer in the world” and that “the best time to buy is after the crash”.⁷

Although Browder has said that he does not see the need to use his fund position to expose wrongdoing in the Gulf, he has added that there is a “slight communications and information problem”, which pundits argue is one of the causes of the 2005 crash.⁸ The Gulf markets must welcome such candid criticism as his.

For the sake of the GCC stock markets, let’s hope that when Browder speaks, the GCC investors listen.


Footnotes
1 http://hermitagefund.com/index.pl/asset_management/manager.html
2 http://www.efinancialnews.com/homepage/content/2448087208
3 http://hermitagefund.com/index.pl/shareholder_value/
4 http://www.washingtonpost.com/wp-dyn/content/article/2006/07/12/AR2006071201782.html
5http://74.125.39.104/search?q=cache:0vVkteXlpPIJ:www.hedgeworld.com/news/read_news.cgi%3Fsection%3Ddail%26story3Ddail15005.html+22Abu+Dhabi+looks+more+like+Omaha&hl=en&ct=clnk&cd=1&gl=ae&lr=lang_en&client=firefox-a
www.hedgeworld.com/news/read_news.cgi?section=dail&story=dail15005.html
6 http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4453893.ece
7 http://jetfinvestments.blogspot.com/2008/05/hermitage-bets-on-abu-dhabi-real-estate.html
8 http://www.thenational.ae/article/20080603/BUSINESS/706846414/1043/NEWS


Sheikh Sultan Sooud Al-Qassemi is the chairman of Barjeel Securities. He can be reached at www.sultansq.blogspot.com.

Opinions expressed in this article are those of the author and do not necessarily represent those of the MONEYworks group of magazines.
This article should not be misconstrued as financial advice.

This article appeared in the September 2008 issue of MONEYworks magazine.