“We expect from the market too much”
Svetlana Le Galle, Executive Director for Investments of Managing Company “Fleming Family & Partners”, describes the difference between European investors and Russian investors, strange movements on the market, and the role of intuition
If this interview was published in the yellow press, its title would sound as follows: “Shocking revelations of a known manager”. Mrs. Le Galle is quite sincere indeed; she tells us about her personal accounts and that she once decided to return to an investor his investments because he was too nervous. This is quite rare among managers that normally prefer to talk about the bright future of Russian shares.
In 2007, when the Russian stock market seemed to be growing endlessly, Svetlana resigned from her position as a senior asset manager at UFG Asset Management and set up her own business in Switzerland, then returned to the Russian market of pooled investments going through a period of absentmindedness and started work at Fleming Family & Partners. Svetlana Le Galle explained to us how their approach to investments differs from ours as well as how and what investments ought to be made into, and, naturally, the future of indices.
— Why, in fact, did you leave and then return?
— In 2007, it seemed that the Russian market reached a certain balance. From the professional perspective, I was not particularly interested in just sitting and managing. This is why I left for Switzerland. It turned out that in Switzerland, just as in Russia, all that was interesting had already been done and one had to come up with something individual to arrive at a new challenge. Therefore, my team and I, we left and set up our own company.
— In other words, you got busy with funds again?
— Yes, we did; I have always believed that markets, in particular such as Russian markets, should receive investments through funds, although they lost their popularity both in the West and here for many reasons. However, statistical data show that a fund yields a much better result throughout a mid-term and long-term period than through a simple choice of specific shares.
— Whose money was invested in those Swiss funds?
— They were raised through Swiss pension funds plus our own funds. Both these funds, UCITS (Undertakings for Collective Investment in Transferable Securities), are funds meeting specific standards developed in the EU (Expert). On the whole, everything was clear and fine. One fund invested in Russian shares; the other one was particularly interesting as it invested in local Russian bonds, but was expressed in Swiss francs. This was quite a complicated task.
— However, the crisis broke as soon as you formed the funds, didn’t it?
— At that time, our funds were just above one year old, but the crisis complicated things as we stuck to the following attitude: we pay out all money deposited by clients for repayment and, at least, we have our own money. Of course, we did not expect such an endemic outcome. The period from October to November 2008 was particularly difficult as the market closed and the pension funds decided to simply leave Russia at any price. On the whole, few assets remained in the funds, but we managed to survive somehow; in 2009, we recorded quite a good result and started to reach normal levels again. For example, bond funds reached the level of approximately CHF 20 million, which is not a bad result for a Russian bond fund; this year, it has shown 9% in francs, i.e. the track proved to be quite good.
— Did investors that had withdrawn money finally come back?
— No, they didn’t. Just as in 1999, investors deciding to exit normally come back only when the market is ready again at +250%. Although we thought that they would come back because we then dealt well with them, it turned out that this was not quite a good decision from the business perspective.
Return to the ant colony
— How did you decide to deal with Russian investors again?
— With Fleming, it developed quite incidentally: I came to Moscow for personal affairs and called in to say hello; but I decided to stay there. Mark Garber (Senior Partner and a member of the Board of Directors of Fleming Family & Partners – Expert), Denis Sukhanov (Head of Moscow Representative Office of Fleming Family & Partners, a member of the Board of Directors of Managing Company “Fleming Family & Partners” – Expert), and I, we drank some champagne, agreed upon everything, and shook each other’s hand (laughing).
— How did they lure you?
— It was the only company in Russia that grew out of the family capital. And we did not have to raise any capital. It makes me slightly smile when I read that a new company or a new fund states that they would raise a specific amount reaching billions by a specific year. I know that it is difficult to raise even one million, in particular now. But we set no such targets at all.
— And what targets have you set?
— We have the following handcraft approach. Imagine a craftsman that produces something. He will not say that he can make 50 cabinets a month and sell them at USD 300 each. He just wants to make something well, fine, appropriately, and, naturally, earn some money. It is not our purpose to win everyone and make a name for ourselves; we simply resemble ants that work and build their ant colony.
— However, despite the fact that you do not try to raise funds at any price, you have opened unit investment funds.
— Yes, we have, and I do believe that it is right when a family office also has such public investments. Unfortunately, this idea is turned upside down to a certain extent in our country: it seems that a UIF is a low quality commodity and that it is a shame to offer it to rich people. This is quite strange because, when one looks at the accounts of any rich person in the West, it becomes immediately clear that when they start to invest, they invest in funds. It is an excellent method of entering the market or exiting it. In Russia, there is capital that is growing and one can do nothing about it. Of course, there occur collapses, crises, and outflows, but all these things are right and normal and nothing ever develops easily. Of course, managing companies are guilty as well: I was surprised to hear interviews with MC managers and directors for whom I have respect stating that UIFs are not relevant any longer.
— But following 2008, UIFs are in a state of anabiosis. Money is gradually withdrawn from them and managing companies, in their turn, stopped promoting them. When will they wake up?
— Firstly, I think that the culture of management should be, in principle, changed in Russia. Development of the pension system would be quite important, because pension funds may secure a high and stable flow. But this will take some time to arrive. Another way of reviving UIFs consists in fully opening the market for foreign investors that understand and know what investments funds are and in developing a possibility for Russian managers to acquire foreign assets.
— Is there any problem here? The portfolio of many UIFs already includes western securities.
— In fact, it is very difficult to acquire a foreign asset. It must have a certain code. If there is no such a code, it is necessary to submit an application for it. It takes three days to process it, assign the code, and only after that is it possible to acquire this share. But no one knows where it can go during this time period. And it is necessary to go through the same procedure to sell it. In other words, liquidity is highly inaccessible. When I can call a broker and acquire LUKoil, Exxon, or whatever, this will be great.
— Because the structure of assets and offers for the market players will be fundamentally changed; a fund of funds can be made normal just as industry-specific funds. In addition, this will make it possible to keep part of capital here. A large number of investors staying in Russia will prefer to enter a Russian managing company and invest in the same foreign assets though it because they already run their own business in Russia. On the contrary, it is important to let foreign capital in so that non-residents could buy everything in an outright way.
Piloting from the ground
— One of your UIFs is announced as a fund of second-tier equities, but, according to reports, it currently includes no second-tier. Is it still difficult to choose assets in a medium capitalization company on our market?
— Last year, we reduced considerably the second tier. When I joined Fleming last summer, I had a feeling that we had to get out of this market as there was something wrong about it. And we reduced all of these items to a large extent because the second tier normally falls most of all. And as we have continued to dislike markets this year as well, particularly in March, because we had no feeling that growth would continue, we reduced items and did not acquire the second tier believing that we should stick to blue-chips which we would be able to exit easily.
— You have just mentioned that “you had a feeling that …”. Do you have a rather intuitive approach to management?
— It is rather an intuitive and deductive one. You really have to clearly understand the way financial mechanisms work and what affects what, but a manager has to feel instead of estimating when it comes to making a decision on what to do with a share in the portfolio. Even now it happens that sometimes you look at the market and do not understand where it will go and what happens. Questions are turning around in your head and then, suddenly at night or at 5.00 a.m., you wake up and know exactly what to do and what will happen. Such moments do happen and I like them much.
— And what do you dislike?
— What is the difference between a manager and a trader? A trader has to make a decision within a moment, but once he/she closes the positions, he/she leaves and forgets about them. This is why traders do not like taking a position for a weekend. And a portfolio manager cannot just close the fund and leave. Meetings of any country leaders are normally held at weekends. Or the OPEC may make a statement. And even if one makes something explode, they do it at weekends, too. This is why, for example, I hate days off and weekends. I do not like a leave, either, because I always worry in such periods. I prefer a normal working week when I am on the market, know everything, and am able to respond somehow.
— Don’t you have a feeling that days when it is unclear what is going on have become more frequent recently?
— I have thought so, too. Well, I do have some feelings. But on the other hand we always think that things are today worse than yesterday. You go to university to take exams and think that it was easier at school. But it was not easy at school at all! The situation is similar when it comes to raising money. They say that money is impossible to be raised and capital cannot be borrowed today. What does “impossible” mean? There is more capital today! And the number of securities and companies has, on the contrary, fallen, so why is it impossible to do it? And when was it easy to raise it?
I think there have always been those unclear days on the market, but we have just forgotten about them. And have we forgotten about the Asian crisis? And Argentinian banks collapsed one day, too. It was unclear, too, what would happen next. In 1998, when I completed my master’s degree and started to trade in East-Asian bonds, our country witnessed retirement of several prime ministers in a row; and then the STB simply stopped existing; I was on the desk and there was an awful situation. In France, just as in 1998, BNP and Paribas merged, Credit Lyonnais, an oldest bank with a large amount of funds raised from ordinary depositors, just like Sberbank (Savings Bank), stopped existing at a certain moment. Therefore, I think that people are now much better equipped to be aware of such things. There is plenty of information at present; online trading enabled arrival of many unprofessional players; this is why strange and chaotic movements start to take place on the market. In addition, trade in defective robots has been developing for the last couple of years. Similar movements on the market now occur both with respect to shares and currencies; and one can see that there is something wrong about it all. Normal people never do such things.
— Don’t you like robot traders?
— People have been in search for an absolute method of earning money since the time of Holland tulips. Warren Buffet recommends acquiring a share in a large company, holding it all your life, and you will be able to earn money. It is clear that one can live up to it if one lives so long. But it is not always efficient; we witnessed how giant companies withdrawn from business within a moment: they disappeared all of a sudden. Then diversification followed. Now all need this robot trade. J. P. Morgan lost USD 3 billion as a result of robot trading. How a Russian company with smart IT specialists can always be better than J. P. Morgan that invested millions in this iron? And how can we eliminate the human factor? This is similar to a plane. They have said since long ago that planes can be flown without any pilots. But I will never fly aboard a Geneva-New York aircraft operated without a pilot. Robot traders can be compared to planes without pilots: the same pilotage by robots from the ground.
How to get unhooked on adrenaline
— How do investors respond to this chaos on the market?
— They come and say: please, tell me what happens to my account? I have just installed a TV in my kitchen and watch a business TV channel showing what happens to shares in Sberbank. I reply: you had better deposit your money with Sberbank whose shares are shown.
— Are you serious?
— Yes, I am. I just told him to withdraw his money from us as I am unwilling to constantly think that a man is nervous about it.
— You continue to have ten blue-chips on the market. Should there be more of them? Should the market have a different width and depth? Or is it enough to have what there is now?
— For adrenaline, Sberbank alone is enough (laughing). 8% is its result today. Why, what for?
— If I wish to make a decent acquisition of shares worth RUB 10 thousand, this will be LUKoil or Gazprom. If I want something different, this will be RTS Board where, if I have not the minimum amount of USD 10 thousand, no broker will talk to me. Should those small companies from RTS Board go to the stock exchange and be normally traded?
— In that case, their capitalization should be high. In principle, if you look at the size of an American economy and capitalization of the American stock market, they nearly match each other. And this is normal because the main companies account for the major share of the GDP. When we abandoned the market last March, S&P capitalization was at the point of exceeding the figure equal to the American GDP. In Russia, the RTS capitalization nearly reached the GDP only once: in 2008. Now, in particular after the release last May, the gap is huge: the economy has already reached USD 1.8 trillion, and I am even afraid of looking at the indices (the RTS index capitalization is about USD 160 billion – Expert). There is clear abnormality here. Furthermore, our economy is much more diversified than our indices, which primarily consist of oil and gas. In other words, it is abnormal, too.
— What does it mean?
— The economic and financial theories and even physics tell us that everything tries to achieve a mean state. The economy is unlikely to collapse because capitalization dropped. It is probable that leveling will be carried out in a different way: the index will be brought in line with the economic structure. If we look at bonds, the bond market is much more diverse in terms of sectors represented.
— And when will the index reach the size of the economy?
— Look, our market has just turned 20 years old. Just 20 years old! And it is absolutely normal that it can’t be the way we all want it to be in just 20 years. On the whole, we expect so much from it. We want profitability, diversification, a lot of second-tier, industry-specific funds, no collapse of any kind, and only growth everywhere. And we want to have dividends. And when we have them, we punish the relevant company because we believe that shareholders paid out too much to themselves.
— From this perspective, do we differ from western investors in any way?
— Ordinary western investors are quiet and have a more planned approach to investments. For example, in France an individual that earned their EUR 30 thousand deposits this sum with the savings bank. This is a long-term deposit that must be made for a period of 10 – 15 years, following which the government will grant you a subsidy for construction of a house. Pension banks represent another kind of investment. In Switzerland, you can choose a pension bank to which you will transfer money and receive stable interest. People normally profit from it because the interest rate is quite fine: 3% or 2.7%. The third step consists in investing in a fund: a trust is set up in case of rich people.
Taking into account my experience, I can say that my portfolio was formed in 1998, and my shares have been deposited there since then. Some shares have been added, none of them have been sold. You might not believe me, but I never look at my portfolio at all. I talk to my banker every quarter; I pay nothing to her as I do nothing; and my profit totals about 12%, including the crisis. Some investments were quite bad, for example, WorldCom; but on the whole, it has turned out quite well.
— In our country, given popularity of online trading, Forex, and MMM, the approach is more active and chaotic at the same time.
— In our country, individuals are subjected to a huge flow of information; everyone talks only about investments and shares, but they lack understanding because it was never taught to them. Nobody is involved in financial planning here. Why don’t we introduce it in school?
And we are distinguished by high investment awareness. We are used to making savings: salt, buckwheat, butter, etc. And no one has ever regretted it! An individual should apply the same approach to finances: irrespective of whether it is salt or UIFs, they should be saved. In my opinion, any housewife in our country is a potential ingenious investor. But only after she has a business TV channel installed at home.