• Wermuth Eastern Europe Long/Short Strategy (WEELS) remains best performing Russia-focused strategy over 10 years
• Impact investments to benefit from new industrial revolution, especially in emerging markets
After a sharp fall in 2014, the Russian market remains more or less flat year to date. The negative performance in 2014 reflected global sanctions against Russia after the annexation of the Crimean peninsula. Trying to stop the rouble collapse end of 2014 the Central Bank of Russia increased the key policy rate to 17% back in December 2014, making borrowing prohibitively expensive. The rate was then gradually cut to 11%, however, the economy still does not show signs of recovery. As of August 2015 real wages, retail sales and investments are all falling 9% y/y. The poor performance of the Russian currency is also driven by weak oil prices, which Wermuth Asset Management believes are going to remain structurally low. Thus, to stay invested in Russia, one not only needs to possess the ability to implement a dynamic hedging strategy but must also adopt a systematic approach. A static Rub/USD hedge would prove too costly as Russian interest rates continue to soar.
Despite difficult East European markets, Wermuth Asset Management’s Eastern-Europe-focused long/short equity strategy (WEELS) delivers positive returns and continues to outperform the market. In 2014 it managed to gain 8% in a market that lost 45%, and is up 15.6% YTD (through end of August 2015) compared to the markets gain of just 5.4%. In the decade since inception it has gained 24.6% per annum net of fees, or 803%, while the RTS index lost 5.5% over the same period. With this, WEELS is also the best performing Eastern Europe investment strategy among its peers.
“In 2015 we expect a recession alongside double-digit inflation and thus a significant deterioration of consumer demand in Russia”, said Jochen Wermuth, CIO of Wermuth Asset Management. “Since it is difficult to time the market, we believe that WEELS is the ideal strategy for raising exposure when the recovery starts, while limiting the downside. The risks posed include a further decline in oil prices, an escalation of the conflict in Eastern Ukraine, further depreciation of the Russian rouble, further capital outflows, and the implementation of capital controls. On the upside potential, the cease-fire in Ukraine might hold at long last and the EU-Russian four Common Spaces for cooperation – free movement of goods and people, common laws and security, and common educational standards – originally pre-agreed in 2005 by then EU Council President Junker, might well be implemented one day.”
Wermuth Asset Management, the German family office and BaFin-regulated investment adviser, focuses on impact investing and also uses its voting rights and interaction with management to push for a stop in fossil-fuel investments, greater resource efficiency and anti-corruption measures.
Jochen Wermuth continued: “We are in the middle of a new industrial revolution. We are shifting away from fossil fuels to renewable power. As a result, there will be significant losers and new champions to emerge. This presents excellent opportunities for long/short strategies globally and in particular in emerging markets so far dependent on fossil fuels. Some current household names and “blue chips” such as Gazprom may be the greatest shorts of all time, which one would not want to miss out on. On the other hand, Russia offers tremendous agricultural land, water, forest, hydro power, wind and solar power resources as well as outstanding human capital in engineering, the natural sciences and IT – all very much in demand in this new industrial revolution and the internet of things. Thus Russia is a land of opportunities both on the long and short side.”
Marina Shestakova, Chief Risk Officer, adds: “Over the past decade we have demonstrated that an impact investing strategy in emerging markets can generate outstanding financial returns of some 24% per annum, if one combines impact objectives with smart financial tools. In the case of WEELS, these tools include a long/short equity strategy using trend-following approaches and an active currency overlay. The latter could incidentally also be very helpful in stabilising the long-term returns of micro-lending in emerging markets. The underlying strategy is great, but currency fluctuations can wipe out all returns – this can be avoided with our active currency overlay, which worked particularly well once again in 2015. Year to date in 2015, the active currency overlay reached up to 90% of the NAV. It moved from being long the dollar at the beginning of the year to slightly short the dollar and long the rouble, in February-April as the rouble was appreciating to fully hedged against rouble devaluation again in June-August. The rouble had appreciated some 14% in the beginning of 2015 and then fell 30% against the dollar, reaching a low of 70.89 roubles/dollar on the 24th of August 2015 versus some 36 roubles/dollar just a year earlier.“
About Wermuth Eastern Europe Long/Short Strategy
The Wermuth Eastern Europe Long/Short Strategy ("WEELS") applies a long-biased, trend-following equity long/short model focusing on Russian equities. The proprietary software allows fully automated trade execution and reduces the possibility of human error. The combination of long and short sub-strategies with an expected net exposure range of minus 60% to plus 200% allows the strategy to benefit from both rising and falling markets. The strategy is diversified among numerous long/short sub-strategies, more than 40 instruments and currency futures.
The main objective is to achieve long-term capital growth with controlled risk. High volatility in the market – or in specific sectors – consistently delivers opportunities to generate returns. Since 2010, a systematic approach is also applied to the management of the rouble FX exposure – investors stand to profit from a rouble appreciation against the dollar while being protected against larger rouble losses. At the same time WEELS pursues an impact investing strategy. It uses the shares in its portfolio to request corporate action to counter corrupt practices and the waste of resources at annual meetings and engages in dialogue with management to document how this will enhance shareholder value.
About Wermuth Asset Management
Wermuth Asset Management GmbH, founded in 1999, is a German family office and investment adviser on alternative and sustainable impact investments, supervised by BaFin. WAM’s headquarters are in Berlin, Germany, with investment team members in Amsterdam, Mainz and Moscow. WAM is the investment adviser to several funds and SPVs whose investors include wealthy persons, family offices, funds of funds, banks, pension funds, endowments and sovereign wealth funds. WAM has overseen investments exceeding $1bn at peak. It is committed to impact investing, in particular to a profitable move towards a sustainable economic model and doing business in an ethical fashion. http://www.wermutham.com