Anton Khmelnitski, the Moscow-born manager of U.K.-based Polar Capital Partners’ Elbrus Fund, seems to have a knack for finding gems buried deep inside the former Soviet Union. Although the $230 million long-short fund isn’t very big, there’s nothing small about its performance: Elbrus has returned a cumulative 59.2 percent (28.87 percent annualized) since it was launched in May 2006. By comparison, the cumulative return for the Russian Trading System index was 24 percent for the same period.
Khmelnitski says Elbrus goes after “deep-value companies” in Kazakhstan, Russia and Ukraine, typically buying shares of industrial companies the firm deems “very cheap.
“We try to extract the alpha out of the companies that we know in the region,” he says.
In assessing steel companies, for instance, Elbrus analysts systematically search for hidden value by measuring a steelmaker against the median value of comparable-size steelmakers’ value and replacement costs — that is, the cost of equipping and building a facility. These metrics led Elbrus to Ukraine’s Enakievo Metallurgical Plant. Elbrus began buying shares in January 2007, when the company was valued at $70 a ton. It now stands at about $400, and the fund remains long on Enakievo in light of tight steel supplies.
Another Ukraine stock Khmelnitski likes is Stirol, a maker of fertilizer nitrates. Sales at Stirol have increased in response to the recent strengthening of the fertilizer market, and the fast growth of the middle class of the developing world points to further strong demand.
Other long positions held by Elbrus include Dragon Property Group, a real estate investment company focused on developing retail, office and warehousing properties in Ukraine, and Russian energy giants Neftgaz and Gazprom.
“We see a big value in the oil sector,” says Khmelnitski. He points out that oil prices have risen 80 percent in the past 12 months and yet the stock prices of the companies are down.
Like many hedge funds, Elbrus has relied somewhat on short positions. Khmelnitski says Russia has no dearth of stocks to short, especially in its banking and real estate sectors, where many companies have had successful initial public offerings recently.
In late March, Khmelnitski traveled to New York to raise $100 million to round out Elbrus. While there he wondered jokingly if there was any money left on Wall Street after the credit crash.
He answered his own question by taking the long view: “People are not going to sit on cash forever.”
